ACC v CIT

• Jurisdiction: Singapore
• Judge: Andrew Ang J
• Judgment Date: 23 September 2009
• Neutral Citation: [2009] SGHC 211
• Date: 23 September 2009
• Subject Matter: Revenue Law
• Docket Number: Originating Summons No 510 of 2009
• Published date: 24 September 2009
• Defendant Counsel: Jimmy Oei and Usha Chandradas (Inland Revenue Authority of Singapore)
• Court: High Court (Singapore)
• Plaintiff Counsel: Leung Yew Kwong and Tan Shao Tong (WongPartnership LLP)

23 September 2009

Andrew Ang J:

Introduction

1 This case concerns an application by a Singapore incorporated parent company (“the Applicant”) for leave under O 53 r 1 of the Rules of Court (Cap 322, R 5, 2006 Rev Ed) to quash the decision of the Comptroller of Income Tax (“the Comptroller”) that withholding tax is applicable to payments made by the Applicant to its overseas subsidiaries.

Background

The facts

2 The Applicant and its subsidiaries are in the business of leasing certain machinery. Most of the subsidiaries are offshore special purpose companies (“SPCs”) incorporated in the Cayman Islands. Each SPC is used to own only one machine. Each SPC also enters into a separate loan agreement with one or more offshore banks to finance the purchase of its machine. The “one-company-one-machine” structure is typically used for the purpose of ring fencing risks and is usually a requirement of the banks providing financing.

3 The leases entered into by the SPCs with lessees can either come with a floating rate rent or a fixed rate rent. When the lease is at a floating rate rent, the rental chargeable by the SPC would fluctuate together with the floating interest rate charged by the offshore banks on the loan granted to finance the purchase of the machine. Therefore, the SPC will not have an exposure arising from the fluctuation in interest rates since both the rental and the interest payment will be naturally hedged.

4 However for leases at a fixed rate rent, the SPC would be exposed to interest rate fluctuations if the financing were at a floating rate since the rent is fixed while the interest payment fluctuates with the prevailing interest rate. In order to minimise the interest rate risk exposure on such fixed rate rents, the SPC would hedge the interest rate exposure on its floating interest rate loan. This is done through an interest rate swap agreement whereby:

(a) the SPC would stream to the counterparty fixed rate periodic payments computed as a fixed percentage of a notional amount; and

(b) in exchange the counterparty would pay to the SPC on the same dates floating rate percentages of the same notional amount.

5 Ordinarily, each SPC would enter into interest swap arrangements directly with banks as counterparties. However, for reasons elaborated upon below, the Applicant and its subsidiaries came to an arrangement whereby the former would enter into interest rate swap agreements with Singapore banks or Singapore branches of foreign banks (“onshore banks”) on behalf of the latter in order to hedge the latter’s exposure to floating interest rates (“the Onshore Swaps Setup”). That arrangement had two main advantages.

6 First, the Onshore Swaps Setup significantly reduced the administrative burden of each SPC in relation to the creation of swap agreements. Before a company enters into a swap transaction with a bank, it has to enter into an International Swaps and Derivative Association (“ISDA”) agreement with that party. I will be elaborating on the nature of ISDA agreements below at [33]. For the present, it suffices to say that typically a company will put in place ISDA agreements with several banks so that it will have a choice of banks to work with. The Onshore Swaps Setup eliminated the need for each SPC to separately enter into ISDA agreements with different banks.

7 Second, the Onshore Swaps Setup allowed the Applicant to dispense with the numerous guarantees that it would otherwise have had to provide to secure the obligations of the SPCs, given that the SPCs, which typically own only one machine each, have much weaker balance sheets compared to the Applicant. The Onshore Swaps Setup did away with the problem of assuring the onshore banks of the SPCs’ creditworthiness.

8 So that the benefit of the Onshore Swaps Setup would flow through to the respective SPCs, the Applicant would enter into swap agreements with each relevant SPC mirroring those which the Applicant entered into on such SPC’s behalf (“Offshore Swaps Agreements”). Thus, where a swap agreement entered into with the onshore bank indicated the onshore bank as the floating rate payer and the Applicant as the fixed rate payer, the Offshore Swaps Agreement with the SPC would indicate the Applicant as the floating rate payer and the SPC as the fixed rate payer. The manner in which the Applicant and the SPCs entered into the Offshore Swaps Agreements reflected their intention that the former was entering into swap agreements for the benefit of the latter.

9 As the interest rate swap agreements with the onshore banks were intended for the Applicant’s subsidiaries, the net payments or receipts were seen to be amounts due from or to the SPCs. Consequently, they were recorded in the Applicant’s balance sheet as “Amount owing to/by subsidiary”. Such corresponding payments or receipts were also recorded in the books of the SPCs. No tax deduction was claimed on the payment made by the Applicant to its subsidiary in relation the Onshore Swaps Setup. Neither were receipts from the banks arising from these interest rate swaps brought to tax. Whether any excess of receipts over payments was taxable was not in issue.

10 The Applicant wrote to the Comptroller on 23 October 2008 for confirmation that withholding tax was not applicable to the payments made by it to the SPCs. On 6 February 2009, the Comptroller replied to say that withholding tax was applicable. The Comptroller took the position that the payments made by the Applicant to its subsidiaries pursuant to the Offshore Swaps Agreement fell within the ambit of s 12(6) of the Income Tax Act (Cap 134, 2008 Rev Ed) (“ITA”) and that the withholding tax requirements under s 45 of the same statute applied. As the Applicant had not complied with the relevant withholding tax requirements with respect to the payments in question, the Applicant was required to account to the respondent for the amount of tax which should have been withheld.

11 In consequence of the Comptroller’s decision, the Applicant came before me seeking leave to apply to quash the determination by the Comptroller.

The Applicant’s case

12 The Applicant made three main submissions. First, it argued that by virtue of the fact that the power exercised is statutorily derived, the matter is amenable to judicial review. Second, the Applicant asserted that it has sufficient interest in seeking judicial review by reason of the possible consequences that the Applicant faces if it fails to withhold and account for tax to the satisfaction of the Comptroller. The Applicant pointed out that the letter of 6 February 2009 was directed at the Applicants to withhold tax and to account for the tax that should have been withheld. In addition, the Applicant stressed that it is liable to pay any penalty that will be imposed arising from its failure to comply with the withholding of tax in respect of payments made to the SPCs.

13 Third, the Applicant submitted that it had met the threshold requirement of showing that the material before the court disclosed a prima facie case of reasonable suspicion in favour of granting the public law remedies sought by the Applicant. It said so on the basis that swap payments made to the SPCs are not “interest, commission, fees, or any other payment in connection with any loan or indebtedness or with any arrangement, management, guarantee or service relating to any loan or indebtedness” within the meaning of s 12(6)(a) of the ITA. Further, on the basis that the Applicant was agent for the respective SPCs, the Applicant argued that the moneys transferred to the SPCs rightly belonged to the latter. It therefore followed that the payments by the Applicant to the SPCs were not “borne” by the Applicant, as provided for in s 12(6)(a)(i), but merely remitted. For the same reason, it followed that the sums, which were transferred to their rightful owners, were not “deductible against any income” of the Applicant as provided in s 12(6)(a)(ii).

The respondent’s case

14 In response, the Comptroller submitted that its powers had been properly exercised and that the materials did not establish that the Comptroller committed any error of procedure or took action outside his area of competence in his dealings with the Applicant. Second, it argued that the Applicant did not have locus standi to seek judicial review because it was not the tax liability of the Applicant that was in issue but its subsidiaries’. The Applicant, according to the Comptroller, was only a collecting agent acting on behalf of the SPCs.

15 Third, the Comptroller made the case that a perusal of the materials would show that there is no arguable case for judicial review upon the grounds of illegality, Wednesbury unreasonableness, or procedural impropriety. Fourth, it urged that leave should not be granted because the application would open the floodgates to frivolous litigation regarding tax liabilities.

Decision of the court

16 After deliberation, I decided in favour of the Applicant. I now set out the reasons for my decision.

The legal principles in relation to the application for leave

17 As helpfully summarised in Singapore Civil Procedure 2007 (Sweet & Maxwell Asia, 2007) at para 53/8/22, pp 785–786, the requirements that need to be fulfilled before the court will grant leave to apply for a quashing order include the following:

(1)	The matter complained of is susceptible to judicial review.
(2)	The applicant has sufficient interest in the matter.
(3)	The material before the court discloses an arguable case or prima facie case of reasonable suspicion in favour of granting the public law remedies sought by the applicant.

18 It is trite reasoning that the requirements are meant to ensure that the application for a quashing order is not groundless, hopeless, misguided, trivial or a waste of time.

Whether the matter complained of is susceptible to judicial review

Nature of power exercised

19 In Public Service Commissioner v Lai Swee...