TaxLegi 30.06.2021

The Tax Department issued on the 17th of May 2021 Application Guidance 15/2021 (“Guidance”), which provides direction to tax payers in relation to the tax treatment of the impact on the Financial Statements upon adoption of the new accounting standards IFRS 9, IFRS 15 and IFRS 16.

The Guidance addresses relevant considerations both from an Income Tax (‘IT’) and Special Defense Contribution (‘SDC’) perspective, as analyzed below.

 

I.                 IFRS 9 – Financial Instruments

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:

A.     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;

B.     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;

C.      Any general provisions for doubtful trade receivables incurred during the year, should be treated as non-tax deductible;

D.     For the purposes of determining the taxable income as of tax year 2018 (inclusive):

 

                           i.          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;

                          ii.          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.

 

Income Tax treatment for credit institutions

The adoption of IFRS 9 for Credit Institutions (‘FI’) should follow a different approach whereby:

A.     Any provisions of loans or advances, which have been categorised as Stage 1 or 2, should be treated as non-tax deductible;

B.     Any provisions of loans or advances, which have been categorised as Stage 3 or POCI (Purchase or originated financial assets that are credit impaired on initial recognition), should be treated as tax deductible;

C.     In case, there are transfers of loans or advances from stage 1 or 2 to stage 3 within a year, the cumulative provisions recognised on such loans or advances in prior years, should be treated as tax deductible in the said year;

D.     In case, there are transfers of loans or advances from stage 3 to stage 1 or 2 within a year, the cumulative provisions recognised on such loans or advances in prior years, should be treated as non-tax deductible in the said year;

E.     Any amount recognized as an initial provision of loans or advances, which have been categorised as Stage 3 or POCI, as at 1/1/2018 directly in the reserves upon initial adoption of IFRS 9, should be treated as tax deductible during the tax year 2018.

 

Tax treatment of the provisions/ impairment of receivables for the purposes of SDC on Deemed Dividend Distribution

The recognition of provisions/ impairments of receivables should not be considered as a revaluation for the purposes of Deemed Dividend Distribution (‘DDD’). In this respect, a provision/ impairment of receivables recognized in the accounting profit for the year in accordance with IFRS 9 will be accepted for the purposes of DDD and as such no adjustment should be made in the accounting profit in relation to the said provision/impairment.

Any amount recognised as a provision as at 1/1/2018 directly in the reserves upon initial adoption of IFRS 9 should be deducted from the accounting profits for the year 2018 for the purpose of DDD.

 

 

     II.          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).

 

 

    III.          IFRS 16 – Leases

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.

 

Tax treatment for the purposes of SDC – DDD

The accounting profit of the year for the lessee as a result of the adoption of IFRS 16 shall be accepted for DDD purposes. In this respect, in relation to the accounting treatment of leases under IFRS 16, there will be no adjustment to the accounting profit for DDD purposes.

The adjustment made to the reserves of the lessee as at 1/1/2019 upon initial adoption of IFRS 16 shall need to be recognized in the accounting profit of the year 2019 for DDD purposes.

Although the Guidance is silent on the SDC – DDD implications for the lessor, in our view the above position should be applicable for the lessor as well.

Lastly, it is noted that for IFRS 9 and IFRS 15, the Guidance applies of tax years 2018 inclusive, whereas IFRS 16 applies as of tax year 2019 (inclusive).

 

EY Cyprus is at your disposal for any information and/or clarifications required.

 

 

Michalis Karatzis - Manager, Direct Tax