I refer to the article under the below caption published on Page 3 of your issue dated Sunday December 12, 2010.
The writer is referring to the proposed amendment to section 61(1) (b)(ii) of the Inland Revenue Act No. 10 of 2006, whereby the existing ceiling on the tax chargeable on a company by reference to the dividends distributed is to be reduced from 25% to 1%.
The tax components under section 61(1) (a) and (b) are not separate taxes but constitute a single tax on the company. This aspect of local corporate taxation was clarified by the Privy Council in the Woodend case (SLTC Vol III, p 405). This is what the Privy Council said in 1970: “In Ceylon the dividends declared by resident companies is not the subject matter of the extra 33-1/3% but the condition of its being levied….)
The concept of deemed dividends is totally alien to the scheme of section 61 and the two things are as different as chalk is from cheese. Perhaps the writer is confusing section 61 with section 66. In terms of the latter section, an Assessor may, if he is satisfied that a company has unreasonably withheld the distribution of a reasonable part of its profits, deem a relevant part of such withheld profits as a deemed dividend and tax it on the company. A set-off is available for the tax paid under section 61(1) (b). True enough, the financial effect of the present provisions of section 61(1) (b) (ii) may have the same deterrent effect as section 66 on the corporate greed to withhold profits from distribution but the financial effect is not the same as the legal effect.
Another important criterion to be borne in mind is that the proposed amendment has the legal effect of reducing the corporate tax burden on the company and is allied to the reduction of the corporate tax rate to 28%. It is thus part of the development initiative of the government to foster the growth of corporate capital which is an important segment of economic growth. In this view it seems unfair to level a charge, however veiled, that the proposed amendment is by special favour. The writer’s spotlight on JKH, VPEL, JNS and HNB is, in my opinion, in bad taste.
In a quoted company, the small shareholder remains small whether the profits distributed are adequate or not. The writer’s concern for small shareholders is, like the love of animals, just a tender feeling and not a sound economic paradigm. The reference to ‘oppression of the minority’ is out of place in the context of the freedom that a person, big or small has, to buy shares in a quoted company.
The small investor like the poor voter in a democracy has Hobson’s choice. You invest small and get something small and learn to be content. You vote with the rich and let them share power and position in society while your ballot paper remains a piece of paper without any potential in the forward march of small democrats!
Tissa Samson Perera (ACA) Colombo |
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