Since the case of PriceSmart v the Board of Inland Revenue (“PriceSmart”) confirmed the High Court’s jurisdiction to adjudicate issues of tax administration, taxpayers have been emboldened to ventilate other issues of the Board of Inland Revenue’s (the “Revenue”) maladministration – issues that have vexed taxpayers for years.
Most recently, Rahim J., who, coincidentally, was also the Judge in PriceSmart, in the case of Therml Impac Affordable Homes Company Limited v The Board of Inland Revenue CV2020-02592 (“Therml Impac”), which decision was delivered on August 4, 2021, considered, amongst other things, the procedural obligations upon the Revenue when in receipt of a letter of objection from a taxpayer pursuant to section 40 of the VAT Act (“VA”), and the consequences emanating from its failure to meet those procedural obligations. The two main questions considered by Rahim J. were:
- When is an Objection under the VA perfected?
- Does receipt of an imperfect Objection impose any duties upon the Revenue nonetheless?
The above questions are important for a few reasons. First, where the Revenue fails to determine a taxpayer’s Objection to an assessment of its tax liability within a prescribed period of time, the Objection is deemed to have been determined in favour of the taxpayer. For assessments governed by the VA, section 40(3) sets that period at 6 months.
Secondly, as a matter of practice, such determination could affect whether the Revenue is able to unilaterally apply refunds to off-set liabilities in periods that are subject to an Objection (albeit ‘imperfect’). Concerning the latter, section 35(2) of the VA provides as follows:
“35. (2) Where, in a return furnished to the Board in accordance with section 31, a refund of any amount is specified as being due, the Board shall satisfy the amount—
(a) by paying the amount, or any of it, to the person to whom the refund is due; or
(b) by applying the amount, or any of it, to the payment of any outstanding tax, interest or penalty payable under this Act or any other Act administered by the Board by the person to whom the refund is due.” [Emphasis Added]
Before we delve into the decision and its implication for tax practice, it is helpful to briefly mention the main facts.
1. Tax Periods in 2007
The taxpayer filed a number of objections under cover of letter dated May 14, 2007 (yet delivered on May 17, 2007) and provided security in lieu of payment of the assessed tax on May 1, 2008 (under cover of letter dated March 27, 2008).
2. Tax Periods in 2010
Two additional objections were later filed under cover of letter dated August 5, 2010 however the taxpayer neither provided security nor paid the liability assessed in relation to these objections.
3. Application of VAT refunds to off-set liabilities
The Revenue applied VAT refunds owed to the taxpayer in relation to other periods to set off liabilities assessed for the periods to which the taxpayer objected in 2007 and 2010.
Tax Periods in 2007
Rahim J. held that once the taxpayer has, along with the letter of objection, provided security to the Revenue’s satisfaction, that Objection becomes active/perfected (taking on the character of an Objection as envisaged in the VA) after allowing a reasonable period of time for the Revenue to peruse and approve same. The reasonable time was found to be 2 weeks. Consequently, 2 weeks after the taxpayer lodged its Objection it was considered “active” and time began to run for the purpose of 40(3). Ultimately, it was held that 6 months had elapsed without any determination of the Objections and, therefore, the 2007 Objections were deemed to be determined in favour of the taxpayer. The taxpayer was entitled to relief in the form of mandamus, and Rahim J. directed the Revenue to amend the assessments to reflect determinations of the said Objections in the taxpayer’s favour.
Tax Periods in 2010
It was held that upon receipt of the taxpayer’s letter of objection, the Revenue was mandated to make a decision concerning whether payment or security was required. At paragraph 58 of the decision, Rahim J said:
“Upon the lodging of the letter of objection … the taxpayer is to be notified by the BIR as to the amount and nature of security required in the case where the payment of full amount of the assessed liabilities is not made at the time the objection is lodged.”
In the Judge’s view, the indefinite delay of such decision would be wholly inconsistent and detrimental to good administration. Accordingly, a period of 1 month after receipt of the objection letter was deemed to be a reasonable time within which the Revenue should make its decision. Rahim J. further stated that such notice should, as a matter of fairness, indicate to the taxpayer the consequences of failure to provide such security and the requisite documentation. It would appear that this obligation arises even where the taxpayer does not raise the issue of security.
On the facts, the Revenue failed to exercise this duty to make a decision as to whether payment or security was required. Rahim J. held that independent of its statutory duty, the Revenue had also, by virtue of its established practice of exercising its discretion in relation to the security required at the objection stage, created a legitimate expectation that it would do so. In the absence of the payment of the assessed amount or approved security, the 2010 Objections remained imperfect and inactive and time had not begun to run for the purpose of section 40(3) of the VA. Rahim J. ordered that the Revenue make a decision in relation to whether payment or security was required and to inform the taxpayer within 30 days of the Order.
Off-Set VAT Refunds
The 2007 Objections having been determined in favour of the taxpayer, Rahim J. condemned the application of VAT refunds owed to the taxpayer to the assessed liabilities to which the taxpayer objected in 2007. Interestingly, Rahim J also ordered that the set off of additional liabilities in respect of the 2010 Objections was stayed pending the determination of the Objections.
As this decision stands, it is now understood that a taxpayer has three different options available to it for filing an Objection, each with distinct consequences:
- Filing an objection letter along with payment of the sum of liability for which the taxpayer has been assessed.
In this scenario, the 6-month timeline begins to run immediately and a failure on the part of the Revenue to make a determination of the Objection within that time would result in the determination being made in favour of the taxpayer with no regard to the merits or demerits of the taxpayer’s case.
- Filing an objection letter initially without payment but providing payment or security subsequently.
In such event, the 6-month timeline is deemed to start after a “reasonable time” has elapsed since the security was provided. (2 weeks in this case)
- Filing an objection letter without payment and without security.
While the 6-month timeline never begins in this circumstance, where a letter of objection is filed without payment or security, the Objection is not entirely void. It places an obligation upon the Revenue to determine whether it will waive a requirement for payment or security pursuant to section 40(2) of the VA – despite the fact the taxpayer did not formally request such consideration. Furthermore, it appears that from the time that an objection letter is lodged and until the Revenue makes such decision, this ‘imperfect’ Objection may act as a “stay” preventing the Revenue from applying its power to set off any VAT refunds against the taxpayer’s liability under section 35(2) of the VA. Interestingly, an ‘imperfect Objection’ never lapses or expires. In other words, should the Revenue fail to make a section 40(2) determination, the imperfect Objection effectively operates as a continuous bar to a unilateral section 35(2) set-off by the Revenue!
The instant case is an example of judicial review being employed to improve fairness and predictability in the conduct of the Revenue. While the specific implications of this decision bestow good news for the taxpayer, the true value is in the subtext – that there is a forum within which a taxpayer may ventilate issues where there is wider remit than that of the Tax Appeal Board; one within which fairness to the taxpayer is a central concern. This is – in no small measure – promising.
The views expressed in this article are the views of the author(s) only and shared for discussion and information purposes only; they are not intended to constitute legal advice. Readers are encouraged to consult with their professional advisors for advice concerning specific matters.