Tax Insights
Hire Purchase and leasing are financial solutions where corporate taxpayers are planning to purchase/lease the assets for use in their business. There are some key differences in tax treatments of hire purchase and leasing (focusing on finance lease) of the assets due to consideration of ownership as outlined below.
- Hire-Purchase
Under a Hire Purchase agreement, ownership of the asset remains with the hire vendor (the “owner”) until the completion of the leasing agreement. The ownership is transferred to the hire purchaser (the “hirer” or the “customer”) after all installments have been settled to the owner.
- Leasing
Unlike the Hire Purchase agreement, leasing is a contract that provides the purchase option for the lessee to buy the leased asset at the agreed price after expiration of the lease contract. The ownership will be transferred to the lessee upon choosing the option to buy the leased asset from the lessor at the end of the contract.
Consideration of Tax Treatment
It is important to note that accounting and tax treatments vary according to the type of asset financing; hire purchase or leasing. In this case, the taxpayer should review the books of accounts and transactions related to the assets acquired by a hire-purchase or leasing and make tax adjustments in calculation of corporate income tax.
- Hire-Purchase
From a Thai tax perspective, the assets acquired by a hire-purchase is considered as the company’s assets. However, in calculation of depreciation on these assets, the company should comply with rules and conditions as prescribed in Section 7 of Royal Decree No.145/2527 of the Revenue Code below.
“An asset acquired by a hire-purchase or installment sale agreement, cost value shall be taken at the whole price payable but wear and tear and depreciation deductible in an accounting period shall not exceed the hire-purchase or installment price payable in the accounting period.”
According to the aforementioned regulation, the company needs to adjust the interest expenses to the corporate income tax computation since the acquisition cost of the assets (including the hire purchase interest) shall be taken at the whole price and depreciated accordingly. In other words, the interest expenses recorded under the hire purchase agreement in the books of accounts are not allowed as tax deductible expenses. Instead, they have to be included as acquisition cost of assets and then deduct depreciation expense.
In addition, if the depreciation expenses exceed the regulatory cap as specified in Section 7 above, the company has to make tax adjustment due to the difference in calculation of corporate income tax.
- Leasing
In general, from a Thai tax perspective, it does not recognize the assets from the leasing contract (as mentioned in II) to be treated as capitalized asset and taken depreciation. Instead, the consideration for this leasing of assets shall be treated as rental payment.
Based on the above, the taxpayer has to review/adjust the transactions regarding those assets to the corporate income tax computation if they were recorded as the company’s assets and taken deprecation expenses in the books of accounts. That is, the rental payment shall be treated as tax deductible instead.
Note that this tax article contains general information in summary form. Therefore, it is only intended for use as a general guidance and should not be used to determine the issues without obtaining professional advice for your specific areas. If you have any questions, please do not hesitate to contact Nutticha@bakertilly.co.th.