Sun | Feb 25, 2018

Privy Council allows Advantage General $692M tax set-off

Published:Sunday | April 3, 2016 | 12:00 AMMcPherse Thompson
Corporate offices of Advantage General Insurance, Trafalgar Road, New Kingston.

The Privy Council has ruled in favour of Advantage General Insurance Company Limited (AGIC) in its appeal against a Court of Appeal decision that it was not entitled to claim a loss of $692 million, which would be set off against future tax assessments.

Responding to queries from Sunday Business as to whether this was precedent-setting, lead lawyer representing the insurance company, Michael Hylton, QC, said this is the first time that a taxpayer has successfully challenged the commissioner of the Taxpayer Audit and Assessment Department's (TAAD) designation of a change in its accounts as a change in policy, as opposed to a change in estimates.

He said the designation is important because a change in policy would allow a restatement of prior-year accounts, while a change in estimates would not.

"That may, in turn, have a significant effect on a taxpayer's liability to the Revenue. In this case, as a result of this successful challenge, AGIC's tax liability of $14 million has been wiped out and it is now effectively entitled to tax relief of $692 million," Hylton said.

AGIC made the appeal against an assessment by the commissioner of the TAAD.


Lord Robert Carnwath, in giving the majority decision of the board last month, noted that the appeal concerned the tax consequences of a change in practice for valuation of AGIC's reserves, arising from the Insurance Act 2001.

Although the act came into operation in December 2001 and was not retrospective, AGIC adopted the new approach to restate its financial statements for calendar year ending December 2000, and submitted an amended tax return on that basis.

The effect of the amendments, if accepted, was to create a substantial loss in that year, which the company sought to carry forward to set against profits in subsequent years up to and including 2003.

In giving the background to the case, Lord Carnwath noted that in June 2001, AGIC submitted its annual income tax returns for 2000. Six months later, in December 2001, the Insurance Act came into operation.

In accordance with the provisions of the Act, AGIC appointed an independent firm of actuaries to value its actuarial reserves. At the end of that valuation exercise, the reserves for prior years, calculated by the company's management, was considered unreasonable and led to a steep increase in the provisions existing at December 31, 2000.

Following that exercise, AGIC in 2004 filed amended income tax returns for the years 2000, 2001 and 2002, converting what was originally assessed as a tax liability of just over $14 million in 2000 to a claimed loss of just over $692 million for that year.

As a result, AGIC claimed tax refunds for the years 2000, 2001 and 2002. In 2007, the commissioner of the TAAD notified AGIC that it did not agree that the company was entitled to amend its tax returns, disallowed the $692 million loss and issued a notice of additional assessment for income tax in the sum of $26.5 million.

AGIC objected to the additional assessment and appealed to the Commissioner of Taxpayer Appeals.

The insurance company argued, among other things, that it had to restate its financial statements because this was what was required under the relevant accounting standards where there was a change in accounting policy, and the change in how it determined its actuarial reserves was a change in accounting policy.

The Commissioner of Taxpayer Appeals disagreed that it was a change in accounting policy and required AGIC to amend its income tax return.

AGIC appealed against that decision to the Revenue Court, which agreed with the Commissioner of Taxpayer Appeals, and dismissed the appeal. AGIC's appeal to the Court of Appeal against the Revenue Court's decision was also dismissed.

Before the Privy Council, Hylton and attorney Kevin Powell argued on behalf of AGIC that the relevant accounting standards require it to restate its financial statements, and by extension, its income tax returns, where there is a change in accounting policy.

They further argued that the valuing of AGIC's actuarial reserves through the use of an actuary, a method not previously employed, was a change in accounting policy.

Lord Carnwath observed that neither party relied on expert accounting evidence, but concluded after examining the provisions of the relevant accounting standards that the change required by the Insurance Act to actuarially value insurance reserves when employed by AGIC represented a change in the company's accounting policy.

Lord Jonathan Sumption, in a dissenting opinion, disagreed that the actuarial valuation of the company's insurance reserves was a change in accounting policy.

He considered that the employment of actuaries to value AGIC's reserves was "only a better way of applying the same accounting policy".

Lord Sumption said he would have advised that the appeal be allowed only on the grounds that AGIC was entitled to carry forward to the 2003 financial statements the loss first recognised in the financial statements for 2000.

He said his concern in the note of dissent was with the view of the majority of the board that the restatement of the accounts for financial year 2000 arose from a change of accounting policy.

The Commissioner of Taxpayer Appeals was represented by Solicitor General Nicole Foster-Pusey, QC, and Althea Jarrett.