(4/2008)

Revenue ruling No. Gor Kor 0706/9362 dated 17 September 2007 stated that interest paid under a hire purchase agreement should be treated as income similar in nature to interest derived from loan.

According to the ruling, company A carrying on the business of manufacturing sewing machines and components for export entered into a hire purchase agreement for a sewing machine with AG, a non-banking company situated in Switzerland. Upon payment of all instalments under the hire purchase agreement, the title to the sewing machine would pass on to Company A. The interest and principal payable under the hire purchase agreement were clearly specified.

The Revenue Department ruled that interest from the hire purchase agreement was regarded as income similar in nature to interest derived from a loan under section 40(4) (a) of the Revenue Code. When Company A paid such income to AG, Company A was liable to withhold tax at 15% under section 70 of the Revenue Code.

In this ruling the fact that the interest amount was clearly specified in the agreement appears to have been a decisive factor in the decision to classify the interest under section 40(4)(a). It is not uncommon in such agreements for the principal and interest payments to be combined in the instalment payment. In such circumstances, it is now unclear whether the Revenue Department would accept the entire instalment amount as income under section 40(8) or would require the interest element to be separately dealt with under Section 40(4)(a).