Non-refundable Value Added Tax on Lease Payments (IFRS 16)

Date recorded:


In its March 2021 meeting, the Committee discussed a submission about whether the lessee includes non-refundable VAT as part of the lease payments. In the fact pattern described, the lessee operates in a jurisdiction which requires sellers to collect VAT and remit the amounts to the government and generally allows purchasers to recover VAT charged on payments for goods and services. However, due to the nature of operations, the lessee can recover only a portion of the VAT charged, including that charged on lease payments. The staff concluded that the non-refundable VAT should be excluded from the measurement of the lease liability and suggested not explaining the accounting treatment lessees apply to it because its impact is not material nor widespread. Most of the Committee members agreed with the accounting conclusion but some of them were not convinced that the matter is not material nor widespread based on the limited outreach performed by the staff.

There were 16 comment letters received. Most respondents agreed with the Committee's decision not to add a standard-setting project to the work plan. However, some of them expressed different views on the accounting treatment and suggested the agenda decision should explain it. 

Staff analysis

For the respondents supporting that non-refundable VAT should be excluded from the lease payments, they considered such payments are not payments to the lessor in exchange for the right to use the underlying asset. Instead, they are payments to the tax authority and therefore meet the definition of a levy under IFRIC 21. While for those who considered VAT should be included as part of lease payments, they referred to IAS 16:16(a) which requires an entity to include "non-refundable purchase taxes" as part of the cost of an item of property, plant and equipment. The lessee has an obligation to make such payments under the contract and therefore, making analogy to IAS 16, the VAT should be part of the payments for the right to use the asset. These views are similar to those identified in the initial outreach or provided in the submission.

Only one of the respondents said the matter could be material and other respondents said the non-refundable VAT is generally not material for lessees. Almost all respondents did not comment on whether there is diversity in the way lessees account for it. Accordingly, the staff considered that there is insufficient evidence to suggest the matter described in the submission has "widespread effect and has, or is expected to have, a material effect on those affected".

In response to the respondents' request for adding an explanation of the accounting treatment in the agenda decision, the staff said that explanatory material would be included if the principles and requirements in the Standards do not provide an adequate basis for the required accounting. They explained that entities had been applying IFRS 16 since it came into effect and such matters had existed for many years, yet there is no evidence showing that the prevalence of the issue has increased in the recent past. For this reason, it is unlikely that significant new diversity would arise. Therefore, the staff continue to support that explaining the accounting treatment is unnecessary to prevent new diversity from arising. Moreover, the staff did not recommend including a reference to IAS 1:117 because they were of the view that without other explanatory material, it might imply there is an accounting policy choice whether to include or exclude the non-refundable VAT as part of the lease payments.

Despite the above, the staff noted that stakeholders will have another chance to provide input on this non-refundable VAT matter as part of the post-implementation review of IFRS 16.

Staff recommendation

The staff recommended finalising the agenda decision with minor editorial changes.


Although most of the Committee members agreed with the staff recommendation to publish the agenda decision, some of them still considered the matter is widespread, it could have a material effect in some jurisdictions and there is diversity in practice. They said it is unclear whether the comment letters received are providing additional evidence or whether they speculate that the matter is not widespread and has no diversity in accounting. They still questioned why explanatory material is not added in the agenda decision given that it could be useful in educating people. The staff explained that even though the VAT rate could be high in some sectors or some jurisdictions, only a piece of it is non-refundable. That is why they considered the non-refundable portion which is the subject of this agenda decision is normally not material, which supported their view that the matter has no material effect and for not providing technical analysis in the agenda decision.

The Committee decided, by a majority vote of 9, to finalise the agenda decision.

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