On 8 October 2018, the Inland Revenue Authority of Singapore (IRAS) has published the Summary of Responses on income tax implications arising from the adoption of FRS 116 – Leases.
The 3 key comments accepted by IRAS are:
1. To provide guidance on the determination of Finance Leases for lessees
IRAS has published an e-Tax guide, Tax Treatment Arising from Adoption of FRS 116 or SFRS(I) 16 for reference.
Lessees may apply the same examples and indicators as provided in paragraphs 63 and 64 of the FRS 116 for lessors in determining if a lease arrangement giving rise to a ‘Right-of-Use’ asset is an Operating Leases or Finance Lease from the perspective of lessees. Where it is clear that the lease does not transfer substantially the obsolescence, risks or rewards incidental to ownership of the asset, that lease arrangement will be treated as an Operating Lease for tax purpose.
2. To include examples to illustrate the application of the proposed tax treatment for sublease under different classification
The determination of the sub-lease for the intermediate lessor is by reference to the underlying asset instead of the ‘Right-of-Use’ asset. This is to align the treatment with the existing treatment for classification of leases for tax purposes. (Refer to Appendix 2 of the e-tax guide)
3. Withholding Tax
With FRS 116, there is no change to the existing withholding tax treatment for leases. The withholding tax obligations will be determined based on the legal characterisation of the payments, i.e., withholding tax applies if the payments fall with the scope of Section 12(6) and (7) of the Income Tax Act and are not granted exemptions under the Act. For a Finance Lease that is not treated as a sale agreement, the entire lease payment for the use of any movable property is treated as a payment falling within the ambit of Section 12(7)(d) of the Income Tax Act.
Complete Summary of Responses document (including those not accepted) can be download from the IRAS’s website.
Source; IRAS, 9 October 2018