Page 38 - Strategic Tax Planning for Global Commerce & Investment

Cross Border Tax Planning Strategies

cause the lease is for a term shorter than
the asset’s useful life and there are no ar-
rangements for the lessee to extend the

lease or acquire ownership at the end of
the lease term. This type of lease can be
used as a form of off-balance sheet financ-
ing.
 Finance leases – Under this arrangement
the lessor effectively relinquishes most or

all of the economic interest in the leased
asset. Under International Accounting
Standards the lessee under a finance lease
is treated as owning the asset and the les-
sor having made a loan.

Different countries have different rules for the tax treatment of
leasing. In general, for operating leases the lessor in entitled to
the tax depreciation and the lease rentals are taxable income for
the lessor and a deductible expense for the lessee. In the case of
finance leases, however, some countries give the tax
depreciation to the lessor and tax the lessor on lease rentals
whereas others base the tax treatment on the economic
substance, so giving tax depreciation to the lessee and allowing
the implicit “interest” in the lease. A number of other countries
combine elements of both systems. In many cases, the diversity
in tax treatment give the multinationals the ability to create tax
savings through an arbitrage between two different tax
systems.

Some of the tax advantages that asset leasing offer is:

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