Income Tax Treatment for entities adopting Financial Report Standard (“FRS”) 116


The Accounting Standards Council issued FRS 116 on 30 Jun 2016 and SFRS(I) 16 on 29 Dec 2017. FRS 116 / SFRS(I) 16 applies to entities with effect from annual reporting periods beginning on or after 1 Jan 2019. Early application is permitted with application of FRS 115 / SFRS(I) 15 Revenue from Contracts with Customers. 2.2

With the adoption of FRS 116 / SFRS(I) 16 for accounting purposes, the Comptroller of Income Tax (“CIT”) will apply the following tax treatment:

Lessor

With the adoption of FRS 116 / SFRS(I) 16 for accounting purposes, where the lease concerned is regarded as an operating lease (“OL”), the lessor can continue to elect to be taxed on income from the OL as determined using the effective rent method under FRS 116 / SFRS(I) 16 (referred to as “FRS 116 / SFRS(I) 16 tax treatment”).

This is subject to the condition that the application of the FRS 116 / SFRS(I) 16 tax treatment is made consistently every year and across for all OLs.  The FRS 116 / SFRS(I) 16 tax treatment is applicable to all leases, including leasing of an asset which is not regarded as a machinery or plant, such as leasing of an office space.


Lessee

A lessee is allowed tax deductions on the contractual lease payments incurred, except under circumstances where a sale is regarded to have taken place.

Where a lease arrangement giving rise to a Right-Of-Use (“ROU”) asset meets the definition of a finance lease under Section 10D(3) of the Income Tax Act (“ITA”) and is to be regarded as a sale agreement, the lessee is eligible to claim interest expense and capital allowances (“CA”) on the relevant asset instead of a deduction on the contractual lease payments.

To determine if a finance lease for tax purposes is to be regarded as a sale agreement, reference should be made to the conditions in paragraphs (a) to (e) of Regulation 4(1) of the Section 10D Regulations.


Withholding tax

Withholding tax obligations would continue to be determined based on the legal characterisation of the payment, and subject to the provisions in Sections 12(6) and (7) of the ITA, notwithstanding the change in the accounting treatment.

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