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Smart Summary

Court Summary — Carreras Group Ltd v. Stamp Commissioner (Privy Council, 1 April 2004)

Factual and Procedural Background

On 27 April 1999 Carreras Group Ltd ("Carreras") entered into a written agreement to transfer all the issued ordinary share capital and most of the preference shares in Jamaica Biscuit Company Ltd ("Jamaica Biscuit") to Caribbean Brands Ltd ("Caribbean"). The stated consideration was a debenture to be issued by Caribbean in the sum of US$37.7 million on terms annexed to the agreement; the debenture was described as unsecured, non-transferable, bearing no interest and repayable by banker’s cheque on 7 May 1999.

The debenture was in fact not redeemed until 11 May 1999, when Caribbean paid US$19.9 million and J$700,344.814, and Carreras accepted those payments in full settlement.

The legal dispute concerned whether the transfer of the Jamaica Biscuit shares attracted transfer tax under Section 3 of the Transfer Tax Act and whether the First Schedule (paragraphs 4 and 6)—which contains special provisions in relation to shares and debentures—exempted the transaction as a reorganisation of share capital. This appeal to the Judicial Committee of the Privy Council arose from the Court of Appeal of Jamaica; the Privy Council delivered judgment on 1 April 2004.

Legal Issues Presented

  1. Whether the transfer of the shares in Jamaica Biscuit to Caribbean Brands Ltd was chargeable to transfer tax under Section 3 of the Transfer Tax Act, given that the stated consideration was a debenture.
  2. Whether the exchange of shares for a debenture fell within the exemption for a "reorganization of a company's share capital" in paragraph 4 (and, by adaptation, paragraph 6) of the First Schedule to the Transfer Tax Act, such that the transaction should not be treated as involving any disposal of the original shares.
  3. Whether the relevant transaction for the purposes of these provisions should be confined to the single step of issuing the debenture on 27 April 1999 (the appellant's contention), or whether the issue and the subsequent redemption of the debenture (on 11 May 1999) should be treated together as a single transaction for tax-characterisation purposes (the view accepted by the courts below and by the Privy Council).

Arguments of the Parties

Appellant's Arguments (Carreras / Mr Goldberg QC)

  • The agreement of 27 April 1999 should be read as an exchange of shares for a debenture and thus within the reorganisation exemption in paragraph 4(2) and paragraph 6(1) of the First Schedule; treated as such, the reorganisation "shall not be treated as involving any disposal of the original shares."
  • The Jamaican provisions are based on corresponding provisions in the United Kingdom Finance Act 1965 (Schedule 7). Under the UK scheme the exchange and the redemption would be analysed separately (the exchange on 27 April as an exchange of shares for a debenture; the redemption as a disposal of the debenture), and therefore the Jamaican provision should be interpreted similarly to confine the relevant transaction to the exchange that happened on 27 April 1999.
  • A broader factual inquiry that potentially aggregates the issue and redemption into a single transaction would produce uncertainty: it would be unclear how long an intervening period could be before the transaction ceases to be characterised as the exchange alone (e.g., why a fortnight would be insufficient to treat exchange and redemption separately).

Respondent's Arguments

This opinion does not contain a detailed account of the respondent's legal arguments.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
MacNiven (HM Inspector of Taxes) v Westmoreland Investments Ltd [2003] 1 AC 311 Illustrates situations where the statute is concerned with the character of a particular act and a narrower focus is inescapable. The Privy Council cited this case as an example where the legislative focus unavoidably relates to the characterisation of a single act rather than an aggregate transaction; but they concluded that the present statute called for consideration of the commercial unity of the overall transaction in this context.
Ramsay Ltd v Inland Revenue Commissioners [1982] AC 300 Establishes the approach, particularly in revenue statutes, of examining the commercial unity of the entirety of transactions rather than isolated formal steps. The court relied on Ramsay to justify examining the transaction as a whole (issue and redemption) to determine its character for tax purposes, rather than giving decisive effect to an isolated formal step.
Craven v White [1989] AC 398 Referential comparison regarding situations where apparent avoidance may not attract an ultimate charge under different statutory schemes. The Privy Council referred to Craven v White by way of comparison to note that, under some factual patterns and differing statutory schemes, a formal step might result in avoidance without an ultimate charge; they used it to illustrate that outcomes may vary by factual context and by statutory structure.

Court's Reasoning and Analysis

The court began by stating the statutory framework: Section 3 of the Transfer Tax Act charges tax on "the amount or value of such money or money's worth as is the consideration for each transfer"; "transfer" includes dispositions such as sale or other disposal. The First Schedule contains special rules for shares and debentures, notably paragraph 4(2) (reorganisation of share capital) which provides that a reorganisation "shall not be treated as involving any disposal of the original shares", and paragraph 6(1) which applies paragraph 4 by necessary adaptations where a company issues debentures in exchange for shares in another company.

Their Lordships accepted that, if attention is confined strictly to the single act recorded in the 27 April 1999 agreement, the transaction falls within the description of an exchange of shares for a debenture and thus within the reorganisation exemption. The critical question, however, was whether the statute required that narrow focus or whether it permitted (or required) a broader inquiry into the commercial unity of the parties' acts, including the subsequent redemption of the debenture on 11 May 1999.

The Privy Council discussed established principles of statutory construction in the tax context. It acknowledged MacNiven as an example of when a statute necessarily concerns a particular act, but noted Ramsay's influence in prompting courts to examine transactions with commercial unity as a whole when construing revenue legislation. The court emphasised that revenue statutes are often construed to characterise the entirety of transactions that form a commercial unit, rather than to give determinative effect to intervening formal steps which lack commercial purpose.

The opinion analysed the relationship between the Jamaican provisions and the analogous UK provisions (Schedule 7 to the Finance Act 1965). It observed that the Jamaican wording is taken from the UK provisions but that the underlying taxes differ in kind: the UK provisions implement capital gains tax (a tax on gains, with rules postponing charge on reorganisation), whereas the Jamaican Transfer Tax is an ad valorem tax on the consideration for property transferred. Because of this difference, the Privy Council refused to transpose automatically the UK interpretative scheme (which treats exchange and redemption as distinct matters under separate paragraphs, including a UK paragraph 11(2) deeming satisfaction of debt a disposal) into the Jamaican context.

Applying these principles to the facts, their Lordships agreed with the majority of the Court of Appeal that the relevant transaction for Jamaican transfer tax purposes comprised both the issue and the redemption of the debenture. Viewed as a whole, the transaction did not properly characterise as an exchange of shares for a debenture: the debenture amounted to a formal step in a transaction whose commercial effect was the exchange of the shares for money. The court drew an inference of intention from the terms and timetable of the arrangement (the short interval before redemption, absence of security and absence of interest), noting that no other explanation had been offered to show a genuine commercial purpose for the debenture beyond facilitating the transfer.

The Privy Council acknowledged that factual inquiries of this kind can create uncertainty in some cases (for example, where steps are separated by longer time periods), but held that deciding whether an act was part of the transaction contemplated by the statute is inherently a question of fact and necessary to give effect to the statutory scheme. The court also endorsed Anderson J's remarks that the legislative wisdom of transplanting UK capital gains provisions into a transfer-tax context merited consideration by the legislature.

Holding and Implications

HOLDING: The appeal is DISMISSED WITH COSTS.

Implications:

  • The Privy Council upheld the view that, for the purposes of the Jamaican Transfer Tax Act, the relevant transaction included both the issue and the redemption of the debenture; on those facts the transaction could not properly be characterised as an exchange of shares for debentures that attracted the exemption in paragraph 4(2) and paragraph 6(1) of the First Schedule.
  • The court rejected the appellant's argument that the UK interpretative approach should be imported wholesale into Jamaican law; the differing nature of the tax (ad valorem transfer tax versus UK capital gains tax) meant that the statutory wording had to be construed in its own context.
  • The judgment recognises that factual variation may produce different outcomes: there may be cases where the facts justify treating an exchange and a later redemption as separate for transfer-tax purposes; the court signalled that legislative reconsideration of transplanting UK capital gains rules into a transfer-tax regime may be desirable.
  • No broader alteration of statutory language was made by the court; the direct effect is that, on these facts, transfer tax was chargeable and the appeal was dismissed. The opinion does not purport to lay down a rigid temporal cutoff distinguishing permitted aggregation from separate transactions; rather it emphasises a facts-and-intention inquiry to determine whether steps form part of a single commercial transaction.

Show full summary ...

    Carreras Group Ltd v. Stamp Commissioner (Jamaica)

    Carreras Group Ltd v. Stamp Commissioner (Jamaica) [2004] UKPC 16 (01 April 2004)

    Privy Council Appeal No. 24 of 2003

    Carreras Group Limited Appellant

    v.

    The Stamp Commissioner Respondent

    FROM

    THE COURT OF APPEAL OF JAMAICA

    ---------------

    JUDGMENT OF THE LORDS OF THE JUDICIAL

    COMMITTEE OF THE PRIVY COUNCIL,

    Delivered the 1st April 2004

    ------------------

    Present at the hearing:-

    Lord Nicholls of Birkenhead

    Lord Hoffmann

    Lord Rodger of Earlsferry

    Lord Carswell

    Lord Brown of Eaton-under-Heywood

    [Delivered by Lord Hoffmann]

    ------------------

    On 27 April 1999 Carreras Group Ltd ("Carreras") entered into a written agreement to transfer all the issued ordinary share capital and most of the preference shares in Jamaica Biscuit Company Ltd ("Jamaica Biscuit") to Caribbean Brands Ltd ("Caribbean"). The consideration was expressed to be a debenture to be issued by Caribbean in the sum of US$37.7 million and in terms annexed to the agreement. The terms were that the debenture would not be either secured or transferable. The principal debt would carry no interest and be repayable by banker's cheque on 7 May 1999.

    In the event, the debenture was not redeemed until 11 May 1999, when Caribbean paid US$19.9 million and J$700,344.814 and Carreras accepted these payments in full settlement.

    The question in this appeal is whether the transfer of shares is chargeable to transfer tax. Section 3 of the Transfer Tax Act imposes the tax on "the amount or value of such money or money's worth as is the consideration for each transfer". "Transfer" includes "any legal or equitable transfer by way of sale exchange or other disposal". Prima facie, therefore, the transfer of the shares was a disposal which attracted tax on the amount or value of the consideration.

    Part I of the First Schedule contains "special provisions with reference to shares and to debentures". Two of these are relevant: paragraphs 4 and 6. Paragraph 4 deals with "reorganization of share capital". The relevant words are:

    "4.-(1) This paragraph shall apply in relation to any reorganization of a company's share capital; and for the purposes of this paragraph

    (a) reference to reorganization of a company's share capital include (i) any case where persons are allotted debentures of the company in respect of and in proportion to (or as nearly as may be in proportion to) their holdings of shares in the company

    (b) 'original shares' means shares held before and concerned in the reorganization of capital, and 'new holding' means, in relation to any original shares, the debentures of the company which, as a result of the reorganization represent the original shares

    (2) a reorganization of a company's share capital shall not be treated as involving any disposal of the original shares."

    Paragraph 4 thus deals with (among other things) an exchange of shares for debentures in the same company. Paragraph 6(1) extends this to an exchange of shares in one company for debentures in another:

    " where a company issues debentures to a person in exchange for shares in another company, paragraph 4 shall apply with any necessary adaptations as if the two companies were one company and the exchange were a reorganization of its share capital."

    Carreras says that if one reads the agreement of 27 April 1999, it falls squarely within these exempting provisions. The issue of the debenture by Caribbean in exchange for the original shares held by Carreras in Jamaica Biscuit was required to be treated as if Caribbean and Jamaica Biscuit were the same company and the exchange was a reorganisation of its share capital. By virtue of paragraph 4(2), it was therefore not to be treated as involving any disposal of the Jamaica Biscuit shares.

    Their Lordships agree that the question is whether the relevant transaction can be characterised as a reorganisation of share capital as defined in the Act, that is to say, as an issue of a debenture in exchange for shares. They also accept that if the relevant transaction is confined to what happened on 27 April by virtue of the agreement executed on that date, there can be no doubt that it fell within that description. On the other hand, if one is allowed to take a wider view and to treat the terms of the debenture and its redemption two weeks later as part of the relevant transaction, it looks very different. From this perspective, the debenture is only a formal step, having no apparent commercial purpose or significance, in a transaction by which the shares in Jamaica Biscuit were exchanged for money.

    Whether the statute is concerned with a single step or a broader view of the acts of the parties depends upon the construction of the language in its context. Sometimes the conclusion that the statute is concerned with the character of a particular act is inescapable: see MacNiven (HM Inspector of Taxes) v Westmoreland Investments Ltd [2003] 1 AC 311. But ever since Ramsay Ltd v Inland Revenue Commissioners [1982] AC 300 the courts have tended to assume that revenue statutes in particular are concerned with the characterisation of the entirety of transactions which have a commercial unity rather than the individual steps into which such transactions may be divided. This approach does not deny the existence or legality of the individual steps but may deprive them of significance for the purposes of the characterisation required by the statute. This has been said so often that citation of authority since Ramsay's case is unnecessary.

    Are there any reasons why Parliament should have contemplated a narrower definition of the transaction which has to be considered in deciding whether it is an exchange of shares for debentures? Mr Goldberg QC said that such a reason can be found by examining the origins of paragraphs 4 and 6 of the First Schedule. They are clearly based upon paragraphs 4 and 6 of Schedule 7 to the (UK) Finance Act 1965, which introduced the capital gains tax in the United Kingdom. In fact, all the words which their Lordships have quoted from the Jamaican statute are to be found in the United Kingdom statute, although there are other words in the United Kingdom statute which have not been transposed.

    As Anderson J pointed out, the differences mainly arise because the transfer tax is an ad valorem tax on the consideration for the property transferred, whereas the capital gains tax is a tax on capital gains, that is, the difference between the consideration paid on acquisition and the consideration received on disposal. A provision in the Transfer Tax Act which deems a transfer not to have been a disposal exempts it altogether from transfer tax whereas a provision to the same effect in the United Kingdom legislation merely postpones the charge until an actual disposal occurs. Thus paragraph 4(2) in the Jamaican schedule simply says (as quoted above) that the reorganisation "shall not be treated as involving any disposal of the original shares" whereas paragraph 4(2) of the United Kingdom schedule goes on to say "but the original shares (taken as a single asset) and the new holding (taken as a single asset) shall be treated as the same asset acquired as the original shares were acquired". The charge to tax is therefore only postponed: when the new holding is sold, capital gains tax is chargeable on the difference between the acquisition cost of the original holding and the consideration received for the new holding.

    In order to fit the issue and redemption of a debenture into this scheme of things, paragraph 11(2) of the United Kingdom schedule provides that "the satisfaction of a debt shall be treated as a disposal of the debt by the creditor made at the time when the debt is satisfied". So Mr Goldberg says that if the transaction now under consideration had happened in the United Kingdom, it would have been analysed for the purposes of capital gains tax in its constituent parts. The agreement of 27 April 1999 would have been an exchange of shares for a debenture and the debenture would be deemed to have been acquired for the acquisition cost of the shares. The redemption would have been treated as a disposal of the debenture under paragraph 11 (2) and capital gains tax (or rather, corporation tax) would have been chargeable on the difference between the acquisition cost to Carreras of the Jamaica Biscuit shares and the consideration received on redemption of the debenture. There would have been no question of treating the exchange and the redemption of the debenture as a single transaction.

    On this basis, Mr Goldberg submits that the transaction with which paragraph 6(1) of the Jamaican schedule is concerned should be construed to mean the transaction with which paragraph 6(1) of the United Kingdom schedule would have been concerned, namely the exchange which happened on 27 April 1999 and nothing else. There is no equivalent of paragraph 11(2) in the Jamaica Statute.

    Their Lordships do not accept that meanings can be transposed in this way from the legislation of one country to that of another. The United Kingdom statute requires the exchange and the redemption to be considered separately, under paragraphs 6(1) with 4(2) and paragraph 11 respectively, because that is in accordance with the scheme of the tax. Such treatment creates a rational system of taxation. The Jamaican legislation, although it uses much of the same language, is concerned with a different kind of tax. A restricted interpretation of the transaction contemplated by paragraph 6(1) would produce the result that exemption from tax could be obtained by a formal step inserted in the transaction for no purpose other than the avoidance of tax. This would not be a rational system of taxation and their Lordships do not accept that it was intended by the legislature. They agree with the majority of the Court of Appeal that the relevant transaction for the purposes of this legislation comprised both the issue and the redemption of the debenture and that such transaction, taken as a whole, could not be appropriately characterised as an exchange of shares for a debenture.

    Their Lordships would however endorse the remarks of Anderson J in which he drew attention to the need for legislative consideration of the wisdom of using the United Kingdom capital gains tax provisions for the purposes of transfer tax. In the present case, the exchange and redemption of the debenture were plainly a single transaction and, as the Court of Appeal held, fell to be taxed as such. But there may well be cases in which the facts do not justify such a conclusion and transfer tax will be avoided without there being any ultimate charge (as there would be under paragraph 11(2) of the United Kingdom schedule) on the redemption of the debenture: compare Craven v White [1989] AC 398.

    Mr Goldberg submitted that a factual inquiry into what constituted the relevant transaction for the purposes of paragraph 6(1) would give rise to uncertainty. He was disposed to accept that if the representative of Carrerras had handed the share certificates over the desk in exchange for the debenture and the representative of Caribbean had then handed it back in exchange for a cheque, it would be hard to say that the relevant transaction should not be characterised as an exchange of shares for money. But what if the debenture had been redeemed a year later? Why should a fortnight be insufficient to separate the exchange from the redemption?

    One answer is that it is plain from the terms of the debenture and the timetable that the redemption was not merely contemplated (the redemption of any debenture may be said to be contemplated) but intended by the parties as an integral part of the transaction, separated from the exchange by as short a time as was thought to be decent in the circumstances. The absence of security and interest reinforces this inference. No other explanation has been offered. In any case, their Lordships think that it is inherent in the process of construction that one will have to decide as a question of fact whether a given act was or was not a part of the transaction contemplated by the statute. In practice, any uncertainty is likely to be confined to transactions into which steps have been inserted without any commercial purpose. Such uncertainty is something which the architects of such schemes have to accept.

    Their Lordships will humbly advise Her Majesty that the appeal should be dismissed with costs.

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    Comments

    Carreras Group Ltd v. Stamp Commissioner (Jamaica)
    (Apr 1, 2004)