Court overrules tax authority

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What is the issue in dispute?
The company is in the business of leasing aircrafts. The company has subsidiary firms in Cayman Island. The subsidiary firms bought aircrafts with loans pegged to floating interest rates. The aircrafts are rented out to airlines on fixed rental rates.

The subsidiary firms are supposed to use the rental proceeds to service the interest obligations. Often, the firms face revenue shortfall to meet those obligations.

The Singapore parent then entered into interest rate swap arrangements with banks in Singapore to hedge against the risk of floating interest rates on behalf of its subsidiaries. During the 17-month period from October 2006, the Singapore parent company made payments to its subsidiaries overseas as part of interest rate swap arrangements. 

IRAS's position

• IRAS has taken the position that these interest payments overseas are subject to withholding tax under provisions dealing with loans borne by the parent firm.
• The Comptroller argued that such broad interpretation of the relevant section for such payments to be taxable has been accepted by tax advisers, practitioners and businesses in the past.

P/S - The name of legal counsel representing IRAS was not mentioned by K.C. Vijayan, the ST law correspondent.

The Singapore parent's position

• The tax authority has taken a too broad an interpretation of the law.
• Such braod interpretation may actually discourage foreign investors from doing business in Singapore.

P/S - Leung Yew Kwong / Tan Shao Tong from WongPartnership represented the plaintiff.

High Court - Justice Andrew Ang
The Court ruled in favour of the Singapore parent on the following grounds:-

• interest rate swap payments are not subject to withholding tax under s12(6)(a) of Income Tax Act
• the payments were not in relation to any loan borne by the firm here
• IRAS has taken a too broad an interpretation of the law
• past acceptances by tax advisers, practitioners etc should not be cited to justify an interpretation of the law

The ruling would mean that the Comptroller of Income would have to make substantial refund and pay costs to the Singapore company. The costs to IRAS could go higher when business entities which were involved in similar situations and had paid the taxes may now seek a review with IRAS given the ruling.

Reference - K.C Vijayan, "Court overrules taxman, orders refund for firm", Straits Times, Nov 6, 2010.