The Financial Accounting Standards Board ratified the Indonesian Financial Accounting Standard (PSAK) 73 regarding Leases which is effective starting from 1 January 2020. Previously, accounting for leases was regulated in PSAK 30. As a result, the existence of PSAK 73 managed to also change the accounting treatment related to leases.
Accounting Treatment
Prior to the enactment of PSAK 73, lease accounting was differentiated into two types: operating leases and finance leases. A lease will be classified as an operating lease if it does not substantially transfer all the risks and rewards incidental to ownership of the underlying asset. In other words, if an entity leases an asset, but said asset is not fully under the lessee's control and the lessee does not bear all the risks associated with the asset, then the lease is classified as an operating lease. On the other hand, a lease will be classified as a finance lease if the lease substantially transfers all the risks and rewards incidental to the ownership of an asset. The recordings that will be conducted for the two types of leases are of course different.
The existence of PSAK 73 causes significant changes in the classification of lease transactions, especially from the lessee's perspective. As for the lessor, there are no significant changes in accounting treatment between PSAK 30 and PSAK 73.
According to PSAK 73, the lessee will record the lease transaction as a finance lease except for matters stated otherwise. Exceptions may be made for short-term (less than 12 months) and low-value leases (international practice is ≤$5,000). Prior to the enactment of PSAK 73, lessees could apply operating lease accounting if they met the criteria set out in PSAK. However, with the enactment of PSAK 73, lessees generally only classified lease transactions as finance leases. The difference in recording between the two PSAKs can be seen in the illustration in the following table:
*When the lease is classified as an operating lease
**Leases must be classified as finance leases
Meanwhile, for the lessor, there is no significant change between PSAK 30 and PSAK 73. In accounting for the lessor, leases are classified into 2 types: operating leases and finance leases. There are differences between operating leases and finance leases recording, where in general, these differences can be seen in the illustration below:
*Journal may differ depending on the payment terms applied
Lease Transactions According to Taxation
In contrast to PSAK 73, rent according to tax laws and regulations is still divided into two types, finance lease and operating lease, both for lessor and for lessee. Taxation treatment related to this lease transaction is regulated in the Minister of Finance Decree Number 1169/KMK.01/1991 (“KMK-1169”). In Article 2 paragraph (1) KMK-1169, it is explained that leasing activities are divided into two types:
Leasing with option rights (finance lease)
Leasing without option rights (operating lease)
In addition to PSAK 73, the leasing criteria according to KMK-1169 can also lead to differences in identification between accounting and taxes, which can affect tax treatment.
Based on KMK-1169, a lessor is a finance company or leasing company that has obtained a business license from the Minister of Finance and carries out leasing activities (currently, a business license is obtained from OJK). Based on this definition, not all finance lease transactions according to accounting can be categorized as tax-based finance lease transactions. If the leasing/financing lease does not meet these criteria, then the transaction may be categorized as taxable goods (BKP) or other more appropriate categories.
Based on Article 3 KMK-1169, in order to be classified as a leasing activity with option rights, it is necessary to meet all of the following criteria:
the amount of lease payments during the first lease period plus the residual value of the capital goods, must be able to cover the acquisition price of the capital goods and the profit of the lessor;
the rental-use-business period is set for at least 2 (two) years for Group I capital goods, 3 (three) years for Group II and III capital goods, and 7 (seven) years for buildings; and
the lease agreement containing provisions regarding options for the lessee.
Then based on Article 4 KMK-1169, leasing activities are classified as leasing without option rights if all of the following criteria are met:
the amount of lease payments during the first lease period cannot cover the acquisition price of the capital goods leased plus the profit calculated by the lessor; and
the lease agreement does not contain provisions regarding options for lessee.
The tax treatment for the two types of leases is further regulated in Article 14 to Article 19 KMK-1169:
*VAT regulations regulated by KMK-1169 are no longer in accordance with the latest tax regulations in Article 16 of VAT Law which regulate that financial services are granted with a VAT exemption
Implications to Corporate Income Tax
There is a difference between tax and accounting treatment. In calculating the amount of income tax, the treatment for lease transactions is based on the classification of leases according to taxation. As a result, these differences require fiscal reconciliation/fiscal correction for tax calculation purposes. The table below will show the fiscal reconciliation arising from differences between fiscal and commercial (for assets other than land and buildings):
1. Finance Lease (Accounting) and Lease with Options Right (Tax)
Lessee
Lessor
2. Finance Lease (Accounting) and Lease without Options Right (Tax)
Lessee
Lessor
3. Accounting Operating Lease and Tax Lease without Options Right
Lessee
Based on PSAK 73, the lessee no longer recognizes an operating lease. Therefore, all lease transactions are recorded as finance leases.
Lessor
Implications to Withholding Income Tax
PSAK 73 generates a difference between lease in accounting terms and in tax terms, which could affect income tax calculation. For example, in the case of property leases, in terms of accounting and in accordance with PSAK 73, the lease transaction is recorded and identified by the lessee as a finance lease. However, in terms of tax calculations, it is necessary to examine the tax treatment further before calculation. Differences in lease definitions in accounting are the reason for this treatment, as in accounting will define this as a finance lease, whereas taxation will define this as an operating lease.
If the property lease transaction meets the financial lease criteria according to KMK-1169/1991, then the transaction is not an object of Income Tax Art. 23 deductions for the lessee. This is regulated in Article 23 paragraph (4) of Law Number 7 Year 1983 as amended by Number 7 Year 2021, which states that Income Tax Art. 23 deductions are not made on rents paid or payable concerning leases with option rights. However, if the property lease transaction is an operating lease, then the lease transaction can be the object of withholding income tax.
If the rental transaction is in the form of leasing a ship and/or aircraft to another party in the sense of renting an uncrewed vessel, Income Tax Art. 23 is subject to payment of rental and other income in connection with the use of assets in the amount of 2% of the gross amount. Meanwhile, if the boat rental transaction is accompanied by the provision of shipping services and/or flight services based on a charter agreement in the form of transporting people and/or goods loaded from one port to another, covering all forms of charter, including the rental of ship space and/or aircraft, will be subject to Income Tax Art. 15 imposed on gross turnover. Income Tax Art. 15 rates are further regulated in Minister of Finance Decree No. 416/KMK.04/1996.
In addition, other deductible aspects can be imposed in transactions leasing, namely for the rental of land and/or buildings that are subject to Final Income Tax 4 paragraph (2) at a rate of 10% of the gross amount of the rental value (Article 4 paragraph (2) sub-paragraph d of the Law regarding Income Tax jo. PP No. 34 Year 2016).
Implications to Value-Added Tax
Referring to KMK-1169/1991, accounting for lease transactions affects the calculation of Value Added Tax. In accounting terms, lease agreements are identified and recorded as finance leases. However, from a tax perspective, it is necessary to examine the contract and supporting evidence further to determine whether the lease transaction is an operating or a finance lease.
If by tax it is classified as an operating lease (ordinary lease), the lease transaction is subject to VAT (currently, 11%). Lessor will collect VAT from the lessee and acknowledge the Output VAT. Meanwhile, the lessor will collect the lessee's VAT and acknowledge the Input VAT.
On the other hand, the VAT provisions regulated by KMK-1169 are no longer in accordance with the tax provisions in Article 16 paragraph (1b) of Law no. 8/1983 as amended by UU no. 7/2021 ("VAT Law"). In KMK-1169, it is stated that a lease with option rights is not subject to VAT. It differs from the VAT Law, which states that a lease with option rights is granted with VAT exemption.
Based on what’s stated in Article 16 paragraph (1b) of the VAT Law, financing services are one of certain taxable services exempt from the imposition of Value Added Tax. In the VAT Law, one of these financing services includes a lease with option rights.
Further rules regarding the VAT exemption are regulated in Article 14 Regulation of Government of The Republic of Indonesia Number 49 Year 2022 (“PP 49/2022”), which explains that leasing with option rights is exempt from the imposition of Value Added Tax.
Illustration
PT Lessee rents a machine owned by PT Lessor. PT Lessee agreed to lease the asset for five years, from 1 January 2019 to 31 December 2023. PT Lessee will pay a rental fee of IDR 5,500/year, starting from the beginning of the lease term, 1 January 2019. On 31 December 2023, PT Lessee will return the machine to PT Lessor and will not renew the lease. The estimated residual value that will be returned to PT Lessor is IDR3,000.
PT Lessor already has a permit from OJK to carry out leasing activities. PT Lessor acquired the asset for IDR25,000, and the life of the asset is ten years. As long as it is leased to PT Lessee, all risks related to the machine will be borne by PT Lessee. In addition, PT Lessor cannot use the machine assets.
Based on calculations, it is known that the implicit interest rate lessor is 9.564%.
How is the accounting record of the transaction above? Then, how is the treatment of taxation?
Lessee
Based on PSAK 73, PT Lessee must record the above transactions using a finance lease. In a finance lease, all lease transactions must be recorded in the statement of financial position. To make journaling easier, the following steps can be taken:
1) Determining the Amount of Lease Liabilities and Use Rights Assets
To obtain the nominal value of Right-of-Use assets and Lease Liability, it is necessary to first calculate the present value of the lease payments by multiplying the payments by the discounting factor.
2) Determining the Amortization of Lease Liabilities
*Initial liability balance of 17,600 has taken into account the first payment
Interest is calculated from the balance of liabilities multiplied by the implicit interest rate lessor by 9.564%
3) Determining Depreciation of Right-of-Use Assets
The Right-of-Use asset is depreciated over the lease term, which is 5 years. Using the straight-line method, the annual depreciation is Rp. 4,620.00 (Rp. 23,100.00 : 5 years).
4) Journaling
After doing the calculations and making the required tables, journals can be made with reference to these tables. The following is an example of a journal entry for a first-period lease:
Because at the end of the period PT Lessee will return the machine to PT Lessor, the
journal that will be made is as follows:
Then, how is the classification in terms of taxation? Regarding taxation, there are no option rights in the transaction above. This is because, at the end of the lease term, there is no right for PT Lessee to buy the machine or extend the lease agreement. Therefore, this lease is categorized as an operating lease. Several differences between accounting and tax treatment require fiscal reconciliation. These differences can be seen in the following table:
In addition, based on KMK-1169, operating leases are subject to VAT and are subject to PPh 23 deductions (not land and buildings). Then, the tax accounting journal that will be made by PT Lessee in the first period of lease payments is:
Lessor
Based on PSAK 73, PT Lessor needs to identify the type of lease applied for transactions with PT Lessee. This transaction with PT Lessee meets the criteria for a finance lease because this lease transfers substantially all the risks and rewards associated with the leased machine assets. This can be seen from the information which states that during the lease term, PT Lessee bears all risks related to the assets, and PT Lessor cannot use or receive benefits from the machine assets.
To facilitate accounting records, the following table can be made:
Interest income is obtained from the balance of lease receivables multiplied by the lessor’s implicit interest rate of 9,564%. In terms of journalizing, interest income must be recognized at the end of the year. For example, PT Lessor will recognize interest income of IDR 1,865 on 31 December 2019 and IDR 1,517 on 31 December 2020.
The initial receivable balance of 19,500 is obtained from 25,000 (acquisition cost of the machine) minus 5,500 (payments made at the beginning of the period, 1 January 2019).
The following is an example of the journal entry made by PT Lessor for first-period of the lease:
Because at the end of the period PT Lessor will get back the machine from PT Lessee, the journal that will be made is as follows:
Then, from a taxation perspective, because it does not have option rights, this lease is classified as an operating lease. There are several differences that may require a fiscal reconciliation. These differences can be seen in the following table:
Then, based on KMK-1169, in operating leases, all lease payments are PPh objects. In addition, this transaction is subject to VAT where PT Lessor collects VAT from PT Lessee. So, the tax accounting journal that will be made by PT Lessor when receiving payment for period 1 is:
Based on the illustration above, differences in lease classification between accounting and fiscal often occur, both for lessee and lessor. Thus, it is important for taxpayers to understand the lease criteria based on the applicable tax regulations.
Legal Basis
PSAK 73 - Lease
Law No. 7 Year 2021 regarding Harmonization of Tax Regulations
Minister of Finance Decree Number 1169/KMK.01/1991
Circular Letter SE-29/PJ.42/1992 regarding Income Tax Treatment of Leasing Activities
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