A new guideline on withholding tax implications for payments under interest rate swap contracts and cross currency swap contracts

(26/2008)

The Revenue Department formerly provided its guidelines in Paw 114/2545 whereby the payment for the difference under interest rate swap, cross currency swap, or cross currency interest rate swap contracts of which the swapper is also a lender is an income item under Section 40(4) (a) of the Revenue Code.

However, the Revenue Department has recently changed its interpretation and issued Departmental Instruction No. Paw. 136/2551 on 29 September 2008. The change in the interpretation is a result of Supreme Court Judgement No. 736/2550 (for further details on this Supreme Court Ruling please refer to PwC Tax Newsletter no. 4/2007 issued on 5 October 2007).

Paw. 136/2551 provides that starting from 29 September 2008 onwards, in the case where a company has entered into interest rate swap, cross currency swap, or cross currency interest rate swap contracts of which the swapper is also a lender, the payment for the differences derived from the currency and interest rate swap will be regarded as income under Section 40(4)(a) of the Revenue Code only if there is a circumstance showing that the counterparties have an intention to enter into a loan agreement and intentionally execute an additional swap contract to change the remuneration stipulated under the loan agreement to be a remuneration item under the swap contracts, i.e. the swap contract is created without an intention to hedge against the fluctuation in the interest rate and foreign currency.

Accordingly, if the swap transaction is truly for a hedging purpose, the payment for the differences under the swap transaction will be regarded as income under Section 40(8) of the Revenue Code and the payer will not be required to withhold tax when making such payment. Conversely, a withholding tax liability may be incurred if the payment for the difference under the swap contract is regarded as income under Section 40(4) (a) of the Revenue Code.

In conclusion, the interpretation under Paw 136 will give rise to a burden of proof that the swap transaction is purely for a hedging purpose. Hence, evidence to prove such intention is required to be maintained.