All lessees, especially a business entity, must treat their taxes appropriately in its books, and this should comply with the provisions of the latest circular “Guidelines on Tax Implications of Leasing” issued by the in Federal Inland Revenue Services (FIRS) in April 2010.
The following specifies how taxes should be treated by a lessee (user of asset):
- Finance Lease Treatment for Lessee
The Companies Income Tax Act (CIT) regards the interest portion of the periodic lease rental and other related expenses such as insurance; maintenance cost as deductible expenses for income tax purposes. Also, the lessee is entitled to claim capital allowance on capital portion of the value of the leased assets
i. Withholding Tax (WHT) is withheld by the lessee at 10% on the interest portion of the lease rental and remitted to FIRS.
ii. Value Added Tax (VAT) on the purchase of the asset is regarded as input tax and should be capitalised with the cost of the asset.
iii. Capital Gain Tax (CGT) will not be applicable to the lessee unless the gain arose from the sale of his interest in the lease. However, the lessee will be liable to CGT if the leased asset was sold by him after exercising the purchase option.
- Operating Lease Treatment for Lessee
i The Rental charges and other associated expenses are allowable deductions for tax purposes.
Capital allowance cannot be claimed by the Lessee.
ii WithholdingTax (WHT) at 10% of the rental payment to the lessor shall be withheld by the lessee and remitted to the relevant tax authority.
iii Value Added Tax (VAT) charged by the lessor on the lease rental is not an input tax to the lessee; it is to be charged to the Profit & Loss Account.
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