Investments Ltd Company v Fiji Revenue and Customs Authority [2013] FJTT 13; Income Tax Appeal 4.2013 (3 October 2013)

IN THE STATUTORY TRIBUNAL, FIJI ISLANDS
SITTING AS THE TAX TRIBUNAL

Income Tax Appeal No 4 of 2013

BETWEEN:

AN INVESTMENTS LIMITED COMPANY
Applicant

AND:

FIJI REVENUE & CUSTOMS AUTHORITY
Respondent

Counsel: Ms R Karan, Mishra Prakash & Associates, for the Applicant.
Ms I Ratuvuku, FRCA Legal Unit, for the Respondent.
Date of Hearing: Thursday 12 September 2013

Date of Decision: Thursday 3 October 2013

DECISION

Background

1. The Applicant Company is a limited liability company having its registered office in Ba, Viti Levu, Fiji.
   
2. The Applicant is in the business of subdividing and developing Certificates of Title and selling the sub-divided lots.
   
3. On 29 October 2012, the Applicant was issued with Notices of Assessments for the Income Periods 2010 and 2011 following an audit review conducted by the Respondent.
   
4. Within those assessments, the Applicant was charged with the payment of a Non Resident Miscellaneous Withholding Tax, for the purposes of Section 8A(2)(d) of the Income Tax Act (Cap 201). The Applicant was also required to pay penalties required in accordance with Sections 43 and 46 of the Tax Administration Decree 2009.
   
5. The Taxpayer filed its objections to the tax and penalty imposed by those assessments, in letters dated 14 and 28 December 2012[1].
   
6. On 2 January 2013, the Respondent fully disallowed the Applicant's objection.
   
7. The Applicant filed its application for review of objection decision, on 1 February 2013.
   

Principal Issues in Dispute

8. The principal issue in dispute relates to the treatment of consultancy services provided to the Taxpayer by Company P, an overseas marketing and sales advisory business. The total amounts of those services were invoiced to the Taxpayer in amounts of $22,300.00 AUD and $25,750.00 respectively.
   
9. A secondary issue, though still a substantive one, is whether or not accounting services also provided to the Taxpayer in 2010 and 2011, were also amenable to Pay As You Earn (PAYE) tax, on the basis that the provider of those services, Mr K, was in fact an employee of the Taxpayer.
   

Consultancy Services Provided by Company P

10. The argument of the Taxpayer is that it had an arrangement with Company P that it need not pay those invoices until it had commenced receiving monies from the proceeds of land sales.
    
11. The Taxpayer nonetheless recorded those expenses as being ones incurred in the Profit and Loss Statements for 2010 and 2011. That is, it claimed the expenses as deduction against its income, but now argues that it should not have to pay any Non-Resident Withholding Tax against those amounts, on the basis that the invoices have not as yet been paid.
    
12. Specifically, Counsel Karan argues that the intent of Section 8A( 2) (d) of the Act, is only to impose a burden on the taxpayer, when a sum has been "paid or credited" for the supply of professional services.
    
13. It is quite clear that if the Taxpayer has claimed the expenses as offsets against its income for the relevant financial year periods, then it has also credited the amount as debt owing to Company P. The Taxpayer cannot expect to claim the benefit of the deduction and yet be indifferent to its obligation to pay tax for the expense it claims to have incurred.[1]
    
14. I note that the Applicant's Closing Submissions states in relation to the invoices:
    

These are expenses only and under the accrual accounting method will be taken forward as a liability until it is paid.[2]

15. That is simply not an option open to the Applicant. While I accept that accounting treatment considerations needs to be divorced from any analysis of legal obligation, the expense once claimed or more importantly the sum once credited, impacts on the amount of income tax to be ultimately imposed. There is no deferral tax arrangement in the case of Non-Resident Miscellaneous Withholding Tax. The requirement imposed by Section 8A(11) is quite clear,
    

The person, who in accordance with the provisions of subsection (9), is required to pay the tax shall remit the same to the Commissioner[3] within 30 days, or such other period as the Commissioner may specify, of the payment or crediting of the sum specified in subsection (2).

16. The Taxpayer has claimed the deduction of the expenses as incurred for the purposes of reducing his total income. It would appear that the monies owed to Company P, are incorporated within the provisioning of liabilities as Trade Creditors.[4]
    
17. It is also noted that invoices that were issued by Company P to the Taxpayer, had terms of "Net 30th after EOM". That is, 30 day terms. Despite the evidence of the Taxpayer that these invoices were not to be paid until such time as the Taxpayer had funds made available through land sales, they have been credited to the Trade Creditors Account as debts owing to Company P and in the absence of anything more, would be capable of being recovered by Company P in the ordinary way.
    
18. For these reasons, I regard the language of Section 8A(2)(d) where it relies on the words, "any sum paid or credited", to mean just that. Either there has been payment to the supplier of the professional services or other independent activities, or there has been a credit raised to signify an amount owing and capable of being realised or called up as a debt.
    
19. Keep in mind two things. Firstly, Section 8A(2)(8) of the Act, makes clear that:
    

The person liable for the tax shall be the person to whom or in whose favour the sums referred to in subsection (2) accrue.

20. That is, the tax burden is intended for Company P, not the Taxpayer. Having said that though, it is the Taxpayer who does have the burden to collect the tax by virtue of Section 8A(2)(9) of the Act.
    
21. To that end, if the Taxpayer did not wish to be exposed to any financial impost associated with the collection of the tax, an obvious way around that would have been to contractually build that amount into the price of the services supplied and to make it a condition of contract. That is, that the tax should be paid, prior to the issuing of an invoice for the works performed.[5]
    
22. I find that the Taxpayer had an obligation to pay to the Commissioner within 30 days of having credited the sums owing to Company P, within the book of accounts of the Taxpayer. I accept that the revised sums provided by the Respondent, within the Respondent's Supplementary Submissions. The calculation of the tax and penalty to be imposed should be based on a converted Fijian dollar rate.
    

Accounting Fees Provided by Mr K

23. In the case of the accounting fees charged during this period, the Respondent appears to argue on several bases for assuming that the services were provided by an employee and not that of a contractor. These include:-
    
    • The admission by Mr K to the Respondent that he was an employee;[6]
    • The lack of evidence of any contractual agreement indicating otherwise; and
    • The fact that Mr K was the Authorised Officer of the Taxpayer for the purposes of Section 41(b) of the Tax Administration Decree 2009.
      
24. On the other hand, Ms Karan has correctly identified the case law pertinent to establishing the principles for classifying an individual as either an employee or independent contractor. I also accept Ms Karan's submissions that the mere fact a person is an 'authorised officer', does not make them an employee.
    
25. That still does not advance the case too much for the Applicant. The onus of Section 21(b) of the Decree is "on the person objecting to the decision to prove that the decision should not have been made or should have been made differently."
    
26. For example, the Taxpayer could have sought to obtain supporting affidavits from Mr K in support of the proposition that he was not an employee. For whatever reason it appears not to have done so.
    
27. More troubling for the Taxpayer's case though, is the ostensible concession it appears to have made within its Objection letter dated 28 December 2012, where it states:
    

Please note payment has not been made and PAYE will be payable and became (sic) due when (the Company) makes the accounting services payment.

28. While again there is nothing determinative to be taken from that concession, I am nonetheless somewhat influenced by it, at least insofar as at one point in time it would appear that this was the understanding between the Taxpayer and Mr K, that they had been involved in an employer –employee relationship.
    
29. While of course, that may open itself to all other sorts of enquiries in relation to other matters pertaining to employment regulation, based on the information before me, I have no reason to disturb that arrangement. [7]
    
30. The issue of course in relation to PAYE, is very much when is that due and payable.
    
31. Section 81 of the Income Tax Act (Cap 201) provides that the Minister may make Regulations for the "assessment, charge, collection, recovery and repayment of tax".
    
32. The Income Tax Regulations as consolidated, set out the various protocols and obligations in relation to the collection of tax.
    
33. Specifically, Regulation 6(2) provides:
    

Every employer shall be deemed to make payment of emoluments to an employee not only when an amount of emoluments is actually paid but also when emoluments are credited for the benefit of an employee to an account on which the employee can draw or over which he has control or are otherwise applied for his benefit.

34. The Respondent argues that the provisioning and claiming of the accounting expense, albeit not correctly allocated as wages, is done so and conforms to the words, "ötherwise applied for his benefit".
    
35. This is a somewhat more difficult issue to determine, based on the lack of evidence that has been provided to the Tribunal. There are no invoices before me, nor evidence of when the services were provided and when otherwise they ordinarily would fall due.
    
36. At one level though, the issues again can be separated. There are two obligations of the Taxpayer at work. The first is the obligation to pay the wages to Mr K. The second is the obligation to deduct tax from those wages, as and when they become due.
    
37. The fact that the Taxpayer has entered into an arrangement to defer the payment of the wages,[8] is immaterial to its obligations to deduct the taxation as accrued.
    
38. Again the Regulation does not appear to make any provision for the deferment of the obligation to remit the taxation, once the wages would be otherwise due and payable.
    
39. I have no doubt in my mind that if Mr K is an employee, then the wages are at statute, due and payable.
    
40. On that basis, the Taxpayer is also required to submit to the request of the Respondent and make good the tax obligations required to be made.
    

Conclusions

41. In all, while the Tribunal sympathises in some respects with the plight of the Taxpayer, the legal obligations of a company are what they are. If a company wishes to embark on a venture into land and property development, it must do so with its eyes fully opened and mindful of its statutory and civic obligations.
    
42. Obligations need to be factored into the feasibility of a venture at the outset. The Taxpayer appeared to have many advisers that could have assisted in this regard.
    
43. I find that the case of the Applicant Taxpayer is not made out.
    
44. The Respondent is to reissue an Amended Notice of Assessment for the relevant periods 2010 and 2011, consistent with the terms of this decision. The Tribunal accepts the adjusted figures that form the basis of the Table provided in the Supplementary Submissions. In relation to PAYE calculations, the Respondent is to reissue its demand for the payment of those deductions, though needs to do so after it corrects the 2011 calculation as provided for within its submissions.[9]
    
45. The Tribunal is not prepared to disrupt the imposition of the penalties that have been applied. I am not prepared to accept that there had been a provisioning for taxes. There is no evidence of that within the Balance Sheets that have been provided and in any event, even if there had been, the decision to do so, would have been erroneous in the circumstances.
    

Decision

(i) The Application is dismissed.

(ii) The Respondent is free to make application for costs within 14 days.

Mr Andrew J See
Resident Magistrate
3/10/2013

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It is noted that a further letter dated 28 December 20[1]2, was also submitted to the Respondent, as to formally comply with the requirement of Section 16(1) of the Decree and make the Objection to the CEO not a departmental officer.

^[1] Perhaps unless with the prior agreement of the Commissioner.

^[2] See Paragraph 1.6 of the Closing Submission of the Applicant.

^[3] Note Section 27(2)(a) of the Fiji Islands Revenue and Customs Authority Act 1998.

^[4] See Balance Sheets for 2010 and 2011, within the Company Income Tax Returns marked as Exhibits R1 and R2.

^[5] I am sure that there would be other methods equally as effective.

^[6] Evidence given at hearing by Mr Joji Vaka, Tax Officer, FRCA.

^[7] For example, what was the contractual position in relation to the payment of wages for the purposes of Section 32 of the Employment Relations Promulgation 2007. .

^[8] Which I would question in any event as to how this could take place in the context of Section 32 (c) of the Employment Relations Promulgation.

^[9] It would appear that the amount of $3000.00 within the Table should be $5050.00, which will thereafter have a further flow on effect to the remaining calculations.