Leasing Challenges for Multinationals
A continuing discussion on navigating leasing tax waters.
November 12, 2009
In the current economic landscape, lessors are facing an industry-wide decline in the number of total financing opportunities. Seeking growth in this environment pushes companies to enter new foreign markets but with this business model comes myriad tax challenges.
Current International Tax Complexities
Multinational leasing organizations find themselves facing unique tax challenges as they look to expand into new markets. As rules and regulations vary from country to country and the industry braces for impending legislation that will take effect in the next few months, the concern grows for proper tax calculation in their new ventures.
A snapshot of the tax horizon brings three unique challenges to the forefront — determining whether a lease is a finance or operating lease, accurately identifying the correct place of supply, and handling country specific tax regulations that may attach themselves to various leasing contracts.
Finance vs. Operating Leases
Every company that conducts a high volume of cross-border leasing transactions must have a tax/contract expert on staff to analyze leases that the organization enters into. This is critical for the proper tax determination of leases since a finance lease is typically exempt from Value Added Tax (VAT) collection while an operating lease is normally taxed at a standard rate. Most organizations have more than likely developed a process that works for them. An automated solution for this issue is not foreseeable as the lease determination is based primarily on contract interpretation.
Place of Supply Determination
Most countries regard leasing as a supply of services rather than goods, and the rules surrounding the place of supply of services are considerably more complex than those applying to supplies of goods. Let’s consider an example:
Example: A construction company (A) in France wins a real-estate development contract in Belgium and it needs to lease some excavation equipment in order to carry out the work. It contracts with a leasing company (B) in the U.K. to build and deliver this equipment directly to the construction site. In this case, the taxing jurisdiction could be the supplier location (U.K.), the customer location (France) or the place where the equipment is used/delivered/accepted (Belgium). All this depends on the contractual terms.
There is a real danger that tax could be wrongly declared in one country and wrongly undeclared in another, leading to a poor compliance record, penalties, and interest. For this reason, strong risk management processes are critical for ensuring multi-country compliance.
Additional Tax Burdens
Conducting business in a global environment also exposes companies to country specific taxes that they are not normally accustomed to handling. While income tax and VAT are applicable in every country, there are additional transaction tax types that may also be imposed depending on the country in which they may be conducting business. Keeping track of these taxes can be time consuming without an automated system that can assist with keeping these issues top of mind. Additional tax types to consider include:
While companies will continue to carry the finance versus operating lease burden for the foreseeable future, there is relief on the horizon for place of supply and additional tax issues. These solutions are capable of streamlining and centralizing tax processing to provide accurate and up-to-date tax rates and rules.
In addition, these systems support the granularity required by the leasing industry to ensure that data is fully captured on the front end and reported in a highly granular and flexible manner at the back end. Implementing a solution with enhanced reporting functionality ensures the ability of the tax department to quickly track and report tax data allowing them to focus more of their time on strategic business decisions and less on audit defense.
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* This article was previously published in World Leasing News.
Doug Cohen is the senior channel manager and a member of the Alliances Group at Vertex Inc. He is a member of the Equipment Leasing and Finance Association (ELFA), ELFA Operations & Technology Planning Committee, Association of Consumer Vehicle Lessors (ACVL) and the Association for Retail Technology Standards (ARTS).