Deferred remuneration deductibility: provisions for future lump sum retirement pay may be deductible if fairly estimated, but taxpayer's method failed.

Whether employers may deduct annual provisions for prospective statutory lump sum retirement payments as accrued income tax expenses was analysed by reference to the Peruvian statutory scheme, authorities on contingent rights and liabilities, and accounting valuation principles. The majority rejected an absolute rule barring such provisions, holding that deferred retirement payments can in principle be apportioned to years of service and treated as deductible when fairly estimated; however the taxpayer's face value method lacked adequate discounting and reliability on the evidence, and on the facts the appeal was decided for the Revenue with divided views on remitting valuation to fact finding authorities.

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Issues: Whether, for the purposes of computing taxable profits under Case I of Schedule D of the Income Tax Act, 1918, the taxpayer may deduct in each accounting year amounts set aside as provision for prospective lump sum retirement payments payable under Peruvian social legislation (i.e. whether such prospective liabilities are properly deductible in the year as accrued or must be allowed only in the year of payment).

Analysis: The House analysed (i) the nature of the Peruvian statutory scheme under Laws No. 4916, 5119, 6871, 8439, 9463 and 10239 and the finding that the lump sums are to be regarded as deferred remuneration; (ii) the line of authorities on whether contingent rights or liabilities may be brought into account where a reliable estimate can be made, including Sun Insurance Office v. Clark and Harrison v. John Cronk & Sons Ltd.; (iii) the accounting and valuation considerations of contingency, discounting and practicability of ascertaining present value; and (iv) whether there exists any absolute legal rule forbidding inclusion of provisions for contingent future payments in annual profit computation. The majority rejected an absolute rule barring such provisions, held that deferred retirement payments can in principle be apportioned to years of service and treated as deductible when fairly estimated, but examined the special facts and findings of the Special Commissioners and the Court of Appeal and found that the particular method adopted by the taxpayer (face value annual increments without adequate allowance for discounting and other relevant factors) was not shown to be a satisfactory or sufficiently reliable method on the evidence before the House. The House further considered whether the matter should be remitted to the Special Commissioners to determine an acceptable method of valuation; some members favoured remit to ascertain practicable deductions, while others refused remit on final appeal grounds.

Conclusion: In favour of Revenue.

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