Court of Appeal rules settlement agreement subject to ad valorem stamp duty
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The Court of Appeal in CIMB Bank Berhad v Pemungut Duti Setem [2024] CLJU 1758 held that a settlement agreement is subject to ad valorem stamp duty under Item 22(1)(a) of the First Schedule to the Stamp Act 1949 (“Stamp Act”).
This article provides an overview of the court’s decision.
Snapshot
This matter relates to a settlement agreement (“Agreement”) executed between CIMB Bank Berhad (“Taxpayer”) and a client. The Agreement served to restructure the client’s payment obligation under an existing International Swaps and Derivates Association Master Agreement (“ISDA”). This approach was adopted instead of invoking the ISDA’s event of default clause.
Typically, the ISDA event of default clause stipulates that in the event of a payment default, all outstanding transactions would be terminated, valued, and then offset to determine a net payment amount due from one party to the other.
However, under the terms of the Agreement, the client committed to making 13 instalment payments of USD66,306,316.80 (“Obligation”) to the Taxpayer. Following the execution of this Agreement, the Collector of Stamp Duties (“Collector”) imposed ad valorem stamp duty of RM1,404,443.25 on the Agreement under Item 22(1)(a) of the First Schedule to the Stamp Act (“Item 22(1)(a)”).
Judgment
The Court of Appeal dismissed the Taxpayer’s appeal, finding that the Collector was correct in imposing ad valorem stamp duty on the Agreement for the following reasons.
Principal agreement subject to ad valorem stamp duty
As the sole instrument documenting the Obligation, the Agreement is the principal agreement and therefore subject to ad valorem stamp duty. Under section 4(3) of the Stamp Act, ad valorem stamp duty is levied on the principal instrument of a transaction, with a nominal duty of RM10 for subsidiary documents.
The Agreement is not a subsidiary instrument nor can the ISDA be considered the principal instrument. The Obligation is not present in the ISDA, despite the Agreement relating to prior payment obligations under the ISDA.
Agreement satisfies definition of “Bond”
The Agreement falls within Item 22(1)(a) of the First Schedule to the Stamp Act as the term “security” therein encompasses any obligation created by an instrument. Consequently, the Agreement served as the primary security for specified sums payable at stated periods. The broad phrasing “instrument of any kind whatsoever” under Item 22 further affirms its applicability.
Additionally, the Agreement satisfies the definition of a “Bond” under the Stamp Act. It formally attests to the client’s obligation to the Taxpayer, witnessed by their representatives, for performance within a stipulated timeframe. The Agreement is therefore subject to the same ad valorem stamp duty as a charge or mortgage under Item 27 of the First Schedule.
Agreement not constituting a “loan”
Although the Agreement set out the instalment payments amount in US dollars, it does not render the Agreement falls within Item 27(a)(ii) as the nature of the Agreement is not a loan. Thus, the applicable category would be Item 27(a)(iii) which imposes ad valorem stamp duty at 0.5% for all other cases.
Legality of letter issued by Association of Banks in Malaysia
The Taxpayer sought to rely on a letter issued by the Association of Banks in Malaysia (“ABM Letter”), contending that the Collector had agreed the Agreement should be subject to only nominal stamp duty. The Collector disagreed, arguing the Agreement did not fall within the scope of the ABM Letter.
Additionally, the court held that the ABM Letter reflected an understanding between taxpayers and the Collector, the ABM Letter cannot supersede written law, except where the law so permits. The court agreed that the Collector is not bound by the ABM Letter and cannot be estopped from performing his statutory duty by imposing proper stamp duty on dutiable instruments.
Ultimately, the proper categorisation of an instrument for stamp duty purposes is a question of law, exclusively for determination by the courts, not by a document such as the ABM Letter.
Comment
The Court of Appeal’s decision clarifies the categorisation of a settlement agreement under Item 22(1)(a) of the First Schedule of the Stamp Act. The ruling confirms that such agreements are subject to ad valorem stamp duty at the rate of 0.5%, thereby providing greater certainty for future transactions.
The decision effectively resolves ambiguities surrounding the definitions of “settlement”, “bond”, and “security”. These terms have often been a source of contention for taxpayers, as their ordinary dictionary meanings often diverge from the definitions in the Stamp Act.
Notably, the Court of Appeal also emphasised that correspondence between taxpayers and tax authorities cannot be relied upon to determine the appropriate tax treatment. Interpretation and application of any tax legislation provision remain a question of law, ultimately reserved for judicial determination. Further, tax authorities are not estopped from adopting positions contrary to views they may have previously expressed.
This decision also serves as a caution to taxpayers who seek written clarification of tax treatment from tax authorities. Such written documents do not guarantee protection when they conflict with the law.
The Taxpayer objected to the imposition of ad valorem stamp duty on the Agreement, but the Collector dismissed the objection. The Taxpayer’s appeal to the High Court was also dismissed.
Further Information
This article was prepared with the assistance of Associate Matthew Wong Eu Ca.
