Senior reporter
Membership shopping company PriceSmart Clubs Ltd has won a lawsuit against the Board of Inland Revenue (BIR) over its move to change from its previously accepted methodology for considering foreign exchange losses when calculating corporation tax.
Delivering a judgment on Wednesday, High Court Judge, Vigel Paul, ruled that the BIR breached the company’s legitimate expectation by not accepting the methodology it had previously approved for the calculations.
The company, which operates four clubs in Trinidad, filed the case after the BIR sought to reassess its tax returns for 2016 in late 2022. The reassessment was based on the BIR rejecting the methodology for foreign exchange gains and losses, which it resolved with the company between 2004 and 2007 and accepted for tax returns up to 2015.
Under the methodology, the company calculated realised foreign exchange losses as the difference between the rate at which it purchased foreign exchange from banks to pay suppliers and the mid-rates at which its foreign currency liabilities are recorded on its books.
The company treated foreign exchange losses as deductible expenses and realised foreign exchange gains as taxable income. The unrealised foreign exchange gains and losses, arising from the revaluation of outstanding foreign currency liabilities, were treated as non-deductible and non-taxable respectively. In its return for 2016, the company claimed that its corporation tax liability was $20,089,759 with a claim for foreign exchange losses of $7,605,383.
In December 2022, the BIR disallowed the losses claimed and requested that the company pay almost $4 million in additional taxes.
One week later, the BIR sent contradictory correspondence in which it agreed with the company’s initial self-assessment. The BIR subsequently claimed that the follow up letter was sent in error. The company, through its lawyers Barrie Attzs and Gary Ramkissoon, filed the case as well as a challenge before the Tax Appeal Board, which is still pending. In upholding the case, Justice Paul found that the company had a legitimate expectation that the methodology would apply unless it was formally notified of a change by the BIR.
“No letter, circular, notice or other communication was issued to inform the company whether in advance of the 2016 audit or at any stage during the audit, that the BIR was minded to change its approach for that year or for future years,” he said.
“The departure from the agreed foreign exchange claim methodology-applied retroactively to income year 2016, without prior notice, without any communication of the BIR’s reasons during the objection period, and without any overriding public interest justification, was conducted in a manner so unfair as to amount to an abuse of process,” the judge added.
Justice Paul ruled that the BIR’s conduct constituted a breach of its duty of fairness and of the principles of natural justice.
Despite his findings, Justice Paul refused to rule on the lawfulness of the methodology or order a refund for PriceSmart.
He said that the Tax Appeal Board had the jurisdiction to make a determination of the methodology.
“The declaration granted is, in the court’s view, sufficient to vindicate the public law wrongs established on the evidence, leaving the substantive tax position to be resolved in the proper forum,” Justice Paul said.
The BIR was represented by Rorey Gaya, and Ufi Broomes.
