Ad Valorem Stamp Duty Imposed On Financing Settlement Agreement
In Malaysia, stamp duty is imposed on various legal, commercial, and financial instruments as outlined in the First Schedule of the Stamp Act 1949 (SA). There are two types of stamp duties: ad valorem duty and fixed duty. The amount payable for ad valorem duty varies based on the type and value of the instruments, while fixed duty generally starts at a nominal value of RM 10 per instrument. Typically, principal loan documents attract stamp duty under item 22(1)(a) of the First Schedule of the SA, subject to ad valorem stamp duty.
However, according to Section 4(3) of the SA, if more than one instrument is utilised in a single transaction, only the principal instrument is chargeable with duty as prescribed in the First Schedule. Any subsidiary instruments incur a fixed duty of RM 10.
In the recent case of CIMB Bank Bhd v Pemungut Duti Setem [2023] MLJU 1011, the High Court ruled that the Settlement Agreement entered into by the parties following an International Swaps and Derivatives Association (ISDA) Master Agreement should be subjected to ad valorem duty.
Background Facts
In CIMB Bank Bhd, the taxpayer and AirAsia Berhad entered into an ISDA Master Agreement for the purposes of entering into transactions by way of confirmations from time to time, whereby the quantum of the loan and terms of repayment will be determined later by the parties and indicated in each confirmation. The ISDA Master Agreement essentially lists down the standard terms which detail what happens if a default occurs to one of the parties e.g. bankruptcy and how OTC derivative transactions are terminated or “closed out” following a default. The ISDA Master Agreement was adjudicated and stamped at RM 10.
Pursuant to the above transactions, an amount of USD 26,927,218.29 was due and payable by AirAsia Berhad to the bank on 16.11.2020. Following the failure to pay those outstanding amounts, AirAsia Berhad requested to restructure the payment of all amounts which were due and payable to the taxpayer for the transactions governed under the ISDA Master Agreement (Transaction Amounts). The Transaction Amounts were to include both past and prospective amounts due and payable by AirAsia Berhad to the taxpayer. The taxpayer proposed to restructure the said Transaction Amounts subject to AirAsia Berhad executing a settlement agreement consisting of repayment terms which were acceptable to the taxpayer.
Subsequently, the taxpayer submitted the Settlement Agreement for stamping to the Collector of Stamp Duties, who consequently issued a Notice of Security Assessment (Ad Valorem Duty) (Assessment) on the basis that the Settlement Agreement was a principal instrument. Aggrieved by the assessment, the taxpayer filed a notice of objection which was subsequently rejected by the Collector. This resulted in the taxpayer appealing to the High Court.
The Taxpayer’s Arguments
The arguments raised by the taxpayer were as follows:
(a)The Settlement Agreement merely recorded the taxpayer’s indulgence in allowing AirAsia Berhad to repay the Settlement Amount in instalments in accordance with the repayment schedule as set out in the Appendix to the Settlement Agreement. This obligation for payment of the said Settlement Amount was already contained in the ISDA Master Agreement.
(b)There was no new loan/borrowing/financing or refinancing that was documented or entered into pursuant to the Settlement Agreement.
(c) For these reasons, the ISDA Master Agreement was, in law and fact, the principal instrument and the Settlement Agreement was the subsidiary instrument. As such, the stamp duty payable for the Settlement Agreement as a subsidiary instrument should be RM 10. The late stamping penalty (if any) should be RM 25. Therefore, the aggregate amount payable should be RM 35 only.
The Collector’s Arguments
The Collector maintained its stance for the following reasons:
(a)The ISDA Master Agreement was a single and general agreement which was entered between the financial institution and other parties for the purpose mentioned in the ISDA Master Agreement.
(b)The Settlement Agreement entered into between AirAsia Berhad and the Taxpayer is a separate agreement and not a subsidiary of the ISDA Master Agreement. Clause 6 of the agreement clearly states that parties shall not relate or refer to any other arrangement or document with regard to the settlement between AirAsia Berhad and the Taxpayer.
(c)The Settlement Agreement contains the mode of payment for a definite and certain period where the total amount payable can be ascertained. Therefore, it attracts an assessment of ad valorem duty under item 22(1)(a) of the Stamp Act 1949.
(d)The imposition of penalty was correct as the Settlement Agreement was stamped after 30 days had lapsed which was provided under Sections 47 and 47A of the Stamp Act 1949.
The High Court’s Ruling
The High Court ruled in favour of the Collector and held that the Settlement Agreement should be subjected to ad valorem duty. According to the court, it was undisputed fact that the ISDA Master Agreement was a general agreement prepared by the International Swaps and Derivatives Association that sets forth all of the general terms and conditions necessary to properly allocate the risk of the transactions between the parties. However, it does not contain any commercial terms specific to a particular transaction. This would mean that once the Master Agreement was executed, the parties can enter into numerous transactions by agreeing to the material commercial terms over the telephone as evidenced by a written confirmation without any need to revisit the underlying terms contained in the Master Agreement.
Moreover, transactions between the parties following the Master Agreement will be considered individual transactions under clause 1(c) of the ISDA Master Agreement. As the ISDA Master Agreement was only a single and general agreement and does not include any sums which can be determined, the said agreement was assessed to nominal stamp duty i.e. RM10 only.
As such, the taxpayer’s contention that the ISDA Master Agreement was a principal document to the Settlement Agreement was untenable and devoid of merits. It was clear that both documents were executed for different purposes and intentions, and they stand as a single and principal document for each of its purposes.
According to the High Court, the ISDA Master Agreement was entered into for the purpose of allowing both parties to enter into the transactions as mentioned under the said agreement whereas the Settlement Agreement was entered into for payment and settlement of the outstanding amount due and payable by AirAsia Berhad to the taxpayer. The following passages from the High Court judgment are instructive:
[36] Based on the above, it is clear that the Settlement Agreement shall stand on its own and is the only agreement referred to in respect of the Settlement Amount due and payable by AirAsia Berhad to the Appellant. It is my view that both parties cannot refer to any other documents or contract.
[37] Having perused both the ISDA Master Agreement and the Settlement Agreement, it is clear that both documents were executed for different purposes and intentions. Both documents stand as a single and principal document entered into by AirAsia Berhad and the Appellant for each of its own purposes.
[38] The ISDA Master Agreement was entered into for the purpose of allowing both parties to enter into the transactions as mentioned under the said agreement whereas the Settlement Agreement was entered into for the purpose of payment and settlement of the outstanding amount due and payable by AirAsia Berhad to the Appellant.
[39] Therefore, based on the above, I view that the contention of the Appellant that the ISDA Master Agreement is a principal document to the Settlement Agreement is doomed to fail.
Based on the above, the High Court held that the contention of the taxpayer that the ISDA Master Agreement was the principal document to the Settlement Agreement was not tenable.
Conclusion
The forthcoming decision holds extensive implications, potentially affecting taxpayers on a broad scale across diverse sectors. Notably, it introduces an element of uncertainty regarding the interpretation of Section 4(3) of the SA as the latter states that instruments are required to be stamped at RM10 when the principal agreement is subject to an ad valorem rate. Additionally, a crucial aspect of Section 4(3) empowers taxpayers to determine the classification of an instrument as a subsidiary. This decision signifies a nuanced yet impactful adjustment in the existing legal framework. While its implications remain to some extent unresolved, it is essential to acknowledge that, pending further clarification from the Court of Appeal or the apex court, this decision presently holds binding authority over taxpayers.