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PART A
INCOME TAX
2.01 Lessor if contract is a lease — The amount paid for the use of
property under an agreement which is determined under these regulations to be
a lease shall be considered as rental ( and therefor includible in gross income) of
the lessor. Such lessor may deduct all ordinary and necessary expenses paid or
incurred during the taxable year which are attributable to the earning of the
income. In addition, the lessor, with respect to properties subject to an
"operating lease" as defined in subparagraph 2.01/1 of this Section, will be
allowed a deduction for depreciation determined pursuant to Section 30 (f)
of the National Internal Revenue Code (NIRC) and the Regulations thereunder:
Provided, however, that tangible personal properties listed in Annex "A" of
these Regulations which are subject to "finance lease" (as defined in
subparagraph 2.01/2 of this Section) may be depreciated during the primary
lease period but such period shall not be less than 60% of the depreciable life of
the property as indicated in Annex "A". If, under the agreement, the lessee pays
Copyright 2018 CD Technologies Asia, Inc. and Accesslaw, Inc. Philippine Taxation Encyclopedia Second Release 2018 1
to the lessor a stipulated rental, and in addition pays certain other expenses
which are properly payable by the lessor, the lessor is deemed to have received
as rental income not only the stipulated rental but also the amount of such other
expenses paid by the lessee to, or for the account of, the lessor.
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2.04 Taxation of income derived from "'package leases"
— The rental income derived from a packaged lease shall be taxable
directly to each of the participating lessors in their individual capacity,
the respective shares of which shall be determined in accordance with
their sharing agreement. Any gain or loss derived by the lessor who sells
the lease contracts or lease receivables to one or more buyers shall be
taxed as ordinary gain or loss. To compute ordinary gain or loss, the
outstanding principal value of the lease as determined in Annex "B"
shall be deducted from the selling price.
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asset.
PART B
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accordance with the formulae prescribed in Annex "B".
6.03 If the lessor is a person other than a finance and leasing company
registered under R.A. 5980, then the rentals resulting from the lease agreement
shall be subjected too the 4% contractor's tax imposed under Section 205 of
the National Internal Revenue Code.
Recommending Approval:
ANNEX A
SCHEDULE OF DEPRECIATION
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1. Land Transportation Equipment 4 years
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2.4 Purse Seiner
2.5 Reefer Vessels
2.6 Container Vessels
2.7 Passenger Vessels
2.8 And such other similar or related equipment, as may be mutually
agreed upon from time to time.
3. AIR TRANSPORT EQUIPMENT
3.1 Helicopters
3.2 Prop Aircraft
3.3 Turbo-Prop Aircraft
3.4 Jet Aircraft
3.5 And such other similar or related equipment, as may be mutually
agreed upon from time to time.
4. INDUSTRIAL EQUIPMENT
4.1 Injection Moulding Machines
4.2 Extruding Machines
4.3 Foundry Equipment
4.3 Metal Fabrication Equipment
4.5 Welding Equipment
4.6 Logging Equipment
4.7 Sawmill Equipment
4.8 Woodworking Equipment
4.9 Kiln Drying Equipment
4.10 Refrigerating Equipment
4.11 Mining and Quarrying Equipment
4.12 Printing Equipment
4.13 Textile Machines
4.14 Refractory Equipment
4.15 Boilers
4.16 Industrial Pumps
4.17 Industrial Gas Manufacturing Equipment
4.18 Distilling Equipment
4.19 Laboratory Testing Equipment AaCTID
ANNEX B
Lease rentals received by financial lessor shall be broken down into a principal and
lease income component, the latter being subjected to the gross receipts tax under Sections
260 and 261 of NIRC, as amended by Section 15 of P.D. 1739. Recognition of lease
income shall be based either on the annuity methods or the sum-of-the years'-digits (SYD)
method.
Lease income under the annuity method is derived by computing the lease rate on the
diminishing outstanding principal of the net lease facility. Explanation follows.
The lease rate is a function of the basic parameters that normally comprise a lease
transactions, namely: the lease amount, guarantee deposit, lease rental, periodic payment, the
term of the lease and the residual value. The lease rate is defined as the internal rate of return
of a specific lease transaction such that:
For purposes of computing the lease rate factor, the cash flows accruing for a period,
whether paid in advance is immaterial and shall be treated as any other in arrears payments.
DTIcSH
(Please refer to Exhibit I for computational examples in the determination of the lease
rate factor.)
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Lease income component of lease rentals shall be determined by the following
formula:
Outstanding principal Lease Lease income
balance of lease X rate = for a specific
facility factor period t
(Please refer to Exhibit 2A for computational examples in the determination of the
lease income component.)
Lease income under the SYD method is derived by computing the SYD factor
(number of remaining periodic payments divided by the sum-of-the-years'-digits) on the total
lease income. Explanation follows:
Exhibit 1
Guarantee Deposit : 0
Based on the above parameters, the resulting cash flows for the lessor and
correspondingly lease rate factor, using the formula
are as follows:
Present
Value Discount
Period Net Net Factor at
(in Lease Lease Residual Cash 3% lease Present
qtr) Facility Rental Value Inflow Rate 1 Value 2
0 1,000,000 (1,000,000) 1.00000 (1,000,000)
1 93,415.88 93,415.88 .97087 90,694.68
2 93,415.88 93,415.88 .94260 88,053.81
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3 93,415.88 93,415.88 .91514 85,488.61
4 93,415.88 93,415.88 .88849 82,999.08
5 93,415.88 93,415.88 .86261 80,581.47
6 93,415.88 93,415.88 .83748 78,233.93
7 93,415.88 93,415.88 .81309 75,955.52
8 93,415.88 93,415.88 .78941 73,743.43
9 93,415.88 93,415.88 .76642 71,595.80
10 93,415.88 93,415.88 .74409 69,509.82
11 93,415.88 93,415.88 .72242 67,485.50
12 93,415.88 100,000 193,415.88 .70138 135,658.03
—————
Total cumulative present value 0
1. Discount factor at a certain rate need not be computed since this could be
acquired from present value tables.
The above example has shown that the lease rate factor for this specific lease
transaction with the given parameters above is 3% per quarter or 12% per annum. Normally,
finding the lease rate factor is a tedious process of trial and error, which would necessitate at
times, the process of interpolation. This however could be determined with greater ease with
the use of a financial calculator with the capability of imputing the internal rate of return. TDcCIS
Example 2. Same parameters as Example 1 except that lease rental payments are in
advance.
For purposes of determining the lease rate factor to be used for computing the lease
income component of a lease rental, timing differences of whether a periodic lease rental
payment is payable in advance or in arrears, is immaterial. Consequently, example 2 would
have the same cash flows as example 1 and thus, the lease rate factor in determining lease
income is also .03.
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rate factor, are as follows:
Present
Value Discount
Period Net Net Factor at
(in Lease Lease Residual Cash 3% lease Present
qtr) Facility Rental Value Inflow Rate 1 Value 3
0 900,000 1 (900,000) 1.00000 (900,000)
1 90,415.88 90,415.88 .97087 85,782.06
2 90,415.88 90,415.88 .94260 85,226.01
3 90,415.88 90,415.88 .91514 82,743.19
4 90,415.88 90,415.88 .88849 80,333.61
5 90,415.88 90,415.88 .86261 77,993.64
6 90,415.88 90,415.88 .83748 75,721.49
7 90,415.88 90,415.88 .81309 73,516.25
8 90,415.88 90,415.88 .78941 71,375.20
9 90,415.88 90,415.88 .76642 69,296.54
10 90,415.88 90,415.88 .74409 67,277.55
11 90,415.88 90,415.88 .72242 65,318.24
12 93,415.88 02 90,415.88 .70138 63,415.89
—————
Total cumulative present value 0
Example 4. Same parameters as Example 3 except that lease rental payments are in
advance.
The resulting cash flows for this transaction are the same as in Example 3 due to
reasons explained in example 2. Thus, lease rate factor is also 3% per quarter. TIHCcA
1 Lease facility minus guarantee deposit is the net cash outflow of the lessor.
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2 The residual value for this transaction, cashflow wise, is 0, since the guarantee
deposit, which is in the amount of P100,000, is given back at the end of the
lease term and is netted out with the residual value, which in this example, is
also P100,000.
Lease rate factor is also 3% per quarter or 12% per annum as Example 5.
2 Guarantee deposit in the amount of P100,000 is netted out at the end of the
lease term from the P200,000 residual value. Thus, cashflow-wise, residual
value is only P100,000.
Exhibit 2A
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Computational Examples in the Determination of the Lease Income Component of Lease
Rental under the Annuity Method
Guarantee Deposit : 0
Example 2. Same parameters as Example 1 except that lease rental payments are in
advance, thus, lease rate quarterly factor is also .03. caTESD
Ending Payment of
Outstanding Residual Principal Lease Lease
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Period Balance Value Repayment Income Rental
0 936,584.12 63,415.88 30,000.00 93,415.88
1 871,265.76 65,318.36 28,097.52 93,415.88
2 803,987.85 67,277.91 26,137.97 93,415.88
3 734,691.61 69,296.24 24,179.64 93,415.88
4 663,316.48 71,375.13 22,040.75 93,415.88
5 589,800.09 73,516.39 19,899.49 93,415.88
6 514,078.21 75,721.88 17,694.00 93,415.88
7 436,084.68 77,993.53 15,422.35 93,415.88
8 355,751.34 80,333.34 13,082.54 93,415.88
9 273,088.00 82,743.34 10,672.54 93,415.88
10 187,782.36 85,225.64 8,190.24 93,415.88
11 100,000.00 87,782.36 5,663.52 1 93,415.88
12 100,000.00
Example 3. Lease Facility : P1,000.000
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0 900,000.00
1 843,630.33 56,369.67 27,000.00 83,369.67
2 785,569.57 58,060.76 25,308.91 83,369.67
3 725,766.99 59,802.58 23,567.09 83,369.67
4 664,170.33 61,596.66 21,773.01 83,369.67
5 600,725.77 63,444.56 19,925.11 83,369.67
6 535,377.87 65,347.90 18,021.77 83,369.67
7 468,069.54 67,308.33 16,061.34 83,369.67
8 398,741.96 69,327.58 14,042.09 83,369.67
9 327,334.55 71,407.41 11,962.26 83,369.67
10 253,784.92 73,549.63 9,820.04 83,369.67
11 178,028.80 75,756.12 7,613.55 83,369.67
12 - 100,000.00 1 78,028.80 5,340.87 2 83,369.67
1 Cashflow-wise, residual value is P100,000, since guarantee deposit which is
also in the amount of P100,000, is netted out at the end of lease term from the
P200,000 residual value.
Example 6. Same parameters as Example 5, except that lease rental payments are in
advance; thus, lease rate quarterly factor is also .03.
Ending Payment of
Outstanding Residual Principal Lease Lease
Period Balance Value Repayment Income Rental
0 843,630.33 56,369.67 27,000.00 83,369.67
1 785,569.57 58,060.76 25,308.91 83,369.67
2 725,766.99 59,802.58 23,567.09 83,369.67
3 664,170.33 61,596.66 21,773.01 83,369.67
4 600,725.77 63,444.56 19,925.11 83,369.67
5 535,377.87 65,347.90 18,021.77 83,369.67
6 468,069.54 67,308.33 16,061.34 83,369.67
7 398,741.96 69,327.58 14,042.09 83,369.67
8 327,334.55 71,407.41 11,962.26 83,369.67
9 253,784.92 73,549.63 9,820.04 83,369.67
10 178,028.80 75,756.12 7,613.55 83,369.67
11 100,000.00 78,028.80 5,340.87 2 83,369.67
12 - 100,000.00 1
1 Cashflow-wise, residual value is P100,000, since guarantee deposit which is
also in the amount of P100,000, is netted out at the end of lease term from the
P200,000 residual value.
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2 Figures not exact due to rounding off.
Exhibit 2B
Guaranty Deposit : 0
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Guaranty Deposit : P100,000
Example 4. Same parameters as Example 3 except that lease rental payments are in
advance, thus, the computation for the lease income is also the same.
(A) (B) (C) (D) (E)
Payment of
Outstanding Residual Lease Lease Principal
Period Balance Value Rental Income Repayment
0 838,044.21 90,415.88 P28,460.09 61,955.79
1 773,716.74 90,415.88 26,088.41 64,327.47
2 707,017.60 90,415.88 23,716.74 66,699.14
3 637,946.78 90,415.88 21,345.06 69,070.82
4 566,504.29 90,415.88 18,973.39 71,442.49
5 492,690.13 90,415.88 16,601.72 73,814.16
6 416,504.29 90,415.88 14,230.04 76,185.84
7 337,946.78 90,415.88 11,858.37 78,557.51
8 257,017.60 90,415.88 9,486.70 80,929.18
9 173,716.74 90,415.88 7,115.02 83,300.86
10 88,044.21 90,415.88 4,743.35 85,672.53
11 - 90,415.88 2,371.67 88,044.21
12 - 01 - - -
Example 5. Lease Facility : P1,000,000
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Period NRP/STD x Income = for the period
1 12/78 P200,436.04 P30,836.31
2 11/78 200,436.04 28,266.62
3 10/78 200,436.04 25,696.93
4 9/78 200,436.04 23,127.24
5 8/78 200,436.04 20,557.54
6 7/78 200,436.04 17,987.85
7 6/78 200,436.04 15,418.16
8 5/78 200,436.04 12,848.46
9 4/78 200,436.04 10,278.77
10 3/78 200,436.04 7,709.08
11 2/78 200,436.04 5,139.39
12 1/78 200,436.04 2,569.69
1 Cashflow-wise, residual value is 0 since guaranty deposit, in the amount of
P100,000, is given back at the end of the lease term and is netted out with the
residual value, which in this example, is also P100,000.
(A) (B) (C) (D) (E)
Payment of
Outstanding Residual Lease Lease Principal
Period Balance Value Rental Income Repayment
0 900,00.00
1 847,466.64 83,369.67 30,836.31 52,533.36
2 792,363.59 83,369.67 28,266.62 55,103.05
3 734,690.85 83,369.67 25,696.93 57,672.74
4 674,448.42 83,369.67 23,127.24 50,242.43
5 611,636.29 83,369.67 20,557.54 62,812.13
6 546,254.47 83,369.67 17,987.85 65,381.82
7 478,302.96 83,369.67 15,418.16 67,951.51
8 407,781.75 83,369.67 12,848.46 70,521.21
9 334,690.85 83,369.67 10,278.77 73,090.90
10 259,030.26 83,369.67 7,709.08 75,660.59
11 180,799.98 83,369.67 5,139.39 78,230.28
12 - 100,000.00 1 83,369.67 2,569.69 80,799.98
Example 6. Same parameters as Example 5, except that lease rental payments are in
advance, thus, the computation for the lease income is also the same.
(A) (B) (C) (D) (E)
Payment of
Outstanding Residual Lease Lease Principal
Period Balance Value Rental Income Repayment
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0 847,466.64 83,369.67 30,836.31 52,533.36
1 792,363.59 83,369.67 28,266.62 55,103.05
2 734,690.85 83,369.67 25,696.93 57,672.74
3 674,448.42 83,369.67 23,127.24 50,242.43
4 611,636.29 83,369.67 20,557.54 62,812.13
5 546,254.47 83,369.67 17,987.85 65,381.82
6 478,302.96 83,369.67 15,418.16 67,951.51
7 407,781.75 83,369.67 12,848.46 70,521.21
8 334,690.85 83,369.67 10,278.77 73,090.90
9 259,030.26 83,369.67 7,709.08 75,660.59
10 180,799.98 83,369.67 5,139.39 78,230.28
11 100,000.00 83,369.67 2,569.69 70,799.98
12 - 100,000.00 - - -
1 Cashflow-wise, residual value is 100,000 since guaranty deposit, in the
amount of P100,000, is given back at the end of the lease term from the
P200,000 residual value.
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Endnotes
1 (Popup - Popup)
Annex A
Annex B
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