RR No. 19-86 PDF

(1)
November 10, 1986 January 1, 1987
REVENUE REGULATIONS NO. 19-86
SUBJECT : Taxation of Leases
TO : All Internal Revenue Officers and Others Concerned
SECTION 1. Purpose. — These regulations pursuant to Section 277 of

the National Internal Revenue Code, prescribe the rules to govern the tax treatment of
lease agreements and provide guidelines for determining whether certain transactions
purporting to be leases of tangible personal property are in reality conditional sales
contracts.
PART A
INCOME TAX
SECTION 2. Reporting of Income and Deductions by a Lessor or a

Vendor.
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
Copyright 2017 CD Technologies Asia, Inc. and Accesslaw, Inc. Philippine Taxation Encyclopedia Second Release 2017 1
indicated in Annex "A". If, under the agreement, the lessee pays 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.
2.01/1 Operating lease defined — An "operating

lease" is a contract under which the asset is not wholly
amortized during the primary period of the lease, and where the
lessor does not rely solely on the rentals during the primary
period for his profits, but looks for the recovery of the balance
of his costs and for the rest of his profits from the sale or
re-lease of the returned asset of the primary lease period.
2.01/2 Finance lease defined — "Finance lease"

or full payout lease is a contract involving payment over an
obligatory period (also called primary or basic period) of
specified rental amounts for the use of a lessor's property,
sufficient in total to amortize the capital outlay of the lessor and
to provide for the lessor's borrowing costs and profits. The
obligatory period refers to the primary or basic non-cancellable
period of the lease which in no case shall be less than 730 days.
The lessee, not the lessor, exercises the choice of the asset and
is normally responsible for maintenance, insurance and such
other expenses pertinent to the use, preservation and operation
of the asset. Finance leases may be extended, after the
expiration of the primary period, by non-cancellable secondary
or subsequent periods with the rentals significantly reduced.
The residual value shall in no instance be less than five per
centum (5%) of the lessor's acquisition cost of the leased asset.
2.02 "Packaged lease" not taxable as a

corporation — A "package lease" or "lease package" shall not
be considered as a joint venture or association taxable as a
corporation as defined in Section 20(b) of the National
Internal Revenue Code.
2.03 "Packaged Lease" or "Lease Package"

defined — A lease package refers to that type of finance lease
which has two or more lessors, particularly if the size of the
lease facility is substantial relative to the exposure limits of a
lessor. Under a lease package, the lead lessor either invites one
or more lessors to participate as a co-lessor in the funding lease.
Consequently, two or more lessors may have co-ownership of a
single leased item, proportionate to their participation. For the
purpose of this subparagraph, the lessors in a lease package
shall be limited to finance and leasing companies registered
under Republic Act No. 5980.
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.
2.05 Vendor, if contract is a conditional sale

— If the agreement is determined to be a sale, the amounts
received under the contract by the vendor will be considered to
be payments which are part of the sales price to the extent such
amounts do not represent interest other charges.
SECTION 3. Deductions Allowable to Lessee or Purchaser.
3.01 Lessee, if contract is a lease — If under the criteria set forth in

these Regulations, an agreement constitutes a lease, the lessee may deduct the
amount of rent paid or accrued, including all expenses which under the terms of
the agreement the lessee is required to pay to, or for the account of, the lessor. If
the payments are so arranged as to constitute advance rentals, such payments
shall be duly apportioned over the lease term. In computing the term of the lease,
all options to renew, shall be taken into consideration if there is a reasonable
expectation that such options will be exercised.
3.02 Vendee, if contract is a conditional sale — If under the provisions

of these Regulations, the agreement is to be treated as a sale, the amounts paid
to the vendor will be considered as payments which are part of the purchase
price to the extent such amounts do not represent interest or other charges. acd
SECTION 4. General criteria for characterizing an agreement as a
conditional sale.
4.01 Statutory basis for distinguishing a lease from a sale — A lease is

a contract whereby one of the parties (lessor) binds himself to give to another
(lessee) the enjoyment or use of a thing for a price certain, and for a period
which may be definite or indefinite (Article 1643, Civil Code ). In other
words, a lease is an agreement between a lessor and a lessee giving the lessee
possession and use of a specific property upon payment of rentals over a period
of time. The lessor retains ownership of the asset so that it shall not become the
property of the lessee or any related third party during the term of the lease. On
the other hand, a sale is a contract whereby one of the contracting parties (seller
or vendor) obligates himself to transfer ownership of and to deliver a determinate
thing while the other party (buyer or vendee) obligates himself to pay for said
thing a price certain in money or its equivalent. (Article 1458, Civil Code.)
4.02 Characterizing a transaction that does not readily fit statutory

concepts — In cases where the true character of the transaction cannot be
definitely determined from the terms and conditions of the agreement, the
Commissioner shall make the determination on the basis of all relevant facts and
circumstances of each transaction, among which are (but not limited) those
indicated in the following subparagraphs.
4.03 Factors to be considered.
4.03/1 In general. Whether an agreement, which in form is

a lease, is in substance a conditional sales contract depends upon the intent
of the parties as evidenced by the provisions of the agreement, read in the
light of the facts and circumstances existing at the time the agreement was
executed. In ascertaining such intent no single test or any special
combination of tests is absolutely determinative. No general rule, applicable
to all cases can be laid down.
4.03/2 Compelling persuasive factors. A contract or

agreement purported to be a lease shall be treated as conditional sales
contract if one or more of the following compelling persuasive factors are
present:
(A) The lessee is given the option to purchase

the asset at anytime during the obligatory period of the
lease, notwithstanding that the option price is equivalent
to or higher than the current fair market value of the
asset;
(B) The lessee acquires automatic ownership
of the asset upon payment of the stated amount of
"rentals" which under the contract he is required to
make;
(C) Portions of the periodic rental payments

are credited to the purchase price of the asset; cdtai
(D) The receipts of payment indicate that the

payment made were partial or full payments of the asset.
4.03/3 Absence of compelling persuasive factors. — In the

absence of the above compelling persuasive factors or contrary implication,
an intent warranting treatment of a transaction for tax purposes as a
purchase and sale rather than as a lease or rental agreement, may in general
be said to exist if, for example, one or more of the following conditions are
present:
(a) Portions of the periodic payments are

made specifically applicable to an equity to be acquired
by the lessee.
(b) The property may be acquired under a

purchase option, at a price which is nominal in relation
to the value of the property at the time when the option
may be exercised, as determined at the time entering
into the original agreement, or which is a relatively small
amount when compared with the total payments which
are required to be made.
SECTION 5. Advance Ruling Required to Recognize Existence of a lease.

— The parties to a lease agreement may secure from the Commissioner an advance
ruling recognizing the fact that an agreement actually constitutes a lease for tax
purposes. In cases where a lessor is engaged in the leasing business and frequently
enters into a contract with various lessees under the same or essentially similar terms
and conditions, the lessor may submit a model lease agreement on which to base an
advance ruling. Thereafter, any specific lease agreement entered into by the lessor and
a lessee which does not substantially deviate from the terms and conditions of the
model contract on the basis which the advance ruling had been secured, need not be
submitted for advance ruling. casia
PART B
GROSS RECEIPTS TAX
SECTION 6. Basis of the Gross Receipts Tax
6.01 The rental amounts received by a lessor from a lessee under an

agreement qualifying as a finance lease as defined in Section 2.01/2 of these
Regulations shall be divided into two components, namely principal and interest
to be arrived at using either the Annuity or the Sum-of-the-Years-Digits method
of accounting. The amount representing interest shall be determined in
accordance with the formulae prescribed in Annex "B".
6.02 The amount of interest, if the same is derived by a finance and

leasing company registered under R.A. 5980 shall be subject to the gross receipts
tax prescribed in Sections 260 and 261 (as amended by PD 1739 ) of
the National Internal Revenue Code based on the remaining maturity of the
lease. Amounts which the lessee, under the agreement, pays to the lessor (in
addition to a stipulated rental) for certain other expenses properly payable by the
lessor (as described in Section 2.01) shall be excluded for purposes of the gross
receipts tax determined under this subparagraph.
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.
6.04 If the lessor is a finance and leasing company registered under R.A.
5980 and sells its lease contract or merely sells its receivables (and therefore
retains title to the equipment), the rental amount received by the buyer shall be
subjected to the pertinent provisions governing corporate taxation under the
NIRC without prejudice to the exemptions and benefits allowed by special laws.
casia
SECTION 7. Effectivity. — These regulations shall take effect on January

1, 1987 and shall be applicable to all leases written on or after the said date."
(SGD.) JAIME V. ONGPIN

Minister of Finance
Recommending Approval:
(SGD.) BIENVENIDO A. TAN, JR.

Commissioner of Internal Revenue
ANNEX "A"
SCHEDULE OF DEPRECIATION
Asset classification Depreciable Life
1. Land Transportation Equipment 4 years
2. Water Transport Equipment 8 years
3. Air Transport Equipment 8 years
4. Industrial Equipment 5 years
5. Agricultural Equipment 4 years
6. Construction Equipment 5 years
7. Telecommunication Equipment 5 years
8. Office Machines 3 years
9. Main Frame Computer 5 years
10. Materials Handling Equipment 5 years
11. Auxiliary Equipment 5 years
(Please refer to subsequent pages for details of various asset classification)
1. LAND TRANSPORT EQUIPMENT

1.1 Automotive Vehicles
1.2 Passenger Bus AEIHaS
1.3 Tourist Bus

1.4 Asian Utility Vehicles
1.5 Light-Duty Trucks (Such as Pick-ups)
1.6 Medium-Duty Trucks (Such as Dump Trucks)
1.7 Heavy-Duty Trucks (Prime Mover)
1.8 Locomotives
1.9 Trailers (Flatbed & Skeletal)
1.10 Tankers (Bulk Carriers)
1.11 Motorcycles
1.12 And such other similar or related equipment, as may be mutually agreed
upon from time to time.
2. WATER TRANSPORT EQUIPMENT
2.1 Tugboats
2.2 Barges
2.3 Tankers
2.4 Purse Seiner
2.5 Reefer Vessels
2.6 Container Vessels
2.7 Passenger Vessels
3. AIR TRANSPORT EQUIPMENT
3.1 Helicopters
3.2 Prop Aircraft
3.3 Turbo-Prop Aircraft
3.4 Jet Aircraft
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
4.20 Medical Equipment

4.21 Drilling Equipment
5. AGRICULTURAL EQUIPMENT
5.1 Threshers
5.2 Palay Drilers
5.3 Rice Mills
5.4 Corn Mills
5.5 Feed Mills
5.6 4-Wheel Tractors with farm implements
5.7 2-Wheel Tractors with farm implements
5.8 Track type agricultural tractors with farm implement
5.9 Hard Tractors with prime mover and farm implements
5.10 Irrigation Pumps/Aerators
5.11 Diesel Engines
6. CONSTRUCTION EQUIPMENT
6.1 Bulldozers (Track type or wheel)
6.2 Loaders (Track type of Wheel)
6.3 Compactors
6.4 Motor Graders
6.5 Tractor-Scrapers
6.6 Off-Highway Trucks
6.7 Excavators (Track Type or Wheel)
6.8 Crushing Plant
6.9 Concrete Batching Plant
6.10 Asphalt Mixing Plant
6.11 Pipelayers
6.12 Asphalt Laying Machines
6.13 Hydraulic Breakers
7. TELECOMMUNICATIONS EQUIPMENT
7.1 PABX Systems
7.2 Telex Machines
7.3 VFT Equipment
7.4 Teleprinters
7.5 Broadcasting Equipment
7.6 Transmitting Equipment
8. OFFICE MACHINES
8.1 Adding Machines
8.2 Copiers
8.3 Calculators
8.4 Typewriters
8.5 Mini-Computers
8.6 Micro-Computers
8.7 Stencil Machines
8.8 Mimeographing Machines
8.9 Posting Machines
8.10 Cash Registers
9. MAINFRAME COMPUTERS
10 MATERIALS HANDING EQUIPMENT

10.1 Forklifts
10.2 Container Vans
10.3 Conveyor Systems
10.4 Box Cars AEaSTC
10.5 Cranes (mounted or overhead)

10.6 Loaders with tines
10.7 Cement Mixers
11 AUXILIARY EQUIPMENT
11.1 Air-conditioning Systems
11.2 Generators and Accessories
11.3 Elevators
11.4 Escalators
11.5 Water Tanks
11.6 Water Heating Systems
11.7 Air Compressors
11.8 Cooling Tanks
11.9 Anti-Pollution Equipment
11.10 Audio-Visual Equipment
ANNEX "B"
GUIDELINES IN THE DETERMINATION OF THE PRINCIPAL AND LEASE INCOME

COMPONENT OF FINANCIAL LEASE RENTAL
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.
PART A: ANNUITY 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.
SEC. 1. Determination of Lease Rate
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:
Where Ct = cash flow or period t, whether it be a net cash inflow
of outflow
r = the lease rate for a period t
t = the periodic time involved in the lease transaction
which may be monthly, quarterly, semi-annually or yearly.
å = the summation of the series of
cash flow over a period of time
n = the last period in which a cash flow is expected
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.)
SEC. 2. Determination of Lease Income
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.)
PART B: SUM-OF-THE-YEARS'-DIGITS (SYD) METHOD
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:
SEC. 1. Determination of SYD
The SYD is computed by
a) using the following algebraic equation

SYD = N (N+1)
———
2
where N represents the number of periodic payments;
b) or, simply adding all the digits representing the periodic payments.
Thus, for a transaction involving twelve (12) periodic payments, SYD
may be computed as follows:
1) SYD = 12 (12+1)
———
2
= 78
2) SYD =
1+2+3+4+5+6+
7+8+9+10+11+12
= 78
SEC. 2. Determination of the Total Lease Income
The total lease income is derived by deducting the net lease facility (lease facility
minus residual value) from the total lease receivables (lease rentals.)
SEC. 3. Determination of Lease Income
Lease income component of lease rentals shall be determined by the following

formula:
Lease
Total income
No. of remaining periodic payments (NRP) X Lease = for a
—————————————————— Income specific
SYD period
(Please refer to Exhibit 28 for computational examples in the determination of the
lease income component.)
Exhibit 1
Computational Examples in the Determination of the Lease Factor
Example 1. Lease Facility : P1,000,000
Guarantee Deposit : 0
Residual Value : P100,000
Period : 3 years in 12 quarterly installments
Lease Rentals : P93,415.88 payable quarterly in arrears
Based on the above parameters, the resulting cash flows for the lessor and
correspondingly lease rate factor, using the formula
Where r = lease rate
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
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.
2. Figures not exact due to rounding off.
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.
Example 3 Lease Facility : P1,000,000
Guaranty Deposit : P100,000

Lease Rental : P90,415.88 payable
quarterly in arrears
Given the parameters of this lease transaction, the cash flows and the resultant lease
rate factor, are as follows:
Present
Value Discount
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
—————
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

The lease rate factor for this transaction is 3% per quarter or 12% per annum as
shown by the following table:
1 Lease facility minus guarantee deposit is the net cash outflow of the lessor.
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.
3 Figures not exact due to rounding off.

Present
Value Discount
0 900,000 1 (900,000) 1.00000 (900,000)
1 83,369.67 83,369.67 .97087 80,941.11
2 83,369.67 83,369.67 .94260 78,584.25
3 83,369.67 83,369.67 .91514 76,294.92
4 83,369.67 83,369.67 .88849 74,073.12
5 83,369.67 83,369.67 .86261 71,915.51
6 83,369.67 83,369.67 .83748 69,820.43
7 83,369.67 83,369.67 .81309 67,787.04
8 83,369.67 83,369.67 .78941 65,812.85
9 83,369.67 83,369.67 .76642 63,896.18
10 83,369.67 83,369.67 .74409 62,034.54
11 83,369.67 83,369.67 .72242 60,227.92
12 83,369.67 100,000 2 183,369.67 .70138 128,611.82
—————
advance.
Lease rate factor is also 3% per quarter or 12% per annum as Example 5.
1 Net cash outflow is lease facility minus guarantee deposit.
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
Computational Examples in the Determination of the Lease Income Component of Lease

Rental under the Annuity Method
Guarantee Deposit : 0

Based on Exhibit 1, example 1, the lease rate quarterly factor is .03. Thus, using the
basic formula:
Ending Outstanding Principal Lease Rate Lease Income for the
Balance of the Lease Facility X Factor = Subsequent period
of the Previous Period (t = n) (t = n+1)
we arrive at the following table:
(A) (B) (C) (D) (E)
Ending Payment of (E-D-C)
Outstanding Residual Principal Lease Income
Period Balance Value Repayment (A) x .03) Lease Rental
0 1,000,000.00 93,415.88
1 936,584.12 63,415.88 30,000.00 93,415.88
2 871,265.76 65,318.36 28,097.52 93,415.88
3 803,987.85 67,277.91 26,137.97 93,415.88
4 734,691.61 69,296.24 24,119.64 93,415.88
5 663,316.48 71,375.13 22,040.75 93,415.88
6 589,800.09 73,516.39 19,899.49 93,415.88
7 514,078.21 75,721.88 17,694.00 93,415.88
8 436,084.68 77,993.53 15,422.35 93,415.88
9 355,751.34 80,333.34 13,082.54 93,415.88
10 273,088.00 82,743.34 10,672.54 93,415.88
11 187,782.36 85,225.64 8,190.24 93,415.88
12 100,000.00 87,782.36 5,663.52 1 93,415.88
advance, thus, lease rate quarterly factor is also .03. caTESD
Ending Payment of
Outstanding Residual Principal Lease Lease
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

Based on Exhibit A, example 3, lease rate quarterly factor is .03. Thus,

Ending Payment of
0 900,000.00
1 836,584.12 63,415.88 27,000.00 90,415.88
2 771,265.76 65,318.36 25,097.52 90,415.88
3 703,987.85 67,277.91 23,137.97 90,415.88
4 634,691.61 69,296.24 21,119.64 90,415.88
5 563,316.48 71,375.13 19,040.75 90,415.88
6 489,800.09 73,516.39 16,899.49 90,415.88
7 414,078.21 75,821.88 14,694.00 90,415.88
8 336,084.68 77,993.53 12,422.35 90,415.88
9 255,751.34 80,333.34 10,082.54 90,415.88
10 173,008.00 82,743.34 7,672.54 90,415.88
11 87,782.36 85,225.64 5,190.24 90,415.88
12 - 01 87,782.36 2,633.52 2 90,415.88
advance, thus, lease rate quarterly factor is also .03.
Ending Payment of
0 836,584.12 63,415.88 27,000.00 90,415.88
1 771,265.76 65,318.36 25,097.52 90,415.88
2 703,987.85 67,277.91 23,137.97 90,415.88
3 634,691.61 69,296.24 21,119.64 90,415.88
4 563,316.48 71,375.13 19,040.75 90,415.88
5 489,800.09 73,516.39 16,899.49 90,415.88
6 414,078.21 75,721.88 14,694.00 90,415.88
7 336,084.68 77,993.53 12,422.35 90,415.88
8 255,751.34 80,333.34 10,082.54 90,415.88
9 173,008.00 82,743.34 7,672.54 90,415.88
10 87,782.36 85,225.64 5,190.24 90,415.88
11 - 87,782.36 2,633.52 2 90,415.88
12 - 01
1 Cashflow-wise, residual value is 0 since guarantee 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.
Example 5. Lease Facility : P1,000.000

Based on Exhibit A, example 3, lease rate quarterly factor is .03. Thus,
Ending Payment of
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
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.
Exhibit 2B
Computational Examples in the Determination of the Lease Income Component of Lease

Rentals under the SYD Method
Guaranty Deposit : 0
Based on the above parameters, the total lease income is P220,990.56 [(93,415.88 x
12) - (P1,000,000-P100,000)], while the SYD is equal to 78. Thus, using the formula:
No. of remaining periodic Total Lease Lease income for a
payments (NRP) X Income = specific period
————————
SYD
the lease income for periods 1 to 12 are computed as follows:
Total Lease Lease Income
Period NRP/STD x Income = for the period
1 12/78 P220,990.56 P33,998.55
2 11/78 220,990.56 31,165.34
3 10/78 220,990.56 28,332.12
4 9/78 220,990.56 25,498.91
5 8/78 220,990.56 22,665.70
6 7/78 220,990.56 19,832.49
7 6/78 220,990.56 16,999.27
8 5/78 220,990.56 14,166.06
9 4/78 220,990.56 11,332.85
10 3/78 220,990.56 8,499.64
11 2/78 220,990.56 5,666.42
12 1/78 220,990.56 2,833.21
——————
P220,990.56
===========
Using the figures above, we arrive at the following table:
(A) (B) (C) (D) (E)
Payment of Principal
Outstanding Residual Lease Lease Repayment
Period Balance Value Rental Income (C-D-E)
0 1,000,000.00
1 940,582.67 93,415.88 33,998.55 59,417.33
2 878,332.13 93,415.88 31,165.34 62,250.54
3 813,248.37 93,415.88 28,332.12 65,083.76
4 745,331.40 93,415.88 25,498.91 67,916.97
5 674,581.22 93,415.88 22,665.70 70,750.18
6 600,997.83 93,415.88 19,832.49 73,583.39
7 524,581.22 93,415.88 16,999.27 76,416.61
8 445,331.40 93,415.88 14,166.06 79,249.82
9 363,248.37 93,415.88 11,332.85 82,083.03
10 278,332.13 93,415.88 8,499.64 84,916.24
11 190,582.67 93,415.88 5,666.42 87,749.46
12 - 100,000.00 93,415.88 2,833.21 90,582.67
advance, thus, the computation for the lease income is also the same. DTIACH
(A) (B) (C) (D) (E)

Payment of
Outstanding Residual Lease Lease Principal
Period Balance Value Rental Income Repayment
0 940,582.67 93,415.88 33,998.55 59,417.33
1 878,332.13 93,415.88 31,165.34 62,250.54
2 813,248.37 93,415.88 28,332.12 65,083.76
3 745,331.40 93,415.88 25,498.91 67,916.97
4 674,581.22 93,415.88 22,665.70 70,750.18
5 600,997.83 93,415.88 19,832.49 73,583.39
6 524,581.22 93,415.88 16,999.27 76,416.61
7 445,331.40 93,415.88 14,166.06 79,249.82
8 363,248.37 93,415.88 11,332.85 82,083.03
9 278,332.13 93,415.88 8,499.64 84,916.24
10 190,582.67 93,415.88 5,666.42 87,749.46
11 100,000.00 93,415.88 2,833.21 90,582.67
12 - 100,000.00 - - -

Period : 3 years payable in 12
quarterly installments
Lease Rental : P93,415.88 payable quarterly
in arrears
Based on the given parameters, the total lease income is P184,990.56 [(P90,415.88 x
12) - (P1,000,000-P100,000)], and the SYD is also 78. Thus,
1 12/78 P184,990.56 P28,460.09
2 11/78 184,990.56 26,088.41
3 10/78 184,990.56 23,716.74
4 9/78 184,990.56 21,345.06
5 8/78 184,990.56 18,973.39
6 7/78 184,990.56 16,601.72
7 6/78 184,990.56 14,230.04
8 5/78 184,990.56 11,858.37
9 4/78 184,990.56 9,486.70
10 3/78 184,990.56 7,115.02
11 2/78 184,990.56 4,743.35
12 1/78 184,990.56 2,371.67
——————
P184,990.56
===========
(A) (B) (C) (D) (E)
Payment of
0 900,00.00
1 838,044.21 90,415.88 28,460.09 61,955.79
2 773,716.74 90,415.88 26,088.41 64,327.47
3 707,017.60 90,415.88 23,716.74 66,699.14
4 637,946.78 90,415.88 21,345.06 69,070.82
5 566,504.29 90,415.88 18,973.39 71,442.49
6 492,690.13 90,415.88 16,601.72 73,814.16
7 416,504.29 90,415.88 14,230.04 76,185.84
8 337,946.78 90,415.88 11,858.37 78,557.51
9 257,017.60 90,415.88 9,486.70 80,929.18
10 173,716.74 90,415.88 7,115.02 83,300.86
11 88,044.21 90,415.88 4,743.35 85,672.53
12 - 01 90,415.88 2,371.67 88,044.21
1 Cashflow-wise, residual value is 0 since guaranty deposit, in the amount of
advance, thus, the computation for the lease income is also the same.
(A) (B) (C) (D) (E)
Payment of
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 - - -
Period : 3 years, 12 quarterly installments

The total lease income in this example is P200,436.04 [(P83,369.67 x 12) -
(P1,000,000.00-P200,000)], while the SYD is also 78.
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
(A) (B) (C) (D) (E)
Payment of
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
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.
Endnotes
1 (Popup - Popup)
Annex A
Annex B

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(1)

November 10, 1986 January 1, 1987

REVENUE REGULATIONS NO. 19-86

SUBJECT : Taxation of Leases

TO : All Internal Revenue Officers and Others Concerned

SECTION 1. Purpose. — These regulations pursuant to Section 277 of

SECTION 2. Reporting of Income and Deductions by a Lessor or a

2.01/1 Operating lease defined — An "operating

2.01/2 Finance lease defined — "Finance lease"

2.02 "Packaged lease" not taxable as a

2.03 "Packaged Lease" or "Lease Package"

2.04 Taxation of income derived from

2.05 Vendor, if contract is a conditional sale

SECTION 3. Deductions Allowable to Lessee or Purchaser.

3.01 Lessee, if contract is a lease — If under the criteria set forth in

3.02 Vendee, if contract is a conditional sale — If under the provisions

SECTION 4. General criteria for characterizing an agreement as a

4.01 Statutory basis for distinguishing a lease from a sale — A lease is

4.02 Characterizing a transaction that does not readily fit statutory

4.03 Factors to be considered.

4.03/1 In general. Whether an agreement, which in form is

4.03/2 Compelling persuasive factors. A contract or

(A) The lessee is given the option to purchase

(C) Portions of the periodic rental payments

(D) The receipts of payment indicate that the

4.03/3 Absence of compelling persuasive factors. — In the

(a) Portions of the periodic payments are

(b) The property may be acquired under a

SECTION 5. Advance Ruling Required to Recognize Existence of a lease.

GROSS RECEIPTS TAX

SECTION 6. Basis of the Gross Receipts Tax

6.01 The rental amounts received by a lessor from a lessee under an

6.02 The amount of interest, if the same is derived by a finance and

SECTION 7. Effectivity. — These regulations shall take effect on January

(SGD.) JAIME V. ONGPIN

(SGD.) BIENVENIDO A. TAN, JR.

Asset classification Depreciable Life

1. Land Transportation Equipment 4 years

2. Water Transport Equipment 8 years

3. Air Transport Equipment 8 years

4. Industrial Equipment 5 years

5. Agricultural Equipment 4 years

6. Construction Equipment 5 years

7. Telecommunication Equipment 5 years

8. Office Machines 3 years

9. Main Frame Computer 5 years

10. Materials Handling Equipment 5 years

11. Auxiliary Equipment 5 years

(Please refer to subsequent pages for details of various asset classification)

1. LAND TRANSPORT EQUIPMENT

1.3 Tourist Bus

4.20 Medical Equipment

10 MATERIALS HANDING EQUIPMENT

10.5 Cranes (mounted or overhead)

GUIDELINES IN THE DETERMINATION OF THE PRINCIPAL AND LEASE INCOME

PART A: ANNUITY METHOD

SEC. 1. Determination of Lease Rate

Where Ct = cash flow or period t, whether it be a net cash inflow

SEC. 2. Determination of Lease Income

Lease income component of lease rentals shall be determined by the following

PART B: SUM-OF-THE-YEARS'-DIGITS (SYD) METHOD

SEC. 1. Determination of SYD

The SYD is computed by