ACC v Comptroller of Income Tax

JudgeAndrew Ang J
Judgment Date25 October 2010
Neutral Citation[2010] SGHC 316
Citation[2010] SGHC 316
Docket NumberOriginating Summons No 510 of 2009 (Summons No 3885 of 2009)
Published date06 April 2011
Hearing Date30 April 2010
Plaintiff CounselLeung Yew Kwong and Tan Shao Tong (WongPartnership LLP)
Date25 October 2010
Defendant CounselJimmy Oei and Usha Chandradas (Inland Revenue Authority of Singapore)
CourtHigh Court (Singapore)
Subject MatterRevenue law
Andrew Ang J: Introduction

This was an application by ACC (“the Applicant”) under O 53 r 5 of the Rules of Court (Cap 322, R5, 2006 Rev Ed) for an order quashing the determination issued by the Comptroller of Income Tax (“the Respondent”) dated 6 February 2009 that withholding tax applied to payments made by the Applicant to its overseas subsidiaries. Leave to apply was granted on 10 July 2009 pursuant to O 53 r 1 (see ACC v CIT [2010] 1 SLR 273), which decision was upheld by the Court of Appeal on 2 February 2010 (see Comptroller of Income Tax v ACC [2010] 2 SLR 1189).

Background facts Aircraft leasing arrangements

The Applicant is a company incorporated in Singapore which engages in the business of aircraft leasing together with its subsidiaries, most of which are special purpose companies (referred to collectively as “SPCs” and individually as an “SPC”) incorporated in the Cayman Islands and are not “resident in Singapore” within the meaning of s 2(1) of the Income Tax Act (Cap 134, 2008 Rev Ed) (“ITA”).

As is typical of most aircraft leasing companies, each SPC owns only one aircraft and enters into separate loan agreements with offshore banks to finance the purchase of its aircraft. Such a “one company-one aircraft” business structure is a usual requirement of the bank providing financing as it serves the purpose of ring-fencing risks. The SPCs lease their aircraft to airline companies. These leases may stipulate a “floating rate” rent or a “fixed rate” rent. If the aircraft is leased on a “floating rate” rent, the rental charged by the SPC fluctuates with the floating interest rate charged by the offshore bank financing the purchase of the aircraft; the SPC therefore will not be exposed to risks in the movement in interest rates.

In the case of “fixed rate” rent, however, the rental that an SPC charges the airline is fixed while the interest the SPC pays on the loan from the offshore bank fluctuates with the prevailing interest rate charged by the bank. This exposes the SPC to potential risks in the fluctuation in interest rates. To minimise such risk exposure, the SPCs hedge the interest rate exposure on their floating interest rate loans by entering into interest rate swap agreements.

Interest rate swap agreements

Before a company can enter into a swap arrangement with a bank, it is required to put in place an International Swaps and Derivatives Association (“ISDA”) agreement, which has been described in the following terms in Graham Roberts, Law Relating to International Banking (Woodhead Publishing Ltd, 1998) at para 9.2.2:

The ISDA agreement is a single Master Agreement, which the parties enter into ideally when they agree their first swap. This master agreement is intended to regulate the legal relationship between the parties; it is a detailed document governing most of the aspects of the relationship. Attached to the Master Agreement is a Schedule, in which the parties can add, amend or vary the details of the Master Agreement. The detailed economic features of each transaction separately are then recorded in a separate document, the confirmation. In addition, ISDA has drafted a booklet containing definitions of various economic terms, such as calculation of floating and fixed amounts, etc. These definitions can be incorporated into the confirmation, thereby keeping each confirmation relatively short.

Typically, a company would put in place ISDA agreements with several banks so that it has a menu of banks to choose from.

If each individual SPC were to enter into an ISDA agreement with a bank, the bank would require the Applicant to provide a guarantee for each ISDA agreement since the SPC would have a relatively weaker balance sheet compared to its parent company. For commercial convenience, rather than having to manage the administrative burden of each SPC’s entering into several ISDA agreements with various banks and the Applicant’s provision of guarantees for each ISDA agreement, the SPCs and the Applicant decided that the Applicant would enter into swap arrangements with Singapore banks or Singapore branches of foreign banks (referred to collectively as “Onshore Banks” and individually as an “Onshore Bank”).

An interest rate swap is essentially a contractual swapping of anticipated cash flows. Each party to an interest rate swap agreement is known in the industry as a “counter-party”. In Hazell v Hammersmith and Fulham London Borough Council [1990] 2 QB 697 (“Hazell”), Woolf LJ explained the nature of interest rate swaps in the following manner (at 739–740):

A swap is an agreement between two parties by which each agrees to pay the other on a specified date or dates an amount calculated by reference to the interest which would have accrued over a given period on the same notional principal sum assuming different rates of interest are payable in each case. For example, one rate may be fixed at 10 per cent. and the other rate may be equivalent to the six-month London Inter-Bank Offered Rate (‘LIBOR’) [ie, a floating interest rate]. If the LIBOR rate over the period of the swap is higher than 10 per cent. then the party agreeing to receive ‘interest’ in accordance with LIBOR will receive more than the party entitled to receive the 10 per cent. Normally neither party will in fact pay the sums which it has agreed to pay over the period of the swap but instead will make a settlement on a ‘net payment basis’ under which the party owing the greater amount on any day simply pays the difference between the two amounts due to the other. [emphasis added]

Neither counter-party to a swap transaction makes any loan to the other so as to give rise to an obligation on the part of the other to pay interest. The quantum of periodic payments each counter-party makes to another is computed as a product of a notional principal amount, an applicable rate and a time period, expressed in a formula thus: Periodic payment = notional amount × applicable rate × time period. In practice, however, as noted by Woolf LJ in Hazell (see [7] above), the amounts payable by the counter-parties are set off against each other so that on each payment date only the difference between the two amounts is paid. Depending on the relationship between the fixed and floating interest rates over the whole period of the swap agreement, the payments between counter-parties could flow either way. An interest rate swap agreement of this nature is known in the industry as a “plain vanilla” interest rate swap: see, eg, John C Hull, Fundamentals of Futures and Options Markets (Pearson Prentice Hall, 6th Ed, 2008) (“Hull”), at ch 7.

From October 2006 onwards, the Applicant and each SPC entered into a swap arrangement mirroring the swap agreements that the Applicant has entered into with the Onshore Banks. Where the swap agreement between the Applicant and an Onshore Bank indicated the Onshore Bank as the floating rate payer and the Applicant as the fixed rate payer, the corresponding swap agreement between the Applicant and the SPC would indicate the Applicant as the floating rate payer and the SPC as the fixed rate payer. In this back-to-back arrangement, the same fixed and floating rates are employed in both sets of swap agreements. In this way, in a situation where the floating interest rate is higher than the fixed interest rate, as between the Onshore Bank and the Applicant, the net payment will be from the Onshore Bank to the Applicant and flow through from the Applicant to the SPC. If the reverse situation materialises, the net payment will be from the SPC to the Applicant and flow through from the Applicant to the Onshore Bank. From this description, it can be readily deduced that the Applicant acts as a middleman between the SPC and the Onshore Bank with net payments flowing through it in either direction.

As the net payments or receipts were amounts due to or from the SPCs, these amounts were recorded in the Applicant’s accounting books as “Amount owing to/by subsidiary” and were also correspondingly recorded in the SPCs’ books.

The Respondent’s determination

In October 2008, the Applicant wrote to the Respondent to confirm that withholding tax was not applicable to the payments made by the Applicant to the SPCs for the period October 2006 to March 2008 (“the SPC Payments”). In a letter dated 6 February 2009, the Respondent indicated its determination that based on s 12(6) read with s 45 of the ITA, withholding tax applied to the SPC Payments (“the Determination”). The same letter also stated that the Applicant was required to account for the amount of tax that should have been withheld and would be liable for a penalty for non-compliance with the withholding tax requirement. Dissatisfied, the Applicant instituted these proceedings to obtain a quashing order against the Determination. Meanwhile, the Applicant paid under protest the amount of withholding tax, but not the penalties, determined by the Respondent.

The parties’ cases

In its submissions, the Applicant sought to show that: On a general level, s 12(6)(a) of the ITA did not extend to interest rate swap payments; and Even if interest rate swap payments did fall within s 12(6)(a), on the facts of the case, where the Applicant has acted on behalf of the SPCs in the swap transactions with the Onshore Banks, the sums credited by the Applicant to the accounts of the SPCs were not interest rate swap payments and did not fall within the provisions of s 12(6)(a).

The Respondent’s contention was that the SPC Payments made by the Applicant to its SPCs were interest rate swap payments that were caught by the current version of s 12(6)(a) and fell within s 12(6)(a)(i) of the ITA in particular because the SPC Payments were “any other payment”, made in connection with a loan or indebtedness, which were borne by the Applicant.

Statutory provisions

The withholding tax requirement stems from s 45(1) of the ITA which...

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