Barbara Gayle, Staff Reporter

Revenue Court Judge Roy Anderson has labelled as 'a sham' the transfer of over two billion dollars booked as 'loans' by the Cigarette Company of Jamaica Limited, now defunct, to its parent company, Carreras Limited.

Anderson made the observation last Wednesday when he dismissed an appeal by the Cigarette Company against a tax assessment for $2.17 billion.

However, despite his decision upholding the assessment by the Commissioner of Taxpayer Audit and Assessment against the Cigarette Company, the judge ruled that the imposition of the maximum penalty of 50 per cent, which amounted to $3.5 billion, was "unreasonable and unfair".

The Cigarette Company was assessed in December 2003 after the commissioner took the decision that the transferred funds were liable to income tax.

The assessment was for the years 1997 to 2002.

In a 97-page judgement handed down last week Wednesday, Justice Anderson dismissed an appeal by the Cigarette Company of Jamaica against the assessment made by the Commissioner of Taxpayer Audit and Assessment and subsequently confirmed by the Commissioner of Taxpayer Appeals.

The judge found that billions of dollars which had been transferred by Cigarette Company to Carreras fell within the definition of 'distributions' as set out in section 34 of the Income Tax Act of Jamaica, and were also probably artificial transactions within the anti-avoidance provisions of Section 16 of the same act.

Lawyers for the Cigarette Company had sought to argue that the huge transfer of funds to Carreras Group was in the nature of loans to the parent company and there was a full intent to repay.

Central treasury function

It was also argued that the reason for the transfers was so that Carreras could provide a central treasury function which would allow for the efficient use of surplus cash within the group and take away the temptation at the level of the subsidiary to waste those resources.

However, after examining the wide range of authorities cited by counsel on both sides, as well as other authorities from other jurisdictions, including Sri Lanka and Hong Kong, Justice Anderson concluded that on the basis of all the objective criteria, the classification of the transfers as 'loans' rep-resented 'a sham', and they were really in the nature of distributions or what American jurisprudence refers to as "constructive dividends".

He said that all the authorities cited and considered seemed to make it clear that whether a transfer constituted a loan or not, did not depend upon whether the transferor said it was a loan, but on a number of various factors.

The judge's determination that the penalties were unreasonably applied was based on the fact that the Cigarette Company and Carreras had consistently submitted income tax returns which showed that the transfers had been made and that there were huge sums outstanding.

The judge has remitted the matter of the penalty to the commissioner of taxpayer audit and assessment with a recommendation that either a nil penalty or a nominal one in an amount not exceeding five per cent of the total tax payable be applied.

The parties have been given leave to appeal the ruling.

barbara.gayle@gleanerjm.com