IFRS 16: Leases | Highlights Tax (Accounting) implications

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IFRS 16: Leases | Highlights Tax (Accounting) implications

IFRS 16 provides for fundamental changes to lease accounting for lessees as virtually all leases are brought on balance. Implementation as of January 1, 2019. Consider the Tax implications in time as IFRS 16 might impact Taxation, Tax Accounting and Transfer Pricing.

Background

In 2016, the International Accounting Standards Board’s issued IFRS 16, leases (hereinafter: ‘IFRS 16’). The implementation date (annual periods beginning on or after January 1, 2019) is approaching fast. Under IFRS 16 nearly all leases will be recognized on the balance sheet of lessees. The changes are driven by the desire to enhance comparability of financial statements between entities that own assets and entities that lease assets. The new standard significantly affects the balance sheets, income statements and financial ratios such as EBITDA and EBIT. Which in their turn might impact taxation, tax accounting and transfer pricing.

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Highlights IFRS 16 tax (accounting) impact

  • A right of use (hereinafter: ROU) asset and a lease liability are recognised on a lessee’s balance sheet for virtually all leases (including operating leases); 
  • Lease expenses move from operating expenses to depreciation and interest cost, impacting financial indicators; 
  • IFRS 16 may or must be followed for tax purposes in some jurisdictions. In other jurisdictions lease cost may be tax deductible on a cash basis or otherwise; 
  • The interest and or depreciation components of the lease expense may be subject to interest limitation rules; 
  • The change in financial ratios such as EBIT, EBITDA and debt equity ratios may impact interest limitation rules; 
  • The increase of (operational) assets on the balance sheet may impact taxation and transfer pricing; 
  • The tax department should determine the tax base of the lease asset and liability and consider the expected IAS 12 amendments in that respect.
Tax accounting alert - Netherlands - IFRS 16

Action required

The transition to IFRS 16 requires the tax department survey relevant jurisdictions to determine as to whether IFRS 16 is the starting point for the tax computation and if specific tax rules are applicable to the lease expense. Furthermore it should be determined if changes to indicators such as EBIT, EBITDA, debt and equity impact the tax expense.
Finally, based upon the local tax treatment, the tax accounting impact should be determined.

More information on this topic?

For more information contact Jeffry Keulaerds or Sander Kloosterhof via the contact details given below

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