Chapter 7 Trade financing techniques
Cross-border leasing arrangements
can be established to take advantage of
different local accounting and tax treatment
of leases between the two countries.
This may be appropriate where there are
differences in the application of VAT or
sales tax between the two jurisdictions.
Companies should always seek specialist
tax advice before entering into a cross-
border leasing arrangement.Advantages
There are a number of advantages to leasing.
Because there is usually no significant
initial cash commitment, there are major
cash flow benefits for the lessee. In effect
the lessee is paying for the asset as it is
used, rather than having to arrange finance
in advance of the asset’s procurement.
This then frees the company’s other
assets to be used as security against other
borrowing, if necessary.
There is a degree of risk mitigation,
depending on the type of lease used.
Under the terms of an operating lease, the
lessee is protected against any failure of
the asset to perform, via the maintenance
contract, and the finance company
assumes any depreciation risk. Under
a finance lease, the lessee assumes a
greater risk.
The lease agreement can be tailored
to the life of the asset in the case of a
finance lease. There are potential tax and accounting
advantages. These vary from jurisdiction
to jurisdiction, but may result in a reduced
tax liability.Disadvantages
As with all transactions, there are potential
disadvantages.
Because of the risk profile, finance leases
are usually recognised on the lessee’s
balance sheet. This can then reduce the
lessee’s ability to raise funds elsewhere,
as it will affect the company’s debt-to-
equity ratio.
Finance leases, in particular, expose the
lessee to much the same risks as simple
ownership of the asset. Companies will
also need to ensure they comply with any
terms and conditions under an operating
lease, which may place restrictions on an
asset’s use. For example, a fleet lease
may limit the annual mileage of a vehicle
under a scheme.Evaluation
Leasing is an attractive technique for
companies seeking to ensure the use of a
particular asset for a set period of time. In
particular, its impact on cash flow can have
significant working capital advantages. Before
entering into any lease agreement, however,
the company should carefully consider the
impact of any restrictions on its potential use
of the asset.