On 17th May 2021 the Tax Department of the Republic issued the Implementing Guideline 15/202, issuing detailed explanations in relation to the tax impact on the financial statements from the application of IFRS 9, IFRS 15 and IFRS 16 , for both Income Tax (IT) purposes and the calculation of Special Defence Contribution (SDC) on Deemed Dividend Distribution (DDD).
1. IFRS 9 – Financial Instruments
A. Income Tax treatment for Companies, other than credit institutions
The tax treatment which arises as a result of the adoption of IFRS 9 as of tax year 2018 (inclusive), should be as follows:
- Any write-offs of trade receivables incurred during the year should be treated as tax deductible on the basis that the taxpayer is in a position to prove that despite the actions taken to collect the said amounts, the specific receivables have become uncollectible and as such these were written-off;
- Specific provisions for doubtful trade receivables booked during the year should be treated as tax deductible, to the extent that the tax payer is in a position to prove that although all relevant courses of action have been taken to collect, there is still a significant difficulty in collecting the due amounts which renders the receivable doubtful;
- Any general provisions for doubtful trade receivables incurred during the year, should be treated as non-tax deductible;
For the purposes of determining the taxable income as of tax year 2018 (inclusive):
- The provisions/ impairments of trade receivables recognised as a result of adopting IFRS 9 should be eliminated, up to the amount which does not relate to write offs/ specific provisions as mentioned in points (A) and (B) above;
- Any amount recognized directly in the reserves upon initial adoption of IFRS 9, may be treated as tax deductible in any tax year during which the taxpayer can prove that although all relevant courses of actions were taken in order to collect the due amounts, there is still significant difficulty in collecting these.
As a result, taxpayers should maintain such records which support their claim that a provision against trade receivables is specific in nature.
B. Tax treatment of the provisions/ impairment of receivables for the purposes of SDC on Deemed Dividend Distribution
According to the SDC Law, the profit on which SDC is imposed due to DDD is the profit as calculated in accordance with generally accepted accounting principles. As per the SDC Law, items arising from revaluation of securities and immovable property, should not form part of the accounting profit subject to DDD.
Given that provisions/impairment of receivables are not considered a revaluation for the purposes of the SDC law, no adjustment should be made to the profit for DDD purposes in respect of provisions/impairment of receivables recognised under IFRS 9.
The initial provision/impairment of receivables recognized on 1 January 2018 and recorded directly in the reserves as a result of the adoption of IFRS 9, is deducted from the accounting profit of the year 2018 (year of transition). The necessary adjustment should therefore be made to the DDD computation for the profits of 2018.
This treatment applies to all companies, including credit institutions
2. IFRS 15 – Revenues from Contracts with Customers
The tax treatment for the revenue that is accounted for under the provisions of the new IFRS 15 should follow the accounting treatment, both for income tax as well as for DDD purposes. Any adjustment made to the reserves as at 1/1/2018 shall need to be recognized in the profit for the year 2018, both for income tax and DDD purposes.
It should be relevant to note that in cases tax circulars, guidelines or administrative degrees have been issued by the Tax Department based on which the tax treatment of revenue recognition has been clarified therein, such guidance shall continue to apply, irrespective of the accounting treatment mentioned in IFRS 15 (e.g. Construction Contracts for developers).
3. IFRS 16 – Leases
A. Income tax treatment
For the purposes of determining the taxable income, the tax treatment applicable for leases up to tax year 2018 shall continue to apply despite the adoption of IFRS 16. As a result, any accounting entries made due to the adoption of IFRS16, should be adjusted for tax purposes.
The tax treatment for the Lessee should be as follows:
Operating Leases (as these are interpreted for the lessor): The amount of annual rent payable, which represents the annual rent expense incurred by the lessee for the use of the leased asset, should be considered as tax deductible.
Finance Leases (as these are interpreted for the lessor): The lessee should be entitled to claim capital allowances on the leased asset. Furthermore, the lessee should be entitled to claim the interest expense included within the lease payment as tax deductible.
Although the Guidance does not cover the Lessor, the tax treatment for the Lessor should be as follows:
Operating Leases: The amount of annual rent receivable, which represents the annual rental income for the lessor should be considered as taxable. Furthermore, the lessor should be entitled to claim capital allowances on the leased asset.
Finance Leases: The lessor should be taxable on the interest income included within the lease payment received.
B. Tax treatment for the purposes of SDC – DDD
According to Article 3 (5) of the SDC Law, the accounting profit of the year for the lessee, as it arises after the application of IFRS 16, will be accepted for the purpose of calculating SDC on DDD. Therefore, no adjustment should be made to the accounting profit subject to DDD in relation to the accounting treatment of leases as per IFRS 16.
For the purposes of calculating SDC on DDD, the adjustment to the lessee’s reserves on 1 January 2019 as a result of the adoption of IFRS 16, should be incorporated in the accounting profit of the year of transition (i.e. 2019). The necessary adjustment should therefore be made to the DDD computation for the profits of 2019.
We remain at your disposal for any information or clarifications required.