Barbara Gayle, Staff Reporter

In what is expected to be a landmark decision, Jamaica's Court of Appeal is expected to rule next month whether interest on securities - as opposed to trading profits - earned by hotels that are covered by the government's special incentives regime should be subject to income tax.

The government's tax collectors say they should, but Lee Issa's Swept Away Resorts Ltd, which has the backing of the lower courts, says they should not. It is now up to appeal judges Seymour Panton, Karl Harrison and Mahavdev Dukharan to decide, although the case could eventually reach the UK-based Privy Council, which is Jamaica's court of last resort.

Beyond the immediate implications for Swept Away, the ruling will clarify for the tourism industry and potential investors the scope of the tax relief that is granted under the Hotels Incentive Act.

The Appeal Justices say they will hand down their ruling by July 31.

Tax exemption

Like many hotels here, Swept Away, a 312-room property in Negril on Jamaica's west coast, was approved for tax exemption under the Hotels Incentive Act.

Section 9 (1) of the Act says: "Any company to which section 8 applies shall be entitled to relief from income tax in respect of profit or gains arising or accruing during the relevant concession period, from the approved hotel enterprise, of an approved extension of any hotel of which it is the owner, tenant or operator."

The concession period is usually 15 years.

In the Swept Away case that is now before the court, the company maintained a fixed deposit account into which it placed surplus cash from the hotel business.

During the period of Swept Away's concession, that account earned $7.4 million in interest, a portion of which the tax authorities, who assessed the company for the period 1995 to 1999, say they are entitled. Ordinary interest income is subject to a government withholding tax of 25 per cent.

When the dispute went to the Revenue Court Swept Away argued that interest accrued on the fixed deposit is tax free since the account was an essential incident to the hotel's business. In the circumstance, it insisted, the interest arose from the hotel business.

Substantially, the same case was made to the appeal judges this week by Swept Away's lawyer, Allan Wood.

The Hotels Incentive Act, Wood said, drew no distinction between trading income and investment income.

Necessary and normal

The keeping of a bank account, he said, was a necessary and normal incident to the carrying on of the hotel business, which meant that interest earned on the funds derived from the hotel business must necessarily enjoy the tax relief offered by the Act.

However, Deputy Solicitor General Patrick Foster, QC who represented the Commissioner of Income Tax, differed.

Foster insisted that the scope of the relief granted by the act was not as broad as claimed by Swept Away, but extended only to the profits and gains arising directly from the hotel business.

In that regard, it could not include interest income accruing from the deposit of funds in a fixed deposit, he said.

barbara.gayle@gleanerjm.com