Question

‘In a taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied’ and ‘subsequent legislation, if it proceeded on an erroneous construction of previous legislation, cannot alter the previous legislation’.Per Rowlatt J in cape brandy syndicate v IRC [1921]1 KB 64

Examine the principle of interpretation of taxing statutes in view of the above cited judicial pronouncement.

INTRODUCTIONArticle 152 of the 1995 constitution provides that no tax shall be imposed except under the authority of an Act of parliament. Parliament has since taken the initiative to enact various tax laws in Uganda.

Tax laws are highly complex, complicated and beyond understanding of a tax-payer. The words and expressions used are not simple. Many sections contain sub-sections, clauses, sub-clauses. Many deeming provisions have been inserted. Meaning of an expression is extended by way of Explanation and is curtailed by way of proviso, sometimes more than one provisos and explanations meaning differently. This therefore calls for the interpretation of these taxing statues.

Interpretation (construction) alone is the process of determining the true meaning of a written document. It is a judicial process, effected in accordance with a number of rules and presumptions.

The Oxford Dictionary of law 5th Ed. (2003) defines interpretation of statutes as the judicial process of determining, in accordance with certain rules and presumptions, the true meaning of Acts of Parliament.

The most commonly interpreted tax statutes in Uganda include but not limited to the Income Tax Act cap 340, the tax Appeals Tribunal Act cap 345 and the Uganda Revenue Authority Act cap 196.

THE ESSENCE OF INTERPRETING TAXING STATUTES

Often, many words and phrases which are used in taxing statutes either have no technical meaning in law or they simply have no precise meaning in ordinary use. For example, the word “profits” of a business in the Income Tax Act, cap 340. The term “profit” is not statutorily defined. “Trade” also lacks satisfactory statutory definition as it is also difficult to ascertain its meaning in its ordinary usage. Although the term “trade” is widely used and appears common, but as regards its application in tax law it poses problems. For instance, whether a resale of property constitute a “trade”

Therefore, due to this lack of precision it has become necessary to define the words or phrases (by practice or precedent) to enable those applying tax law to decide on various taxing matters.

Courts have been playing the role of interpreting the law as laid down in the statutes to give meaning to the words and phrases which in themselves do not have precise meaning. What the courts do in construing taxing statutes is in effect the same as in other statutes, namely, to ascertain the intention of the legislature as it appears from the language it has used.

BRIEF FACTS OF CAPE BRANDY SYNDICATE V IRC

Members of a wine syndicate joined in a separate syndicate to purchase brandy from South Africa.  Some was shipped to the East with the remainder being sent to London to be blended with French Brandy, re-casked and sold at a profit.  The Appellants contended that they carried out an isolated transaction of a speculative nature, which was not a trade or business within the meaning of Section 39 of the Finance (No. 2) Act, 1915; and, alternatively, that if they carried on a trade or business, the profits arising from a business commencing after 4th August, 1914, were not chargeable to Excess Profits Duty.

Held , (1) that the question whether the Appellants carried on a trade was one of fact, and that there was evidence on which the Special Commissioners could arrive at their conclusion; and (2) that, on a true construction of the Finance (No. 2) Act, 1915, and subsequent Acts, a trade or business commenced since the beginning of the war was liable to assessment to Excess Profits Duty.

Rowlatt J said: ‘In a taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied’ and ‘subsequent legislation, if it proceeded on an erroneous construction of previous legislation, cannot alter the previous legislation’.

Lord Sterndale MR said: ‘I quite agree that subsequent legislation, if it proceed upon an erroneous construction of previous legislation, cannot alter that previous legislation; but if there be any ambiguity in the earlier legislation, then the subsequent legislation may fix the proper interpretation which is to be put upon the earlier.’

Lord Atkinson: ‘Where the interpretation of a statute is obscure or ambiguous, or readily capable of more than one interpretation, light may be thrown on the true view to be taken of it by the aim and provisions of a subsequent statute.’

Interpretation of tax states in Uganda

There are three primary approaches to the interpretation of statutory provisions as originally developed by the English judges at common law

and absorbed into the law of the general law of Uganda. First, the “literal rule” that where the words of statute are clear and unambiguous, they should be interpreted according to their natural and ordinary meaning. Secondly, the golden rule, allowing the judge to modify the literal meaning in the event of ambiguity. Thirdly, the mischief rule, directing the judge to interpret statute by reference to the mischief it was designed to cure. In more recent times a fourth approach has emerged in the form of purposive interpretation, requiring the judge to ascertain the “true intent of the legislature”

In the absence of constitutional or other statutory provision prescribing a particular approach, judges have considerable freedom in deciding which of these approaches to adopt in interpreting statutory provisions. In the exercise of this freedom, the courts in Uganda have consistently held that tax statutes must be interpreted in accordance with the literal rule.

The general rules used in interpretation of taxing statutes were cited by Justice Christopher Madrama in Kinyara Sugar Ltd vs Commissioner General Uganda Revenue Authority where he recognised that he drew inspiration from Lord Donovan in Mangin v IRC and these rules include;

The literal rule

The literal rule, sometimes referred to as strict constructionism, directs that where the words of a statute are plain and unambiguous, they should be construed strictly according to their natural and ordinary meaning “without looking to other sources to ascertain its meaning”1. A classic statement of the rule in the tax context is to be found in the judgment of Rowlat J in the case of Cape Brandy v IRC2:

In a taxing Act, clear words are necessary to tax the subject. But it is often endeavoured to give to this maxim a wide and fanciful construction. It does not mean that words are to be unduly restricted against the Crown or that there is to be any discrimination against the Crown in such acts. It means this, I think, it means that in taxation you have to look simply at what is clearly said. There is no room for any intendment, there is no equity about tax, you read nothing in; you imply nothing, but you look fairly at what I said and at what is said clearly and that is tax

This rule which has been followed religiously by Ugandan judges means that “the subject is not to be taxed unless the words of the taxing statute unambiguously impose that tax on him”. It follows from this that for tax liability to arise there must be a clear link between the charging provisions and the intended taxpayer. This link must be direct, not 1 A. Ipaye, op cit , p .42 [1921] 12 Tax Cases 358

inferential. Implicit in all this is that the courts have no business in trying to repair legislation that fails to fire or misfires. This is illustrated by the case of Ayshire Pullman v IRC3 where a provision intended to widen the tax net failed to achieve that purpose. Lord Simmonds said:

It is at least clear what is the gap that is intended to be filled and hardly less clear how it is intended to fill the gap. Yet I can come to no other conclusion than that the language of the section fails to achieve its apparent purpose and I must decline to insert words or phrases which might succeed where the draftsman failed4.

This is not to say that the literal rule confines the judge to the words of the particular provision calling for interpretation. A statute must be read as a whole and so the literal meaning of a particular provision may be modified when read in the light of surrounding provisions.

Furthermore, where the literal meaning of a word will result in ambiguity, in the sense that the words are capable of more than one meaning, the judge may “seek internal aid within the body of the statute itself or external aid from statutes in pari-material in order to resolve the ambiguity”. If, however, the statutory provision is found to be irredeemably ambiguous, the judge to adopt the interpretation that most favours the taxpayer.

Justification of Literal ruleOutside of the tax context the courts have had no difficulty in accepting that as a matter of principle, statutes should be interpreted purposively. The principle reason appears to be that tax is seen as involving the “imposition of a burden” on the citizen5.This reflects the traditional hostility of judges at common law to statutes seen as encroaching on a citizen’s property or liberty. Tobias puts this view forcefully when he writes:

The revenue statutes constitute penalties imposed by the state which encroach on a citizen’s liberty, that is, their right to prosper from free enterprise. Given that there exists no doctrine in the courts to support the notion that there is a duty to contribute to the upkeep of the state through tax, and given that there exists a right to avoid but no duty to pay taxes, it seems most appropriate that before the state confiscates a taxpayer’s liberty it should make its grounds for doing so crystal clear. For this very reason tax laws should be construed in highly technical terms, without regard for the purpose they were designed to serve, just as criminal

3 (1921) 14 TC 7454 [1946] 1 All ER 6375 Federal Board of Inland Revenue v American International Insurance Company (Nig.) PLC

(1999) 1 N.R.L.R. 50, at p. 56 (per Belgore C.J.)

penalties, which similarly impose a restriction on one’s liberty, are construed.

Deficiencies of Literal rule

In invoking the literal rule, the courts proceed from the premise that “the surest guide to the intention of Parliament is the words used by it in the statute”. This, however, overlooks the limitations that attend process of legislative drafting. In particular, it ignores the fragility of language in assuming that draftsmen can always choose words to accurately describe the situation to be covered by the provision which will leave no room for difference of view as to their meaning. The literal rule also fails to allow for the difficulty of foreseeing and providing for all contingencies capable of having a bearing on a proposed provision6. In these ways, the literal rule is unrealistic in “assuming unattainable perfection in drafting”. Indeed draftsmen often deliberately choose to use broad terms in drafting bills (i.e. words of wide or variable meaning) on the basis that the courts can be relied on to determine what situations fall within them.

Another major criticism is that by precluding the judges from having regard to the underlying purposes of statute, it imposes an arbitrary limit on the ability of judges to ascertain the will of parliament. This is perverse because “if the purpose of construction is ascertainment of meaning nothing that it is logically relevant should be excluded”7. The exclusion from consideration of the underlying purposes of a statute carries the risk that judges may end up construing tax provisions in ways that defy the apparent intention of the legislation. This is illustrated by the case of IRC v Duke of Westminster8. There the House upheld a scheme entered into by the Duke to reduce his tax liability by paying his workmen in the form of tax deductible annuities rather than wages. The Revenue argued that the court should look at the substance of transaction to treat the annuities as non-taxable wages, but this was decisively rejected by the court. Lord Tomlin said:

“This so called doctrine of “the substance” seems to me to be nothing more than an attempt to make a man pay notwithstanding that he has so ordered his affairs that the amount of tax sought from him is not legally claimable”9.

As this case illustrates, the literal rule may facilitate tax avoidance by enabling taxpayers to structure transactions that fall within the terms of tax relieving provisions literally construed, but which in terms of their substance are different from those anticipated by Parliament. For this reason literal interpretation has been described as providing a charter for tax avoidance. This is of no small importance. Nigeria, like many other

6 W. Twining and D. Miers, How to do things with Rules (1977),pp. 40-437 English Law Commission, op cit, p 68 [1935] AC 19 Ibid, p. 10

developing countries, loses huge sums of potential tax revenue annually to tax avoidance to the detriment of development.

The golden rule

“The object of the construction of a statute being to ascertain the will of the legislature, it may be presumed that neither injustice nor absurdity was intended. If therefore a literal interpretation would produce such a result, and the language admits of an interpretation which would avoid it, then such an interpretation may be adopted.” The history of an enactment and the reasons which led to its being passed may be used as an aid to construction.

This approach allows the court to take into account the consequences of a particular interpretation. If the literal meaning of the words results in an absurdity; the court will modify the ordinary meaning of the words to overcome this. This approach allows for rectification of an error in the wording of the provision when a literal meaning may not result in the intention of parliament being realised. Lord Wensleydale outlined the approach to the golden rule in Grey v Pearson. 1857) 6 HLC 61, 106.

The mischief ruleThis approach allows the court to determine the reasons or purpose for the passing of the Act by parliament (the mischief to which the Act is directed) and provides for an interpretation to be preferred that advances the purpose of the Act to one that does not. This approach is only applied if there is an ambiguity in the legislation as the position in Heydon’s case (1584) 3 Co Rep 7a, 7b.4. In Heydon’s Case the mischief rule was stated in the following way:  [F]or the sure and true interpretation of all Statutes in general four things are to be discerned and considered: (1st) What was the common law before the making of the Act? (2nd) What was the mischief and defect for which the common law did not provide? (3rd) What remedy the Parliament hath resolved and appointed to cure the disease of the Commonwealth? And (4th) the true reason for the remedy; and then the office of all the Judges is always to make such construction as shall suppress the mischief, and advance the remedy, and to suppress subtle inventions and evasions for continuance of the mischief, pro privato commodo, and to add force and life to the cure and remedy, according to the true intent of the makers of the Act, pro bono publico. Under this rule a court is required to make a “sure and true interpretation” of a statute by interpreting it “according to the true intent of the makers of the Act”. Heydon’s Case specifically refers to the situation where common law did not adequately deal with a problem, but by logical extension the rule

should also apply where earlier statute law on a subject is inadequate and has, for that reason, been changed by a later statute.

In support of the proposition that in the construction of an earlier statute one can have reference to a later statute as held in the case of Jafferali M. Alibhai versus the Commissioner of Income Tax [1961] EA page 610 at page 614 the Court of Appeal of East Africa in the judgment of Sir Alistair Forbes stated at page 614 paragraphs A and B that a reference to a later Act for the purpose of clarifying a provision in an earlier Act is permissible. In the Jafferali case the latter statute was held to clarify and therefore lend support to a particular interpretation of an earlier statute.

The Mischief Rule is of narrower application than the golden rule or the plain meaning rule, in that it can only be used to interpret a statute and, strictly speaking, only when the statute was passed to remedy a defect in the common law. Legislative intent is determined by examining secondary sources, such as committee reports, treatises, law review articles and corresponding statutes. The application of this rule gives the judge more discretion than the literal and the golden rule as it allows him to effectively decide on Parliament's intent. It can be argued that this undermines Parliament's supremacy and is undemocratic as it takes law-making decisions away from the legislature.

The Purposive approach

The purpose approach proceeds from the premise that in enacting tax legislation “the legislature must have had in mind some rational purpose in mind”, and directs the judge to ascertain the “true purposes” of the legislature and to interpret the words of the statute in accordance with that intent. This may or may not require the words of the provision in question to be read strictly.

The purposive approach to interpretation overlaps with the mischief rule, which itself dates back to the 16th century when judges viewed legislation as a means of meeting the deficiencies of the common law. The mischief rule directs the judge to interpret statute by reference to the particular problem (mischief) that Parliament intended to remedy and then to give such construction as will suppress the mischief and advance the remedy. Thus, like the purposive approach it “contemplates an inquiry into the policy and purposes behind the statute”. Although the purposive approach goes further than the mischief rule by looking at the underlying purpose of the statute considered as a whole, rather than just the mischief the statute was designed to remedy. Furthermore, strictly speaking, the mischief rule operates within a narrower compass as it only becomes applicable where the statute in view was enacted to deal with a particular mischief for which the common law failed to provide a remedy. However

the modern approach is to invoke the rule without regard to whether the common law provides a remedy for the mischief to which the statute is directed.

In adopting a purposive approach, judges are informed by the fallibility of draftsman and the limitations of the English language as a medium for capturing legislative intention in express words, and accept that they have a constitutional responsibility to assist parliament by repairing legislation where it fails to express Parliament’s true intention. As Lord Denning put in Seaford Court Estate Ltd v Asher10:

Wherever a statute comes up for consideration it must be remembered that it is not within human powers to foresee the manifold sets of facts which may arise, and, even if it were, it is not possible to provide for them in terms free from all ambiguity. The English Language is not an instrument of mathematical precision. Our literature would be much poorer if it were. This is where the draftsmen of Acts of Parliament have often been unfairly criticized. A judge, believing himself to be fettered by the supposed rule that he must look to the language and nothing else, laments that the draftsmen have not provided for this or that, or have been guilty of some or other ambiguity. It would certainly save the judges trouble if Acts of Parliament were drafted with define prescience and perfect clarity. In the absence of it, when a defect appears a judge cannot simply hold his hands and blame the draftsman. He must set to work on the constructive task of finding the intention of Parliament, and he must do this not only from the language of the statute, but also from a consideration of the social conditions which gave rise to it, and the mischief which it was passed to remedy, and then he must supplement the written word so as to give ‘force to it and the intention of the legislature11.

Thus the purposive approach enables judges to modify or even “reframe” the language of legislation to accord with the intention or purpose of the legislation, even to the extent of “doing some violence to the words” of the statute.

CONCLUDING COMMENTS

At the heart of the varying approaches taken by judges in the interpretation of taxing statutes is “ideology and conflict of values as to the proper role of the courts in interpreting statutes”. The literal rule in excluding consideration of legislative purpose and resolving ambiguous provisions in favour of the taxpayers, promotes the interests of the

10 [1949] K.B. 48111 [1974] 3 ALL ER 24

taxpayer ahead of the collective interest of the generality of citizens in orderly development.