The tax treatment of leasing and the implications of IFRS 16

Abstract

Purpose: The objectives of this study focused on the tax treatments related to different lease assets. Furthermore, the study looked at possible tax implications brought about by the new lease standard, IFRS 16. Lastly, the study determined whether there are any areas for improvements in the taxation of leases. Design: In pursuit of these objectives, semi-structured interviews were conducted with tax practitioners and a representative from the Commissioner for Revenue. Findings: The study established that there are some shortcomings in the taxation of lease assets. There are inconsistencies in the treatment of leases due to the lack of definitions of what constitutes a lease. Because there are no clear definitions, it is imprecise whether the accounting framework applies to establish whether a lease should be classified as a finance lease or an operating lease for tax purposes. Hence, the study suggests that the tax treatment of leasing is complex because of several issues arising when understanding and applying the tax treatment to leases in practice. Moreover, the absence of local guidance and responsiveness from tax authorities frequently leads practitioners to make certain decisions on their own at the risk of making errors. Conclusions: To adjust to the current business environment, the Office of the Commissioner for Revenue should consider issuing a set of guidelines and modifying the current finance leasing rules. Implications: Since there is a lack of specific regulations and differing interpretations of the law, this dissertation provides readers with an analysis of the provisions that apply to leases as well as suggestions for how to improve the taxation of lease assets.