KPMG will conduct a workshop to demystify the aspects pertaining to tax and accounting stemming from the new Inland Revenue Act and SLFRS 16 pertaining to leases at the Movenpick Hotel on January 18 from 9 a.m. to 12 noon.
With the change in the tax framework applicable to finance leases brought about by the new Inland Revenue Act, a new dimension has been added to the process of evaluation of tax efficiency of usage of assets via leases, as against other means such as hire purchase or outright purchase.
The evaluation of freehold ownership viz-a-viz sale and lease back option, under the new Inland Revenue Act may lead to a new outcome, which strategic decision makers of a company would have to take cognizance of. There is an urgent need for all companies to revisit the leasing contracts in the context of classification of leases based on the definitions provided in the new Inland Revenue Act.
Assessing whether an arrangement is, or contains, a lease will be one of the biggest practical issues when applying IFRS 16 Leases. The lease definition is the new test that determines whether an arrangement is on or off-balance sheet for a customer.
In many instances, the assessment will be straightforward, and a transaction that is a lease today will be a lease under the new standard. In other instances, the assessment will be more complex, and the conclusion on whether an arrangement is, or contains, a lease may change.
This could affect common transactions such as power purchase agreements, IT outsourcing agreements and transport agreements, where the focus of the analysis will often be on whether the customer ‘controls’ the use of an identified asset.
In essence, analysing the tax implications of the lease arrangements is vital for the lessor and the lessee. The tax impact of the lease arrangement executed before April 1, 2018 under the 2006 Inland Revenue Act is different to the tax impact and the character of the lease arrangements executed after April 1, 2018 under the new Inland Revenue Act. Thus, it has complex tax implications on assets and liabilities, and income and expenses of the parties to the lease arrangement.
Determining the appropriate discount rate will be particularly demanding at the point of transition. Identifying appropriate discount rates and documenting the basis for these determinations will be a major task – particularly for a company brave enough to adopt the new standard retrospectively. Presentations on accounting and tax aspects will be made by KPMG Partner-Accounting Advisory, Mohamed Shameel, Principal-Tax, Suresh R.I. Perera and Director-Tax Hasna Hasan.