1. UGANDA LEASING ASSOCIATION ACCOUNTING AND TAXATION OF LEASING TRASACTIONS BY: IRAGUHA ADAD DATE:17 th June,2015

2. Objectives of this session To understand the accounting practices in the different types of leases in Uganda The different accounting policies applicable on leasing locally and internationally VAT treatment on leasing in Uganda Income tax treatment on leasing in Uganda Suppliers treatment of withholding Tax Interactive session

3. Definitions A lease is a an agreement between two parties that is to say the lessor and lessee for the hire of an asset for a given period of time. Under a leasing transaction, the title of the asset remains with the lessor and in the names of lessor but the lessee has possession and economic use of the asset There are two different types of leases namely………… and ………….. The accounting treatment of leasing transactions in Uganda are governed by International Accounting Standard 17(IAS 17) IAS 17, requires lessees and lessors to classify leases as either finance lease or operating lease at inception. The classification depends on whether the lease transfers substantially all risks and rewards to the lessor or the lessee.

4. Definitions Therefore, whether a lease is classified as operating or finance lease depends on the substance of the transaction rather than form.(The accounting principle of substance over form)

5. Finance lease A lease is classified as a finance lease if it transfers substantially all the risks and rewards incident to ownership to the lessee. Salient features of a finance lease according to IAS 17 The lease transfers ownership of the asset to the lessee by the end of the lease term. The lessee has the option to purchase the asset at the price which is expected to be sufficiently lower than the fair value at the date the option becomes exercisable,that, the inception, it was reasonably certain that the option will be exercised The lease term is for a major part of the economic life of the asset, even if

6. Finance lease the tittle is not transferred. At the inception of the lease, the present value of the minimum lease payments amount to substantially all of the fair value of the leased assets The lease assets are of a specialized nature such that only the lessee can use them without major modifications being made Others situations that may give classification as finance lease; If the lessee is entitled to cancel the lease, the lessor’s losses associated with cancellation are borne by the lessee

7. Finance lease Gains or losses from fluctuations in the fair value of the residual fall to the lessee( eg by means of rebate of lease payments) The lessee has the ability to continue to lease for a secondary period at a rent that is substantially lower than market rent Accounting of finance leases by lessees At the commencement of the lease term, finance leases should be recorded as an asset and liability at the lower of the fair value of the asset and the present value of the minimum lease payments( discounted at the interest rate implicit in the lease) Finance lease payments should be apportioned between the finance charge and capital investment (which reduces the outstanding liability) Depreciation policy for the assets held under finance lease should be consistent with that of owned assets. However, if there is no reasonable certainty that the lessee will obtain ownership at the end of he lease term, the asset should be depreciated over the shorter of the lease term or the life of the asset

8. Accounting for finance leases by lessee Journal Entries DR : Non-Current assets CR: Creditors(Liabilities) When a rental is paid DR: Creditors CR: Cash For Depreciation DR: Income statement

9. Accounting for finance leases by lessee CR: Provision for Depreciation

10. Accounting of finance lease for lessors The following principles should be applied in the financial statements of the lessors At start of the lease term, the lessor should record a finance lease in the balance sheet as a receivable(Loan and advance) at an amount equal to the net investment in the lease The lessor should recognize finance lease income on a pattern reflecting a constant periodic rate of return on the lessor’s net investment outstanding in respect of the finance lease DR: Loans and Advances( Finance lease advance) CR: Receivables ( Lease receivable)

11. Accounting of finance lease for lessors When a rental is received DR: Lease Receivable CR: Finance lease advance

12. Accounting for Operating leases by lessee An operating leaser is a lease other than a finance lease. At its most clear cut, an operating lease is a very short term agreement for a temporary hire of an asset for instance, hiring a car to take on holiday For a lessee, the operating lease payments should be recognized as an expense in the income statement over the lease term on straight line basis. There is no balance sheet item to be recognized. Accounting for operating leases by Lessor For lessor, the assets held for operating lease should be presented in the balance sheet of the lessor according to the nature of the asset Lease income should be recognized over the lease term on straight line basis The lessor is entitled to claims in respect to capital allowances

13. Taxation of leasing transactions “ Give to Ceasor what belongs to …… The taxation of leasing transactions in Uganda is governed under the Income Tax Act(1997) and VAT Act(1996) Cap 349 Section 60, of the income tax act defines a finance lease and provides guidance on the taxation of the same. Below is the definition of finance lease according to section 60 The lease term exceeds 75 percent of the effective life of the property The lessee has the option to buy the property at the expiration of the lease for a fixed price. The estimated residual value of the property to the lessor at the expiration of the lease term is less than 25 percent of its fair market value at the beginning of the lease

14. For finance lease, all the capital allowances like depreciation are claimed by the lessee while under the operating lease the capital allowances are claimed by the lessor. VAT treatment Whereas VAT does not apply to the provision of financial services, the provision of leasing as financial service is subject to VAT because provision of leasing services is considered as a supply of services and therefore VAT is charged on interest. The applicable VAT rate is 18%

15. VAT on Rentals Leasing of assets is treated as a supply of service and not goods, for which services the lessee pays periodic rentals. Where rentals are paid on a monthly basis, then the services are deemed to be supplied monthly and the lessee accordingly billed for the same plus VAT on the rental due. The rentals communicated to clients are net rentals meaning that the tax component where relevant has been netted off. However the lessor will invoice the lessee for VAT along with the rental payments. The VAT will be added to rental payments using applicable rate Leasing is increasingly becoming an important form of capital formation and source of finance to enterprises in Uganda. Leasing is a particularly flexible in the assets and liabilities recorded by lessors and lessee

16. Under both finance and operating leases, the input vat is claimable. The fore, if the business is Vat registered, Vat on rentals will be claimed. The lessor is obliged to give a lessee a tax invoice as evidence that the Vat has been paid For business not registered for Vat, the vat component is taken as a normal business expense. VAT on Bad debts The taxable person must have paid the full(output) on the supply to the Commissioner General but has not received payment within two years The taxable person must have taken all reasonable steps to the satisfaction of CG to persue payments and he or she has reasonable belief that it will not be received If a return has been made and later payment is received in whole or part in respect of debts he or she shall remit to CG the portion of payment that represent tax refunded in the next tax return.

17. Withholding Tax Withholding Tax Section 124 states that when a person is withholding agent and they don't withhold, that person becomes personally liable. The exception to this rule is where a person is exempted... In Uganda, most of the suppliers are exempted from withholding tax and the list is normally published by URA annually. In case a tax is withheld, Withholding tax is not treated as final tax. It is treated as an advance tax of the tax payers liability for the year of income and in practice the amounts suffered by way of withholding tax may be included by the tax payer in the provisional income tax return as satisfying part or whole of the estimated tax payable.

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