U12

04

ITA 2015
TAX TREATMENT
OF DIVIDEND INCOME
AND OTHER MATTERS

prepared for the course team by

Pet er Fulche r

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Welcome to Week 12 of AF308 in blended mode.

This week we look at the tax treatment of dividend income under the ITA 2015.

In week 4 we looked at the topic of income from property and surveyed rent, interest,
annuities, royalties, and dividends. Dividends are no more complex than other examples of
income from property. However, commonly the tax treatment is more complicated. This is
the reason we consider the tax treatment of dividend income as a discrete topic.

This week I also want to take the opportunity to look at a few other smaller matters. We do
that under the heading ‘Other Matters’.

Let’s get started.

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The problem of double tax
The term dividend in its most commonly used sense refers to a distribution of profit by a
company to its members during the life of the company. The term dividend may also have
other meanings. For example, where a company is in liquidation a payment by the liquidator
to the members is called a dividend. In this unit we use the term dividend in its more common
sense. (Week 4 looked at different usages of the term dividend at p.15.)

Companies, shareholders and dividend income arguably give rise to a problem. We can call
this ‘the problem of double tax on income derived through a company.’ Let me illustrate the
problem by considering two scenarios.

Scenario one
X, a sole trader, owns a business producing profit for tax purposes of $100.

Scenario two
Aco, a company, owns the same business. There is the same profit for tax purposes of $100.
X owns all the shares of Aco.

The diagrams below set out the two scenarios.

X X

Aco

business business

For the sake of simplicity, presume we have a flat tax of 30% for all taxpayers. Prima facie,
what will be the tax treatment in the two different scenarios?

In the first scenario, there will be tax of $30 and X's income after tax will be $70.

In the second scenario, the company will pay tax of $30. If Aco then distributes all of its after
tax income X will receive a dividend of $70. X with income of $70 will pay tax of $21. X's
income after tax will be $49.

Here is the outcome for X.

Scenario one: after tax income $70
Scenario two: after tax income $49

What do you make of the story?

- The very different tax outcomes in the two scenarios make no sense.
- The very different tax outcomes make perfect sense.

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- The tax lesson is, aim to own a business directly rather than use a company to own the
same business.
- X pays a high tax price for gaining the benefit of limited liability obtained from using a
company to own and carry on the business.
- X should be smarter. Presuming that X is the managing director in scenario two, X should
have Aco pay him a salary of $100. Aco would then have zero profit and no tax. X would
have employment income of $100 and following tax of 30%, after tax income of $70.
- All of the above.
- None of the above.

I want to focus on the first two alternative responses and state each a little more fully.

- The very different tax outcomes in the two scenarios make no sense. The two scenarios
from an economic viewpoint are substantially the same. There is the same business
generating the same income. Situations that are substantially the same should produce
substantially the same tax outcome. That is not happening. There is a problem and the
problem lies in scenario two. Here the income generated by the business is being taxed first
in the hands of the company and then again in the hands of the shareholder. This is a double
tax problem; what we might call ‘the problem of double tax on income derived through a
company.’

- The very different tax outcomes make perfect sense. In scenario one, there is one taxpayer
and one source of income. In scenario two, there are two taxpayers and two sources of
income. Aco has income (business profit) of $100; X has income (income from property) of
$70. Altogether there is income of $170. The aggregate tax bill ($30+$21) is precisely what
one would expect where tax is levied at a flat rate of 30%. There is no problem here.

Each of the two alternative reactions above is reasonable. An initial question for any income
tax is whether it will ‘see’ or not ‘see’ in these two scenarios a ‘problem of double tax’.

Is there a problem?
So which is the better way of seeing scenario two? Does the juxtaposition of scenarios one
and two bring to light a problem of double tax on income derived through a company or does
it not? There is no obvious right answer here. There is merit to each point of view.

Unsurprisingly, if we look at tax regimes at different times and in different places we find
examples of regimes that see a problem of double tax and examples of regimes that see no
such problem.

An income tax regime that taxes both the company on its business profit and the shareholder
on her dividend income can be interpreted as not seeing any problem of double tax. This is
the ‘classical tax treatment’ of a company and its dividend income.

An income tax regime that by some means has the tax outcome in scenario two approximate
the tax outcome in scenario one (i.e. X in scenario two has after tax income approximating
$70) can be interpreted as having acknowledged a double tax problem and taken steps to
address the problem.

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Addressing the problem
Suppose we do see a problem of double tax. What means exist to have the tax outcome in
scenario two approximate the tax outcome in scenario one?
We could tax only the company.
We could tax only the shareholder.
We could alternatively tax the company or shareholder but not both.
We could tax both the company and shareholder but allow the shareholder a credit for tax
paid by the company.
[Note these options are only broadly stated.]

Two arguments
I want to put two arguments in favour of recognising a problem of double tax on income
derived through a company.

The first and strongest argument for recognizing a ‘problem’ is scenario three. Here is
scenario three.

X owns all the shares in Bco. Bco owns all the shares in Aco. Aco owns the business.
X

Bco
o

Aco
o

business

In scenario three, adopting a classical tax treatment of a company and its dividend income,
Aco will pay tax of $30 on $100 of business income, Bco will pay tax of $21 on $70 of
dividend income, and X will pay $14.70 of tax on $49 of dividend income. X's income after
tax is $34.30! This is a long way from the tax outcome in scenario one. X’s after tax income
is slightly less than half that in scenario one.

Not yet convinced there is a problem? Then consider scenario four, potentially a story of
‘quadruple tax’ on income derived through a company. And scenario five etc.

Here is a second argument. This is policy based.

A company can be financed with debt or equity. In equity financing investors hand money to
the company and receive shares. In debt financing investors hand money to the company and
receive bonds. All investors expect a reward. Shareholders receive dividends. Bondholders
receive interest.

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In scenario two X has invested in Aco. Suppose the investment is debt and the reward to the
investor is interest of $100. In this situation Aco will have profits of zero due to the additional
expense of interest. Aco’s tax liability is zero. Meanwhile X has interest income of $100, and
after tax of 30%, an after tax income of $70. The tax outcome is the same as in scenario one.
If you were X, would you capitalize your company Aco with equity producing an after tax
income of $49 or with debt producing an after tax income of $70? Presumably the latter.

So here is the policy based argument. A classical tax treatment of companies and dividends
results in inferior after tax returns to equity investors when compared to debt investors.
Companies and investors will therefor prefer companies to be financed with debt. This is not
good for the economy as a whole. Companies with heavy debt loads face a greater risk of
insolvency than companies financed with equity. Increasing corporate insolvency increases
instability in the economy as a whole. A tax law that induces a bias towards debt finance is
thus a bad thing.

If as a student you read American finance textbooks you may read that debt finance is more
tax effective than equity finance. It is important to recognise that this is not an immutable
universal truth. Rather it depends on whether the tax regime adopts or does not adopt a
classical scheme for the taxation of companies and dividends. If a tax regime does recognise
the problem of double tax on income derived through a company and adopts some means to
counter this, then it will not be true that debt finance is more tax effective than equity finance.

ITA 2015
The new Fiji ITA does not have a single tax treatment for dividend income. Rather there are a
number of different treatments dependant on the identity of the company and shareholder. We
see situations where the Act adopts the classical tax treatment and situations where the tax
rules address the problem of double tax on income derived through a company.

For the purpose of detailing the different tax treatments I want to create three different
categories or headings: Wholly domestic situation; Partially foreign situation; Special cases.

Wholly domestic situation

This heading refers to situations where both the company and the shareholder are Fiji
residents.

Inter-corporate dividends
The ITA 2015 defines a resident company as a company created in Fiji or having its central
management and control located in Fiji (see s.2). For practical purposes most resident
companies will be Fiji companies, by which I mean, companies created under the Fiji Cos
Act.

A Fiji company is subject to Income Tax (s.8(1)) on chargeable income being worldwide
income (see s.14(3)(a)).
Dividends paid to a shareholder being another Fiji company are exempt income of the
shareholder.

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Exempt income (s.20) is identified in the Schedule to the Income Tax (Exempt Income)
Regulations 2016. Part 5 para.5 lists as exempt dividends:
‘A dividend paid by a resident company to another resident company.’

This exemption is based not on policy but principle. Classifying the dividend as exempt
income of the shareholder (a Fiji company) solves the problem of double tax on income
derived through a company. It also ensures there is no problem of triple tax etc where there is
a chain of Fiji companies.

The position is often summarised by saying ‘intercorporate dividends between two Fiji
companies is exempt income.’

Shareholder is Fiji resident individual

Where the shareholder is a resident individual a different rule applies. The Fiji company
paying the dividend to a resident individual withholds an amount of 3%. This becomes a final
tax and the dividend is not included in the shareholder’s gross income and chargeable
income. The governing provisions are s.112(2) and s.125.

Section 112(2) provides:

‘(2) Subject to this Subdivision, a resident company paying a dividend to a resident
person must withhold tax from the gross amount of the dividend at the rate of 3%.’

[Note that s.112(2) was amended in 2016 by deleting ‘of 3%’ and substituting ‘prescribed by
Regulations.’ The Regulations are the Income Tax (Rates of Tax and Levies) Regulations
2016. These are the regulations where we find the tax rates for Income Tax, SRT, NrWT,
CGT etc. Placing the rate in the regulations rather than s.112(2) itself, removes an anomaly.
Why were most other rates in the Regs while s.112 stated the rate itself?
(My favoured explanation was: ‘Viva la difference. Variety is the spice of life.’)

It’s good to remove anomalies. But recall my earlier critique that Parliament should not hand
to the executive the power to set tax rates. Removing the rate in s.112(2) to the Regulations
exacerbates matters. One wishes the anomaly was addressed rather by returning all rates to
the Act.]

Section 125(1) provides:

‘(1) This section applies to tax withheld during a tax year under –
…
(d) section 112(2).’

We looked at s.125(1) in week 10. It is concerned with the question: When does this section
apply? If the section does apply then we read on. Section 125(2) provides:
‘(2) If this section applies, the tax withheld is a final tax on the income in respect
of which the tax has been withheld and –
(a) the income is not included in –
(i) gross income in computing the chargeable income of the person who
derives it for any tax year, …’

I suggest we can understand the tax treatment in this case (Fiji company with Fiji resident
individual shareholder) as follows. The Act recognises the problem of double tax and then

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largely addresses it. There is a degree of double tax. The shareholder is taxed at a rate of 3%
on the dividend income, but this is substantially less than the rate which could apply if the
dividend entered gross income and so chargeable income.

If the individual’s chargeable income exceeded $50,000 before including the dividend
income, then the dividend income would be subject to Income Tax of 20%. And if chargeable
income exceeded $270,000 before including any dividend income then SRT would be levied
at an additional 23% and upwards.

Final point. Note that s.112(2) refers to a dividend paid by a Fiji company to a ‘resident
person’. The term ‘person’ includes individuals and companies. On its face, s.112(2) also
applies to a shareholder that is a Fiji company. However, as seen earlier intercorporate
dividends between two Fiji companies are exempt income. While s.112(2) refers to resident
persons, it is in practice confined to resident individuals.
(Section 115, inter alia, provides that s.112(2) shall not apply to exempt income.)

Partially foreign situation

This heading refers to situations where either the company or the shareholder are non-
residents.

Foreign company with Fiji resident shareholder

A Fiji resident (individual or company) receiving a dividend from a foreign company will
include the dividend in gross income (s.14(3)(a)) and chargeable income. Income Tax (s.8(1))
will be levied on the resident’s chargeable income. This much we can say with certainty.

What is happening in the home country of the foreign company? This depends on the tax law
of that home country. Very likely the foreign company is subject to income tax on its business
profit. Let’s presume that is the case.

We see here that there is double tax. However, note that this is not the standard ‘classical tax
treatment’ story. The company is taxed on business income and the shareholder is taxed on
after tax profit of the company distributed as a dividend. But the two taxes are imposed by
different tax jurisdictions. Business profit is taxed in the foreign country. Dividend income is
taxed in Fiji.

Before leaving this case (foreign company and Fiji resident shareholder) note that there can
be one other (and different) double tax problem. The Fiji resident with foreign sourced
dividend income might be taxed in the source country on that dividend income. When the
foreign sourced dividend is included in gross income in Fiji we see the shareholder being
taxed twice on the same income. We have earlier noted this double tax problem and noted the
solution. The solution is a DTA between Fiji and the foreign jurisdiction. Absent a DTA, Fiji
has the unilateral solution in s.60.

You should be able to see that the double tax problem that arises from two countries adopting
a similar tax base (residents taxed on worldwide income and non-residents taxed on income
sourced within the jurisdiction) is different from the problem of double tax on income derived
through a company. You should also be able to see how the two problems may become

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entangled. The first of these problems can be addressed with something like s.60. The second
problem cannot.

Fiji company with non-resident shareholder

The profits of a Fiji company enter gross income/chargeable income and are subject to
Income Tax. After tax profits distributed as dividends to a non-resident shareholder are
subject to NrWT (s.10). The tax rate is 9% (see the Income Tax (Rates of Tax and Levies)
Regulations 2016). NrWT is a final tax and the dividend is not included in the gross income
of the non-resident shareholder (s.12(a)).

The NrWT rate of 9% is three times the s.112(2) rate that applies to a resident shareholder. It
is less than the Income Tax rate of 20% on non-residents (individual or company). However,
note that any expense incurred in deriving the dividend income (e.g. interest on money
borrowed to purchase shares) is not deductible (s.12(b)).

On balance we can probably see the rate of 9% as a reduced rate (compared to Income Tax
for non-residents) adopted as a partial response to the problem of double tax on income
derived through a company.

Special cases
This heading concerns situations with their own specific tax treatments.

Companies listed on the SPSE

Companies listed on the SPSE are subject to Income Tax on chargeable income at the
concessionary rate of 10% (see the Income Tax (Rates of Tax and Levies) Regulations 2016).
Dividends received by shareholders of a SPSE listed company are exempt income (see
Income Tax (Exempt Income) Regulations 2016 Part 5 para.1). The exemption covers all
shareholders whether residents or non-residents, individuals or companies.

Income that is exempt is exempt for all purposes. Thus there is no Income Tax (s.14(2)(a)),
no NrWT (s.10(3)(e)), and no s.112(2) tax (s.115).

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‘Dividend’ for tax purposes
Transformation tales
In nature the caterpillar transforms into a butterfly. In the classic horror story Mr Jekyll
transforms into Mr Hyde. In modern Hollywood movies a male character transforms into a
wolverine. In the world of companies and shareholders we find that gains may transform.

The most common story of transformation concerns business income becoming property
income. In scenario two discussed earlier, Aco owns and carries on a profitable business.
Aco has business income. Subsequently profits are distributed to members in the form of a
dividend. Members have property income. Gains that were business income have become
property income. Is this significant? Is it important? That likely depends on other matters.
Suppose we had a tax regime that levied tax at different rates on earned and unearned income.
(Recall that income from property is sometimes known as ‘unearned income’.) In this context
the transformation would be important.

Here are some other transformation stories.

Suppose a company disposes of land held as a capital asset and realises a capital gain. On
general principles this will not enter the company’s profit calculation for tax purposes.
Meanwhile company law provides that a company may only pay a dividend from profits. For
the purposes of company law’s dividend rule the capital gain will be included in the
company’s profit calculation and justify payment of a dividend. Dividends received by the
company’s shareholders are an income receipt. A gain that was a capital gain in the hands of
the company becomes an income gain in the hands of the member.

Suppose a company carries on business and makes substantial profits. The company pays no
dividends to members. Subsequently the company is wound up. In the winding up process,
company creditors are first paid in full. Remaining value is then distributed among
shareholders. This is seen as a capital transaction. Undistributed income of the company in a
winding up becomes a distribution of capital.

Suppose a company issues redeemable preference shares. Company law provides that
redeemable preference shares can only be redeemed from undistributed profits (or the issue
of replacement shares). Money received by a shareholder in a redemption is a capital receipt.

Suppose a company issues bonus shares to its shareholders. The bonus shares are fully paid
up from retained profits of the company. Does a bonus share constitute income? Different
courts have come to different conclusions on that issue.

The tax significance of transformation

In these transformation stories we see that a capital gain in the hands of a company may
become an income receipt in the hands of a shareholder or that income gains in the hands of
the company may become capital receipts in the hands of the shareholder. What is income tax
law to do in such situations?

There are two broad possibilities.

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First, tax law could shrug its shoulders and say ‘C’est la vie’.
[‘C’est la vie’ is a French language phrase sometimes used by English language speakers. It
means ‘that’s life’ or ‘life is like that.’ It can be accompanied by a Gallic shrug of the
shoulders if you choose.]
Alternatively, tax law could aim to counter the transformation taking place, aim to ensure that
income gains in the hands of the company remain income when distributed to members, and
that capital gains of the company constitute a capital receipt when distributed to members.
This objective could be met by adopting a tax definition of dividend. For example, capital
gains of the company distributed to members do not constitute a dividend. Another example:
retained profits of the company distributed to shareholders in a winding up, do constitute a
dividend.

So which should it be? C’est la vie, or create a special tax definition of dividend?

I want to express a personal opinion here.

Is the classical tax treatment in which the company is taxed on its business profit and the
shareholder is taxed on dividend income a story of double tax? Arguments may be put both
for and against this being a story of double tax.

The against argument emphasizes the company law truths. A company is a legal person. The
company as a legal person is separate and distinct from the shareholder. The shareholder
owns the company (more technically shares in the company); the company owns the
business; the shareholder does not own the business. The company has business income. The
shareholder has property income. In our earlier scenario 2 there was aggregate income of
$170. With a tax rate of 30% the aggregate tax should be $51. Honouring these truths is the
reason why X has after tax income of $49.

The against case focuses on the legal truths or legal reality rather than the economic reality. A
party taking this position should take this position consistently. If, for example, undistributed
business profit distributed to shareholders in a winding up is a capital receipt, then so be it.
C’est la vie.

The for case (yes there is a problem of double tax) rests on an economic analysis. The
company is only a device. Business profit is the reward to investors who have supplied
capital. To tax the company on the business profit and then tax shareholders on a distribution
of that profit is to tax twice. This should be avoided. In line with this focus on economic
substance it makes sense to focus on transformation stories and look beyond legal form to the
economic substance.

Only a caveat needs to be entered. The importance of any particular transformation story will
depend on the larger overall tax treatment of companies and dividends. If, for example, tax is
levied only on the company and dividends are exempt income of the shareholder then there is
no need to expand the definition of dividend to include a distribution of undistributed profits
to shareholders in a winding up.

ITA 2015
The ITA 2015 does provide an expanded definition of dividend for tax purposes. We looked
at this in week 4 (see pp.18-19).

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This concludes our survey of the tax treatment of dividend income under the ITA 2015.

Some other matters

This week I want also to look at a few other matters.

In looking at the tax treatment of dividend income we have taken note of s.112(2) and the
related s.125 and also made reference to s.10. The ‘other matters’ do not concern dividends
but they do concern these same sections. I want to first look further at s.112 and then second
look further at s.10.

Other matters re s.112

Section 112(2) imposes a withholding obligation with respect to dividend payments. Section
112(1) imposes a withholding obligation with respect to interest payments.

Section 112(1) provides:

‘(1) Subject to this Subdivision, a resident company or permanent establishment in
Fiji of a non-resident company paying interest to a resident person, must withhold
tax from the gross amount of the interest at the rate of 10% except if –
(a) the payment is to a financial institution; or
(b) the CEO issues a certificate of exemption to a resident person on the basis
that the interest is exempt as prescribed by Regulations made under this Act.’

‘Permanent establishment’ is a defined term in s.2. The archetypal permanent establishment is

a branch office.

A number of foreign banks carry on business in Fiji (e.g. BSP, ANZ, Westpac, Bank of
Baroda) through branch offices. If you bank in Fiji with BSP then you are technically a
customer of a PNG company. If you bank with ANZ or Westpac then you are technically a
customer of an Australian company (and more technically again a Victorian or New South
Wales company). If you bank with Baroda you are a customer of an Indian company.
Notwithstanding their very significant presence in Fiji, BSP, ANZ, Westpac and Baroda are
for tax purposes non-resident companies. While the company, the legal person is a non-
resident, the branch office constitutes a ‘permanent establishment’.

Under s.112(1) a Fiji company or permanent establishment of a foreign company making an

interest payment to a resident person must withhold 10% of the payment which is then
remitted to FRCA.

There are two exceptions. The important one is para.(a); the creditor in receipt of the payment
is a bank. This exception does not concern payments of interest to say BSP or ANZ. The
reason: neither BSP or ANZ is a resident. It does concern interest paid by a Fiji company to
say FDB (Fiji Development Bank). Or interest paid by say ANZ (a permanent establishment)

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to say RBF (Reserve Bank of Fiji). (Both FDB and RBF are Fiji companies and thus resident
persons for tax purposes.)

Section 112(1) is confined to interest paid to a resident person because interest paid to a non-
resident is already covered by s.10 NrWT.

[I have quoted s.112(1) above as it appears in the unamended ITA 2015.

In 2016, s.112(1) was amended in the same fashion as s.112(2). The tax rate of 10% was
deleted and ‘prescribed by Regulations’ substituted. The 10% rate is now located in the
Income Tax (Rates of Tax and Levies) Regulations 2016.]

s.112(1) - final tax or tax collection?

Sums withheld under s.112(1) may, just like s.112(2), constitute a final tax per s.125.
However, this is not always the case. Sums withheld may be only a story of collection, in
which event s.124 applies.
We find the same complexity as exists with PAYE. PAYE is generally a final tax but
sometimes is only a collection mechanism governed by s.124.

Section 125(1) provides:

‘(1) This section applies to tax withheld during a tax year under –
…
(b) section 112(1) from interest paid by a financial institution to a resident
individual;’

Once s.125 applies, then s.125(2) kicks in. The sum withheld is a final tax and the income is
not included in gross income/chargeable income.

All this is straightforward. Bank interest paid to a resident individual becomes subject to a
specific tax of 10% and will not enter gross income/chargeable income and not be subject to
Income Tax.

Section 125(1) also makes reference to s.112(1) in para.(c). Section 125(1)(c) provides:
‘(1) This section applies to tax withheld during a tax year under –
…
(c) section 112(1) from interest paid to a resident individual to which paragraph
(b) does not apply and the only other income of the individual is the
following –
(i) income to which this section applies;
(ii) subject to tax under section 9; or’

[Note nothing follows the final ‘or’. This appears to be a drafting error.]

Paragraph (c) concerns interest that is not bank interest. Section 125 will also apply if the
taxpayer’s only other income is limited to:
- employment income subject to PAYE final,
- bank interest
- dividends from a Fiji company

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- Presumptive Income Tax re a micro business.

Interest payments to which para.(c) applies are likely to be relatively uncommon.

Other matters re s.10

Section 10 imposes Non-resident Withholding Tax. This is a specific tax. The tax applies to
dividends paid by a Fiji company to a non-resident shareholder. But the tax is not limited to
dividend payments. It also applies to a non-resident taxpayer who has Fiji sourced income in
the form of:
- interest
- a royalty
- a natural resource amount
- an insurance premium
- a management fee
- a fee for professional or other independent services.

We looked at s.10 NrWT in week 6 (see pp.11-14).

Section 10 is headed: ‘Imposition of Non-resident Withholding Tax on non-resident

payments’. Section 10 has to be read together with s.12. I don’t wish here and now to repeat
matters we have considered previously concerning ss.10 and 12. What I do want to deal with
are the references found in s.10 to a ‘permanent establishment’.

Section 10, as the heading states, imposes the specific tax NrWT. But this is actually an
incomplete statement of what the section does. Importantly, the section also creates rules
concerning the tax treatment of ‘permanent establishments’. This is the further matter that I
want to look at concerning s.10.

Domestic income tax law generally divides taxpayers into two camps: residents and non-
residents. ‘Resident’ is defined in positive terms. A ‘non-resident’ is a person who is not a
resident. The ITA 2015 follows this tradition. (See the definitions of resident and non-resident
in s.2.)

The two camps commonly are subject to different rules. For example, gross income of a
resident is worldwide income; gross income of a non-resident is Fiji sourced income (see.
s.14(3)). Another example: resident individuals are subject to withholding tax on bank
interest and dividends from Fiji companies (s.112 and 125); non-resident persons are subject
to a different withholding tax on Fiji sourced interest and dividends (ss.10 and 12).

The ITA 2015 does something new (or at least new for Fiji). It creates a third camp: a
permanent establishment of a non-resident company. The permanent establishment is then
treated as if it were a resident. We find this in s.10(6).

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Section 10(6) provides:
‘(6) For the purposes of this section, section 7, and Subdivision 4 of Division 2 of
Part 9 –
(a) a permanent establishment in Fiji of a non-resident company and the rest of
the company are treated as separate persons;
(b) the permanent establishment is treated as a resident company and the rest of
the company (referred to as the “head office company”) is treated as a non-
resident company; and …’

[Note that s.7 concerns rules re the geographic source of income. Part 9 Division 2
Subdivison 4 is ss.111-125,]

What we have here is a novel (but perfectly sensible) construct. A foreign company is a non-
resident. But a permanent establishment of the foreign company will be seen and treated as if
it were a resident company separate and distinct from head office.

The stance taken in s.10(6) has two particularly important consequences.

The first concerns a limitation on the application of the NrWT. By way of example let’s
consider somebody like BSP. BSP is a PNG company with an extensive branch network in
Fiji. (As a matter of fact this is the banking business previously owned and carried on by the
Fiji company NBF later renamed Colonial National. BSP acquired not the company but the
banking business of the company.) Fiji customers of BSP pay interest to the bank on their
home loans and business loans etc. Technically this is a payment by a Fiji resident to a non-
resident person. Prima facie, therefor, the interest payment is subject to NrWT.

(I have a question. On your most recent interest payment of on your car loan from BSP did
you withhold 10% and remit this to FRCA as required by s.113 and s.117? The answer, of
course, is ‘Of course not.’)

Prima facie interest payments to the bank will attract NrWT. But that would be ridiculous.
How can we remove interest payments by Fiji customers to the bank from NrWT? Section
10(6) provides a means. Treating the permanent establishment as a resident company enables
us to say that NrWT has no application here.

Section 10(3) states the point more explicitly and in greater detail. Section 10(3) provides:
‘(3) This section does not apply to the following –
(a) any dividend if the holding giving rise to the dividend is effectively
connected with a permanent establishment in Fiji of the non-resident person;
(b) any interest if the debt claim or other instrument or agreement giving rise to
the interest is effectively connected with a permanent establishment in Fiji
of the non-resident person;
(c) any royalty or natural resource amount if the property, right or supply giving
rise to the royalty or natural resource amount is effectively connected with a
permanent establishment in Fiji of the non-resident person;
(d) any insurance premium, management fee or fee for the provision of
professional or other independent services if the services giving rise to the
premium or fee are rendered through a permanent establishment in Fiji of
the non-resident person; …’

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Paragraphs (a), (b), (c) and (d) list in turn all of the forms of income encompassed by NrWT.
Where the payment is to a permanent establishment of a non-resident person, NrWT will not
apply.

[Note that very technically s.10(6) does not render s.10(3)(a)-(d) redundant. The latter is
slightly broader in applying to the permanent establishment of any non-resident. Thus it
includes the permanent establishment of a non-resident sole trader or non-resident
partnership.]

The second important consequence of s.10(6) concerns the tax treatment that arises where
profits of the permanent establishment of a foreign company are remitted to headquarters.

Section 10(6)(c) provides:

‘(6) For the purposes of this section, section 7, and Subdivision 4 of Division 2 of
Part 9 –
…
(c) the after tax earnings of the permanent establishment as determined
according to generally accepted accounting principles paid or credited in
favour of the head office company is treated as a dividend derived by the
head office company and paid by the permanent establishment.’

This is a story of a deemed dividend. In truth income remitted from a branch office to
headquarters is not a dividend. However, once the branch office is seen as a separate person
(more particularly a resident company) it becomes possible to view any remission of profit to
head office as a dividend. The ‘dividend’ from the deemed resident company to the foreign
parent (i.e. shareholder) attracts NrWT.

The tax treatment imposed on non-resident companies with a permanent establishment is

likely to be viewed as harsh. The non-resident company is subject to Income Tax (s.8) on
profits of the permanent establishment and then subject to a further level of tax (NrWT) when
the after tax profits are remitted to headquarters.

The tax treatment sets out to create a story of double tax. If there were no s.10(6) the non-
resident company would be subject to Income Tax on its Fiji sourced income (s.14(3)(b)) or
NrWHT but not both the general tax and the specific tax (s.12(a)).

This concludes our review of other matters concerning s.112 and s.10.

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