An interesting decision was given by the Singapore High Court in ACC v Comptroller of Income Tax  SGHC 316 recently dealing with the question whether payments made under an interest rate swap agreement could constitute interest and thus be subject to withholding tax in terms of the relevant Treaty. In particular, the taxpayer entered into interest rate swap agreements to hedge its exposure under a loan agreement made to it.
The issue arose whether the swap payments could be said to be subject to a withholding tax, as the local provisions imposed a withholding tax on interest, commission, fees or any other payment in connection with a loan or indebtedness.
It was indicated that, in the case of an interest rate swap agreement, there is no loan or indebtedness between the parties. An interest rate agreement is an agreement between the parties to exchange cashflows in the future. There is no capital amount concerned. The capital amount is only used as a point of reference. Accordingly it was held that the payments were not made in connection with a loan or indebtedness and do not constitute same.