In re Appeal by Cable and Wireless PLC [2001] SBHC 180; HCSI-CC 199 of 1999 (20 February 2001)

CC 199/99 HC

IN THE HIGH COURT OF SOLOMON ISLANDS

Civil Case No. 199 of 1999

IN THE MATTER OF THE INCOME TAX ACT (Cap. 123 Section 79) AND IN THE MATTER OF AN APPEAL BY CABLE AND WIRELESS PLC, THE APPELLANT AND SOLOMON TELEKOM COMPANY LIMITED THE RESPONDENT

High Court of Solomon Islands
(Lungole-Awich, j)

Civil Case No. 199 of 1999

Hearing: 15th September 2000
Judgment: 20th February 2001

J Sullivan for the Appellant
Attorney General P. Afeau, for the Respondent

JUDGMENT

Notes: Taxation:- Income Tax Act Chapter 23 of Statutory Laws, double tax treaty (arrangement), meaning on carrying on trade or business through, “a permanent establishment.”

Interpretation of Statutes:- Income Tax Act sections 45 and 115, adoption of treaty into an Act, declaring treaty part of an Act. Holistic approach and the intention and purposive approach to interpretation of statute.

(LUNGOLE-AWICH, J): Cable and Wireless PLC, the appellant, has appealed to the High Court against the decision of the Commissioner of Inland Revenue, the respondent, disallowing an objection of the appellant to tax assessment. The assessment had been notified to the appellant in Notice of Assessment No.C974, dated 23.12.1997. The revenue on which tax was assessed was described as management fees. The appeal has been brought by authority of section 79 of the Income Tax Act, Chapter 123 of the Statute Laws of Solomon Islands. In the notice of appeal, tax assessed payable by the appellant, for the tax year ending 31.12.1990 was $315,454.50 on revenue of $630,909.00. The power which the Commissioner exercised to disallow the objection is stated in s.78 (1) (c) of the Act in these words: “(1) Where a valid objection has been received, the Commissioner may - (a) ... (b) ..... (c) refuse to amend the assessment.” Subsections (a) and (b) authorise the Commissioner to amend an assessment, “in accordance with” or, “in the light of” an objection lodged; they are not relevant to the appeal. Under s:79 an appeal from a decision of the Commissioner refusing to “amend” an assessment objected to lies to the High Court.

How The Revenue Accrued

The management fees, the revenue on which tax was assessed, had been paid by Solomon Telekom Company Ltd, “Soltel” to Cable and Wireless pursuant to terms of an agreement between them dated 22.8.1988, in particular, terms at paragraph 9.1.

Briefly this is how the revenue accrued. On 22.8.1988 Cable and Wireless entered a “Services Agreement” with Soltel concerning the business operations of Soltel in Solomon Islands. Soltel’s business was and is still the providing of telecommunication services in Solomon Islands. At the time of the agreement, Soltel was a new company, it did not have knowledgeable and experienced Solomon Islanders staff and did not have experience in the telecommunication business.

By paragraph 3.2, Cable and Wireless would provide technical and managerial knowledge and experience in communication business to the business of Soltel. Cable and Wireless would do that by “[making] available to [Soltel] the services of Cable and Wireless employees either on secondment or consultancy basis)” and in particular, would “nominate” its qualified employees to be seconded to the business of Soltel in the posts of general manager and sub-managers, ‘‘for full time employment.” The personnel made available or nominated would be posted to Soltel’s business in Solomon Islands, but would remain the employees of Cable and Wireless. The nominated general manager would be responsible to the board of directors of Soltel and the sub-managers to the general manager. Their salaries, allowances, other emoluments and expenses would be paid by Cable and Wireless and Soltel would reimburse Cable and Wireless in full. Soltel would pay and Cable and Wireless would receive fees for providing the technical and managerial knowledge and experience for the years 1989 to 2000 inclusive. Since the agreement Cable and Wireless has nominated and seconded the personnel required and Soltel has paid the management fees; those for the tax year ending 31.12.1990 were in the sum of $630,909. The Commissioner assessed tax of $315,454.50 on the sum, the assessment was objected to and is now the subject of this appeal. Reimbursement paid to Cable and Wireless for expenses for the year was $999,757.00; it is not the subject of this appeal.

The arrangement at workplace was provided for at paragraph 7.2 of the agreement. Soltel would, “supply Cable and Wireless free if charge with a suitable workplace and free access to all necessary premises or works and any materials, instruments and equipment which Cable and Wireless may request for [the] performance if its obligation under [the] agreement.”

Cable and Wireless is a public company incorporated in the United Kingdom. It does not have a branch office in Solomon Islands and its board of directors has never met in Solomon Islands. Soltel is a company incorporated in Solomon Islands, Cable and Wireless owns 48% of the shares in Soltel and 52% is owned by Investment Corporation of Solomon Islands, the “ICSI”, an investment agency of Solomon Islands government. Dividend paid to Cable and Wireless is exempt from tax.

The Tax Assessed, Objected to and Appealed against to the High Court

It is convenient to repeat here that for the tax year ending 31.12.1990, the Commissioner assessed tax payable by Cable and Wireless in the sum of $315,454.50 on revenue of $630,909.00 received by Cable and Wireless from Soltel as management fees. Cable and Wireless did not accept the assessment, it lodged objection under s:77 of the Income Tax Act, on the ground stated in its notice of objection dated 4.2.1998 to the Commissioner. The words of the ground are:

“The industrial and Commercial profits derived from its [Cable and Wireless’] operations at Solomon Telekom Company Limited are not taxable in S.I. as it [Cable and Wireless] is not engaged in trade or business in SI through a permanent establishment situated therein.”

The Commissioner having considered the objection, refused to amend the assessment. The reason he gave was that Cable and Wireless earned the fees by carrying on trade or business by its seconded employees through the permanent establishment of Soltel in Solomon Islands. Cable and Wireless was dissatisfied, it has appealed to the High Court against the decision taken on its objection. Its notice of appeal dated 3.6.1999 was on the main ground that Cable and Wireless was not, “engaged in trade or business through a permanent establishment in Solomon Islands and accordingly is not assessable to tax on industrial or commercial profits derived from the provision of services to Telekom under the services agreement.” Telekom is another shortened name of Soltel. In addition, Cable and Wireless included two other grounds which it had not raised as grounds for objection in the notice of objection dated 4.2.1998, to the Commissioner; and no other notice stating them as grounds for objection had been given to the Commissioner before the additional grounds were included in the grounds of the appeal. The two additional grounds are described as alternative to the main ground. All the three grounds of appeal are summarised at paragraphs 19, 20 and 21 of the notice of appeal to this Court; they are:

“19. In the premises of the facts aforesaid and upon a proper construction of the arrangement, the appellant was not during the year of income engaged in trade or business through a permanent establishment in Solomon Islands and accordingly is not assessable to tax on industrial or commercial profits derived from the provision of services to Telekom under the Service Agreement;

20. In the alternative, if the appellant did during the year of income engage in trade or business through a permanent establishment in Solomon Islands (which is denied), then the management fees were not attributable to any such permanent establishment.

21. In the further alternative, if the Appellant did during the year of income engage in trade or business through a permanent establishment in Solomon Islands (which is denied), the Commissioner has erred in assessing to tax the gross management fees rather than the profit required to be assessed under Article 3.3 of the Arrangement.”

The Power to Impose Tax

The imposition or alteration of tax in Solomon Islands, like in many countries, is a constitutional matter. It is authorised by s:106 of the Constitution of Solomon Islands, the section states:

“106. No taxation shall be imposed or altered except by or under an Act of Parliament.”

It is appropriate that s: 106 of the Constitution should provide for the imposition or alteration of tax, especially if the alteration adversely affects the taxpayer. Without that constitutional power, imposition of tax, even by an Act of Parliament, would be contrary to s:3 of the Constitution which provides for the protection of fundamental rights and freedoms of the individual which include protection from deprivation of property. In history imposition of tax has been a vexed matter. The events leading to the independence of the United States of America is an example of how a people may react to unacceptable imposition of tax.

From the power given in the Constitution, Parliament enacted the Income Tax Act, it is the detailed law in Solomon Islands applicable to taxing personal income. It is in the Income Tax Act or in subsidiary legislations made thereunder that provisions are made for such things as, which revenue or income may be taxed, which expenses may be deducted off income, who or which organisations are or may be exempted from tax and many others. In determining some of those matters, facts about the source of income, about whether the intended tax payer is a resident or non-resident of Solomon Islands, or about whether the intended taxpayer might suffer double tax, one in Solomon Islands and another in another country and other facts, become important considerations.

Cable and Wireless is a corporate persona. Solomon Islands has no separate Act for the taxation of income of limited companies. The Income Tax Act applies to the income of an individual as well as to the income of a corporation. That was the case in England until the Finance Act, 1965, of England. Income of a corporation in England is now chargeable to corporation tax and not to income tax; personal income remains chargeable to income tax. Of course indirect taxes on goods and services also diminish income.

The Procedure to Object and Appeal

The Act, in Part XI headed “OBJECTIONS AND APPEALS,” states the steps that an intended taxpayer who is dissatisfied with the decision of the Commissioner to assess tax on his particular income or with the facts upon which the Commissioner has made an assessment of tax, or merely with the computation of the tax by the Commissioner and with other grounds, may take. First under s:77, the dissatisfied intended taxpayer gives notice of his objection to the tax assessment in writing to the Commissioner within 50 days of the receipt of notice of assessment. By authority of s:78, the Commissioner may accept the objection or bear it in mind and “amend” the assessment, or he may refuse the objection and “refuse to amend the assessment.” If the intended taxpayer is still dissatisfied, he may, under s:79, give to the Commissioner notice in writing within 60 days from the time he had received notice from the Commissioner refusing his objection, of his intention to appeal to the High Court and the grounds. Similarly the intending appellant taxpayer lodges notice including grounds of his appeal at the High Court. The Court hears the appeal and may confirm, reduce, increase or even annul the tax assessment altogether.

Determination:

The Two Alternative Grounds of Appeal Struck Out

From the law in ss: 77, 78 and 79 regarding the procedure to appeal, I have to conclude that the appeal, to the extent that it is based on the two alternative grounds at paragraphs 20 and 21, is an incompetent appeal. In respect to those alternative grounds, Cable and Wireless has not complied with the conditions precedent in s:77. It did not, in the first place, give to the Commissioner, notice of objection based on or that included the alternative two grounds, and as the result, the Commissioner has been denied, in the first place, the opportunity to consider them as grounds for objection and to decide, based on the alternative grounds, whether he would amend or refuse to amend the assessment. Moreover, s:79 requires that even after the Commissioner has refused an objection, the intended taxpayer must give to the Commissioner notice of his intention and grounds to appeal to the High Court. That gives the Commissioner a second opportunity to consider the grounds of objection and also gives him opportunity to consider whether it will be worthwhile for him to oppose the appeal. In my view, the High Court cannot assume the power to waive the requirements in ss: 77 and 79 to give notices, imposed on a dissatisfied taxpayer because the requirements are statutory preconditions, and because that would result in denying the Commissioner the two statutory opportunities to consider grounds for an objection and grounds for the appeal thereafter. The two alternative grounds of appeal at paragraphs 20 and 21 of the notice of appeal to this Court are struck out because they are incompetent grounds, the appeal, to the extent that it was based on the alternative grounds, would be dismissed.

Determination:

The Main Ground of Appeal

The main ground of appeal stated at paragraph 19 of the notice of appeal is a competent ground to be heard and decided by the Court, the appellant has complied with the conditions precedent in ss:77 and 79 in respect of the ground. The ground is that, “the appellant was not during the year of income engaged in trade or business through a permanent establishment in Solomon Islands and accordingly is not assessable to tax on industrial or commercial profits derived from the provisions of services to Telekom under the Services Agreement.” Parties have considerably reduced the question in contention to simply whether Cable and Wireless was during the year, engaged in trade or business through a permanent establishment in Solomon Islands. They have agreed that the management fees, the subjects of the appeal, were industrial or commercial profits of Cable and Wireless and would be taxable if Cable and Wireless was engaged in trade or business in Solomon Islands through a permanent establishment, and conversely that the fees would not be taxable if Cable and Wireless was not engaged in business and trade through a permanent establishment in Solomon Islands. So the shortened common form of the question to be decided is whether Cable and Wireless’ business with Soltel was carried out through a permanent establishment in Solomon Islands.

The question is one of law based on the facts obtaining. The law is traceable back to an arrangement (now treaty) between the British Solomon Islands Protectorate Territory (now simply Solomon Islands) and the United Kingdom in May 1950. The arrangement was styled, “United Kingdom - Solomon Islands (Income Tax) Arrangement.” It was adopted in the Protectorate’s colonial Proclamation No.2 of 1950 The Proclamation was amended in 1969 and 1974. Legal Notice No. 30/1974 contains the last amendment. The current legislation that authorises the adoption of the arrangement into the current Income Tax Act is s:115 of the Act. The section, in addition to authorising adoption of the United Kingdom - Solomon Islands arrangement, authorised adoption of similar arrangements with Sweden, Denmark and Norway.

The section states:

“115. The Double Taxation Relief (British Solomon Islands Protectorate/United Kingdom) Arrangements Proclamation, 1950*, the Double Taxation Relief (British Solomon Protectorate/Sweden) Arrangements Proclamation, 1954+, the Double Taxation Relief (British Solomon Islands Protectorate/Denmark) Arrangements Proclamation, 1956**, and the Double Taxation Relief (British Solomon Islands Protectorate/Norway) Arrangements Proclamation, 1957++, and the Arrangements set out in such Proclamations shall continue to have full force and effect as if such Proclamations and Arrangements had been made under section 45.”

S:45 referred to states:

“45. * - (1) If the Minister by order declares that arrangements specified in such order have been made with the Government of any territory outside Solomon Islands with a view to affording relief from double taxation in relation to income tax or any tax of a similar nature imposed by the laws of that territory and that it is expedient that those arrangements should have effect, then such arrangements shall, not withstanding anything in this Act, so have effect as if such arrangements were contained in this Act.

(2) ...........”

Accordingly the terms in the 1950 arrangement, as amended, are to be regarded as having been declared by the Minister as having been made by him and that it will have effect notwithstanding anything in the Income Tax Act, and further more, the arrangement is to be regarded as if it is contained in the Act.

The crucial clauses of the arrangement between Solomon Islands and the United Kingdom, which arrangement has become provisions in the income tax law, are at articles 3.1 and 3.2 read together with the definition of the phrase, “permanent establishment” given at article 2.1 (k) and 4. The clauses at articles 3.1 and 3.2 state:

“[3.1] The industrial or commercial profits of a United Kingdom enterprise shall not be subject to [Solomon Islands] tax unless the enterprise is engaged in trade or business in the [Solomon Islands] through a permanent establishment situated therein. If it is so engaged, tax may be imposed on those profits by [Solomon Islands] but only on so much of them as are attributable to that permanent establishment.

[3.2] The industrial or commercial profits of [Solomon Islands] enterprise shall not be subject to United Kingdom tax unless the enterprise is engaged in trade or business in the United Kingdom through a permanent establishment situated therein. If it is so engaged, tax may be imposed on those profits by the United Kingdom, but only on so much of them as are attributable to that permanent establishment.”

And the relevant part of the definition of permanent establishment is given as:

“(2.1)

“(k) The term “permanent establishment”, when used with respect to an enterprise of one of the territories, means a branch, management or other fixed place of business, but does not include an agency unless the agent has, and habitually exercises, a general authority to negotiate and conclude contracts on behalf of such enterprise or has a stock of merchandise from which he regularly fills orders on it. An enterprise of one of the territories shall not be deemed to have a permanent establishment in the other territory merely because it carries on business dealings in that other territory through a bona fide broker or general commission agent acting in the ordinary course of his business as such.

The fact that an enterprise of one of the territories maintains in the other territory a fixed place of business exclusively for the purchase of goods or merchandise shall not of itself constitute that fixed place of business a permanent establishment of the enterprise.

The fact that a company which is a resident of one of the territories has a subsidiary company which is a resident of the other territory or which is engaged in trade or business in that other territory (whether through a permanent establishment or otherwise) shall not of itself constitute that subsidiary company a permanent establishment of its parent company.”

The definition of permanent establishment at 2.1 (k) above is expanded by clauses at article 4 which are:

“4. Where-

(a) an enterprise of one of the territories participates directly or indirectly in the management, control or capital of an enterprise of the other territory, or

(b) the same persons participate directly or indirectly in the management, control or capital of an enterprise of the other territories and an enterprise of one of the territory, and

(c) in either case conditions are made or imposed between the two enterprises in their commercial or financial relations, which differ from those which would be made between independent enterprises, then any profits which would but for those conditions have accrued to one of the enterprises but by reason of those conditions have not so accrued may be included in the profits of that enterprise and taxed accordingly”.

The whole arrangement has 16 articles. The remaining articles are in one way or another relevant to allocating the right to tax to Solomon Islands or to the United Kingdom or to exempt from tax of either country certain incomes based on considerations not relevant to this appeal. Further more, some articles concern tax evasion and tax credit. The arrangement has the heading:

“ARRANGEMENT BETWEEN THE GOVERNMENTS OF THE SOLOMON ISLANDS AND THE UNITED KINGDOM FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME”

The well researched and learned submissions of learned counsel for the appellant, Mr. John Sullivan, commenced with urging the Court to adopt a holistic approach in interpreting tax treaties in contrast with interpreting domestic legislations. Mr. Sullivan submitted that the holistic approach is applicable to interpreting tax treaties as well as other “international treaties” and has the effect of producing more liberal interpretation. He cited, Commissioner of Taxation v Lamesa Holdings BV (1997) 77FCR 597, a case from the Federal Court of Australia, and, Commissioner of Inland Revenue v United Dominion Trust Ltd [1973] ZNZLR (CA) 558, a New Zealand case. Given the text, purpose and objective of that part of the Income Tax Act we are concerned with, the arrangement between Solomon Island and the United Kingdom, I accept that the arrangement part of the Act should be interpreted in a holistic way. I doubt though, whether the entire provisions of the Income Tax Act should be included in the holistic approach when the arrangement part only of the Act is being interpreted. And I do not accept that the holistic approach to interpreting is applicable only to statutes adopting treaties, that is, agreements between states, as opposed to domestic legislations, nor do I accept that the holistic approach is applicable exclusively of the other approaches to interpretation. In my view, much depends on the nature of the legislation to be interpreted, that is, whether the purpose and objective of the legislation can be regarded as a whole. More often than not, treaties tend to have objectives that are regarded as a whole, but sometimes legislations about purely domestic matters have that character too.

I shall also be wary of applying judgments generally as authorities or as being persuasive. Tax law is statutory law and not common law, the specific details of the particular legislation must be examined carefully and applied accurately. Often legislations adopted from elsewhere are modified or their wordings are changed. The present legislation is an example. I discovered that the provisions in the arrangement, the subject of this appeal, are almost identical to the arrangement between Australia and the United Kingdom, the subject of the Australian case, Case No F 85 (1955) 6TBRD 483. The Australian-United Kingdom arrangement was published in the Third Schedule to the Australian Income Tax Acts 1936-1948.

Of the 21 cases cited by Mr. Sullivan, Case No. F85 (1955), was the nearest to this appeal case. In the Case, the appellant apparently, deliberately arranged its business of selling goods bearing its trade mark in Australia in such a way that it claimed that it did not carry on trade or business through a permanent establishment in Australia. It had two Australian agents place orders for the goods from a manufacturer in Australia, but the appellant received the invoices in the United Kingdom, and set the sale prices from its office in the United Kingdom for the Australian agents to sell the goods in Australia at. The appellant instructed a subsidiary in Australia to pay the agents’ commissions. The appellant held minority shares in the manufacturing company and one of the selling agents was its subsidiary. The appellant was successful before the Taxation Board of Review in the contention that the profits made were not from carrying on trade or business through a permanent establishment in Australia. I noticed however, that the case was to go on further appeal. On careful perusal of the arrangement in that case and in this appeal, I realised that the part of the definition of permanent establishment in the Australian- United Kingdom Arrangement, enumerating factory, mine, agricultural or pastoral property was excluded from the later Solomon Islands-United Kingdom Arrangement. Further more, clause 4 in the Solomon Islands-United Kingdom arrangement was not in the Australian-United Kingdom one. Careful consideration must be given to such differences.

I approach the interpretation of the phrase, “through a permanent establishment” in the context of the facts of this appeal, bearing in mind that it is an important principle of tax law that one is entitled to arrange one’s affairs, (including complicated business affairs), in such a way as to place one’s affairs outside liability to tax or to minimise the incidence of tax. That statement of the law was settled in the judgment of Lord Tomlin in, IRC -v- Duke of Westminster [1936] AC 1. At pages 19-20, Lord Tomlin said:

“........it is said that in revenue cases there is a doctrine that the court may ignore the legal position and regard what is called ‘the substance of the matter,’ and that here the substance of the matter is that the annuitant was serving the Duke for something equal to his former salary or wages, and that therefore, while he is so serving, the annuity must be treated as salary or wages. This supposed doctrine ...... seems to rest for its support upon a misunderstanding of language used in same earlier cases. The sooner this misunderstanding is dispelled and the supposed doctrine given its quietus, the better it will be for all concerned....... Every man is entitled if he can to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure this result, then, however unappreciative the Commissioners of Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax. This so-called doctrine of the ‘substance’ seems to me to be nothing more than an attempt to make a man pay notwithstanding that he has so ordered his affairs that the amount of tax sought from him is not legally claimable.”

That is the basis of the rather not so strict an expression that tax avoidance is permissible but, tax evasion is not.

I also remind myself that if I entertain doubt about tax liability of a taxpayer as stated in a charging provision of an Act, the doubt must be to the taxpayer’s favour, although I take note of the provision of s:79 (4) of the Income Tax Act, that the burden is on the person assessed to prove that an assessment is excessive. That burden of proof, in my view, must be limited only to proof following objection of the quantum of assessment and to proof of the quantum of assessment on appeal to the Court thereafter and does not affect the overall burden to prove that the person assessed is, in the first place, liable to pay tax at all on the income. That primary burden of proof of liability rests on the state. There have been several cases in which the burden to prove liability has been explained to rest on the state, examples are: Parlington -v- Attorney General [1869] LR 4 HL, Cape Brandy Syndicate -v- IRC [1921] 1 KB 64, Russell -v- Scott [1948] AC 422 and Hoschstrasser -v- Mayes [1959] 38 TC 673 where Viscount Simonds at page 706 said:

“It is for the Crown, seeking to tax the subject, to prove that the tax is exigible, not for the subject to prove that his case falls within exceptions which are not expressed in the Statute but arbitrarily inferred from it.”

I shall start by looking at the purpose and objective of the arrangement which is stated as to avoid double taxing and to eliminate evasion of tax in both Solomon Islands and the United Kingdom. Then I shall look at the meaning of the phrase, ‘‘permanent establishment.”

The intention in the Solomon Islands-United Kingdom arrangement is that when business has been carried on by an enterprise of the one country in the other Country, the right to collect tax from the profit must be determined according to whether the business has been carried on, “through a permanent establishment,” or not. If it was carried on through a permanent establishment, then the host country collects tax, otherwise the home country collects. The arrangement is also to eliminate tax evasion. If an enterprise is not taxed in the host country, it does not necessarily escape the tax in home country. Article 14 which provides for exchange of information between the two countries aims at that Article 13 which authorises tax credit aims at correcting incidence of double tax.

The expression, permanent establishment, has been given special meaning at articles 2.1 (k) and 4 of the arrangement so the plain meaning of the two words cannot be applied, the special meaning of the phrase has to be applied the special meaning at article 2.1 (k) is “a branch, management or of business.” It is agreed that Cable and Wireless does not have a branch or its own fixed place of business in Solomon Islands so the only definition of, “ Permanent establishment,” that remains in contention is, “management.”

At this point it is convenient to put the phrase, permanent establishment, in the context of this case. I have to remind myself that the wider question to be determined is: were the management fees earned by Cable and Wireless by providing its employees to Soltel in Solomon Islands, the employees to work from the premises of Soltel in Solomon Islands and to be answerable to the directors of Soltel, earned through a permanent establishment so that the fees are taxable by Solomon Islands?

Mr. Sullivan’s submission is of course that Cable and Wireless did not carry on business, “through a permanent establishment.” He said that the word management in the definition at article 2.1 (k) which the respondent relied on to show permanent establishment is management “referable to Cable and Wireless,” so to succeed, the respondent would have to show that the management of Cable and Wireless was conducted in Solomon Islands. Mr. Sullivan urged the Court to reject the submission of the learned Attorney General, Mr. P. Afeau, for the respondent, that the word management in the definition referred to the management of the trade or business carried on which business, was carried on in Solomon Islands by the General Manager and Sub-managers provided by Cable and Wireless. Mr. Afeau emphasised in addition to written submission that the fact that the day to day management of the business in Solomon Islands was conducted by seconded employees of Cable and Wireless constituted, according to article 2.1 (k), permanent establishment in Solomon Islands through which Cable and Wireless carried on its trade or business. The learned Attorney General, further submitted that the premises of Soltel from which seconded employees of Cable and Wireless worked, was a fixed place of business and therefore a permanent establishment through which Cable and Wireless carried on its trade or business for which it earned the management fees assessed to tax. Mr. Afeau urged the Court to conclude that the business of Cable and Wireless for which it earned management fees was carried on through a permanent establishment in Solomon Islands, the fees were taxable.

I reject the submission of Mr. Sullivan that the management that is a definition of “permanent establishment” at article 2.1 (k), is the management of Cable and Wireless. The management of Cable and Wireless is of course through the resolutions of its Board of Directors and may be through a managing director or a general manager instructed by the board if the articles of association authorise. If Cable and Wireless were to have that management or part of it in Solomon Islands, it would be regarded as having a branch in Solomon Islands. A branch has already been recognised in the definition as constituting permanent establishment, and parties have agreed that there was no branch of Cable and Wireless in Solomon Islands. In my view, the word management at article 2.1 (k) refers to the management of the business carried on in the one country (Solomon Islands) by an enterprise of the other country (the United Kingdom). If the management of the trade or business is in Solomon Islands, then permanent establishment is deemed to exist.

In my view the nature of the business between Cable and Wireless and Soltel was that Cable and Wireless hired out some of its senior and knowledgeable employees to Soltel for the duration agreed. Cable and Wireless was paid management fees for hiring out its employees to Soltel; it was not paid for carrying on the trade or business that the employees were engaged in; that business was carried on by Soltel itself The hiring out of the employees of Cable and Wireless was not done through an office or a place of business in Solomon Islands, let alone a permanent place of business or permanent establishment. It was done simply by the dispatch of the employees to Soltel in Solomon Islands. Thus far, Cable and Wireless did not carry on trade or business through a permanent establishment at the offices or on the premises of Soltel in Solomon Islands.

One aspect of the definition of permanent establishment, however, changes the picture. It is the definition at article 4. In my view, the definition of the phrase, permanent establishment given at article 2.1 (k) is qualified by further definition at article 4, which extends the definition to include an enterprise in the one country participating in the management, control or capital of the enterprise of the other country, accompanied by unusual conditions (arrangements) in their commercial or financial relations. Circumstances that are covered at article 4 are also deemed to create permanent establishment.

On the facts before Court, Cable and Wireless does not control Soltel, it would need to hold more than 50% shares in Soltel. Further, evidence was not made available to show whether the 48% in Soltel shares held by Cable and Wireless entitled it to have enough directors on the board of Soltel to control the management of Soltel. There is evidence, however, that Cable and Wireless participated indirectly in the management of the trade or business of Soltel in Solomon Islands. And participation by Cable and Wireless in the capital of Soltel has been clearly proved, notwithstanding that the participation is less than 50%. Cable and Wireless holds 48% of shares in Soltel. In addition conditions at 4 (c) about making or imposing unusual conditions in the financial or commercial arrangement between the two enterprises have been proved. The arrangement whereby Cable and Wireless provided a general manager, the most senior official in the day to day business of Soltel and even provided sub-managers who were all to remain employees of Cable and Wireless and Cable and Wireless paid their salaries and other emoluments, was a commercial arrangement which differed from those which would be made between independent enterprise. The financial arrangement whereby Soltel paid management fees to Cable and Wireless is also an unusual arrangement because Soltel is already liable to refund to Cable and Wireless, salaries and other emoluments of the seconded employees and other expenses incidental to the engagement of the employees. The management fees that Soltel paid to Cable and Wireless would be profit that would accrue. Cable and Wireless in fact was paid what would otherwise be taxable profit after emolument and other expenses had been deducted. Carrying on business through permanent establishment as deemed at article 4 has been proved.

The Commissioner of Taxes was entitled to assess tax for the tax year ending 31.12.1990 on the management fees paid to the appellant. Liability to assessment is confirmed, but no order is made about the sum assessed. That was a matter to be properly objected to first and if it was necessary the decision on the objection would be appealed by giving the prescribed notices.

It may be suggested that my decision based on article 4 attaching liability to tax on payment from a related enterprise which is not a subsidiary would not be consistent with the provision elsewhere in the arrangement that a subsidiary is exempted. My answer would be that the Court had to interpret the provisions of the arrangement (forming part of the Income Tax Act) and not to question the wisdom of taxing a foreign enterprise and not a subsidiary of a foreign enterprise. Another answer would be that the income of a subsidiary is taxable independently, it being income of a resident enterprise.

It may also be suggested that parties did not submit on the meaning and effect of article 4, the Court should not have considered it. To that I would say that the matter before Court was to be decided taking into account all the relevant provisions of the applicable Act.

Parties devoted some time of their submissions to urging the Court to apply or not to apply the meaning of the phrase, through permanent establishment, given in the 1996 United Nations Model Double Taxation Convention. I considered it unnecessary to apply or rely on the definition in the Convention because the Income Tax Act at article 4 of the Arrangement was, in my view, adequate for the determination of this case. It was not necessary therefore, for me to decide whether or not the definition in the Convention was applicable.

The appeal is dismissed. Liability of the appellant, Cable and Wireless PLC, to pay tax on the management fees paid to it by Solomon Telekom Company Limited in the tax year ending 31.12.1990 is confirmed. No order is made about the sum assessed as that was a point to be properly objected to first and if it was necessary, the decision on the objection would be appealed.

Costs of the appeal are awarded to the respondent.

Delivered this Tuesday the 20th day of February 2001
At the High Court
Honiara

Sam Lungole-Awich
Judge