RR No. 19-86

(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.
Vendor.
Reporting of Income and Deductions by a Lessor or a
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 to the lessor a
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CD Technologies Asia, Inc. and Accesslaw, Inc.
Philippine Taxation Encyclopedia First Release 2015
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.
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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.
conditional sale.
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General criteria for characterizing an agreement as a
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
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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
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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.
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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:
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(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
1.2
1.3
1.4
1.5
1.6
1.7
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Automotive Vehicles
Passenger Bus
Tourist Bus
Asian Utility Vehicles
Light-Duty Trucks (Such as Pick-ups)
Medium-Duty Trucks (Such as Dump Trucks)
Heavy-Duty Trucks (Prime Mover)
AEIHaS
1.8
1.9
1.10
1.11
1.12
2.
WATER TRANSPORT EQUIPMENT

2.1
2.2
2.3
2.4
2.5
2.6
2.7
2.8
3.
Helicopters
Prop Aircraft
Turbo-Prop Aircraft
Jet Aircraft
And such other similar or related equipment, as may be mutually agreed
upon from time to time.
INDUSTRIAL EQUIPMENT
4.1
4.2
4.3
4.3
4.5
4.6
4.7
4.8
4.9
4.10
4.11
4.12
4.13
4.14
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Tugboats
Barges
Tankers
Purse Seiner
Reefer Vessels
Container Vessels
Passenger Vessels
AIR TRANSPORT EQUIPMENT

3.1
3.2
3.3
3.4
3.5
4.
Locomotives
Trailers (Flatbed & Skeletal)
Tankers (Bulk Carriers)
Motorcycles
Injection Moulding Machines

Extruding Machines
Foundry Equipment
Metal Fabrication Equipment
Welding Equipment
Logging Equipment
Sawmill Equipment
Woodworking Equipment
Kiln Drying Equipment
Refrigerating Equipment
Mining and Quarrying Equipment
Printing Equipment
Textile Machines
Refractory Equipment
4.15
4.16
4.17
4.18
4.19
4.20
4.21
4.22
5.
Threshers
Palay Driers
Rice Mills
Corn Mills
Feed Mills
4-Wheel Tractors with farm implements
2-Wheel Tractors with farm implements
Track type agricultural tractors with farm implement
Hard Tractors with prime mover and farm implements
Irrigation Pumps/Aerators
Diesel Engines
CONSTRUCTION EQUIPMENT
6.1
6.2
6.3
6.4
6.5
6.6
6.7
6.8
6.9
6.10
6.11
6.12
6.13
6.14
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AaCTID
AGRICULTURAL EQUIPMENT
5.1
5.2
5.3
5.4
5.5
5.6
5.7
5.8
5.9
5.10
5.11
5.12
6.
Boilers
Industrial Pumps
Industrial Gas Manufacturing Equipment
Distilling Equipment
Laboratory Testing Equipment
Medical Equipment
Drilling Equipment
Bulldozers (Track type or wheel)

Loaders (Track type of Wheel)
Compactors
Motor Graders
Tractor-Scrapers
Off-Highway Trucks
Excavators (Track Type or Wheel)
Crushing Plant
Concrete Batching Plant
Asphalt Mixing Plant
Pipelayers
Asphalt Laying Machines
Hydraulic Breakers
7.
TELECOMMUNICATIONS EQUIPMENT
7.1
7.2
7.3
7.4
7.5
7.6
7.7
8.
OFFICE MACHINES
8.1
8.2
8.3
8.4
8.5
8.6
8.7
8.8
8.9
8.10
8.11
Adding Machines
Copiers
Calculators
Typewriters
Mini-Computers
Micro-Computers
Stencil Machines
Mimeographing Machines
Posting Machines
Cash Registers
9.
MAINFRAME COMPUTERS
10
MATERIALS HANDING EQUIPMENT

10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
11
Forklifts
Container Vans
Conveyor Systems
Box Cars
Cranes (mounted or overhead)
Loaders with tines
Cement Mixers
AEaSTC
AUXILIARY EQUIPMENT
11.1
11.2
11.3
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PABX Systems
Telex Machines
VFT Equipment
Teleprinters
Broadcasting Equipment
Transmitting Equipment
Air-conditioning Systems
Generators and Accessories
Elevators
10
11.4
11.5
11.6
11.7
11.8
11.9
11.10
11.11
Escalators
Water Tanks
Water Heating Systems
Air Compressors
Cooling Tanks
Anti-Pollution Equipment
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.
SECTION 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:
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Where Ct
cash flow or period t, whether it be a net cash inflow

of outflow
the lease rate for a period t
11
the periodic time involved in the lease transaction

which may be monthly, quarterly, semi-annually or yearly.
the summation of the series of

cash flow over a period of time
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.)
SECTION 2.
Determination of Lease Income
Lease income component of lease rentals shall be determined by the following

formula:
Outstanding principal
balance of lease
facility
Lease
rate
factor
Lease income
for a specific
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+1)
2
where N represents the number of periodic payments;
b)
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or, simply adding all the digits representing the periodic payments.
Thus, for a transaction involving twelve (12) periodic payments, SYD
12
may be computed as follows:

1)
2)
SEC. 2.
SYD
SYD
12
78
(12+1)
1+2+3+4+5+6+
7+8+9+10+11+12
= 78
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:
No. of remaining periodic payments (NRP)
SYD
Lease
Total
Lease =
Income
income
for a
specific
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
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
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13
Where r = lease rate

are as follows:
Period Net
(in
Lease
qtr) Facility
0 1,000,000
1
2
3
4
5
6
7
8
9
10
11
12
Lease
Rental
Net
Cash
Inflow
Residual
Value
93,415.88
93,415.88
93,415.88
93,415.88
93,415.88
93,415.88
93,415.88
93,415.88
93,415.88
93,415.88
93,415.88
93,415.88
100,000
(1,000,000)
93,415.88
93,415.88
93,415.88
93,415.88
93,415.88
93,415.88
93,415.88
93,415.88
93,415.88
93,415.88
93,415.88
193,415.88
Present
Value Discount
Factor at
3% lease
Rate 1
1.00000
.97087
.94260
.91514
.88849
.86261
.83748
.81309
.78941
.76642
.74409
.72242
.70138
Total cumulative present value
Present
Value 2
(1,000,000)
90,694.68
88,053.81
85,488.61
82,999.08
80,581.47
78,233.93
75,955.52
73,743.43
71,595.80
69,509.82
67,485.50
135,658.03
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
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14
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
Residual Value
P100,000
Period
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:
Period Net
(in
Lease
qtr) Facility
0 900,000 1
1
2
3
4
5
6
7
8
9
10
11
12
Lease
Rental
Residual
Value
Net
Cash
Inflow
02
(900,000)
90,415.88
90,415.88
90,415.88
90,415.88
90,415.88
90,415.88
90,415.88
90,415.88
90,415.88
90,415.88
90,415.88
90,415.88
90,415.88
90,415.88
90,415.88
90,415.88
90,415.88
90,415.88
90,415.88
90,415.88
90,415.88
90,415.88
90,415.88
93,415.88
Present
Value Discount
Factor at
3% lease
Rate 1
1.00000
.97087
.94260
.91514
.88849
.86261
.83748
.81309
.78941
.76642
.74409
.72242
.70138
Present
Value 3
(900,000)
85,782.06
85,226.01
82,743.19
80,333.61
77,993.64
75,721.49
73,516.25
71,375.20
69,296.54
67,277.55
65,318.24
63,415.89
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15
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
P1,000,000
Guaranty Deposit
P100,000
Residual Value
P200,000
Period
Lease Rental
P83,369.67 payable
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.
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.
Period Net
(in
Lease
qtr) Facility
0 900,000 1
1
2
3
4
5
6
7
8
9
10
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Lease
Rental
Residual
Value
83,369.67
83,369.67
83,369.67
83,369.67
83,369.67
83,369.67
83,369.67
83,369.67
83,369.67
83,369.67
Net
Cash
Inflow
Present
Value Discount
Factor at
3% lease
Rate 1
(900,000)
83,369.67
83,369.67
83,369.67
83,369.67
83,369.67
83,369.67
83,369.67
83,369.67
83,369.67
83,369.67
1.00000
.97087
.94260
.91514
.88849
.86261
.83748
.81309
.78941
.76642
.74409
Present
Value 3
(900,000)
80,941.11
78,584.25
76,294.92
74,073.12
71,915.51
69,820.43
67,787.04
65,812.85
63,896.18
62,034.54
16
11
12
83,369.67
83,369.67
100,000
83,369.67
183,369.67
.72242
.70138
60,227.92
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.
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
P1,000,000
Guarantee Deposit
Period
Lease Rental
P93,415.88 payable
Based on Exhibit 1, example 1, the lease rate quarterly factor is .03. Thus, using the
basic formula:
Ending Outstanding Principal
Balance of the Lease Facility
of the Previous Period (t = n)
Lease Rate
Factor
Lease Income for the

Subsequent period
(t = n+1)
we arrive at the following table:
Period
0
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(A)
Ending
Outstanding
Balance
(B)
Payment of
Residual
Value
(C)
(E-D-C)
Principal
Repayment
(D)
(E)
Lease Income
(A) x .03)
Lease Rental
1,000,000.00
93,415.88
17
1
2
3
4
5
6
7
8
9
10
11
12
936,584.12
871,265.76
803,987.85
734,691.61
663,316.48
589,800.09
514,078.21
436,084.68
355,751.34
273,088.00
187,782.36
100,000.00
63,415.88
65,318.36
67,277.91
69,296.24
71,375.13
73,516.39
75,721.88
77,993.53
80,333.34
82,743.34
85,225.64
87,782.36
30,000.00
28,097.52
26,137.97
24,119.64
22,040.75
19,899.49
17,694.00
15,422.35
13,082.54
10,672.54
8,190.24
5,663.52 1
93,415.88
93,415.88
93,415.88
93,415.88
93,415.88
93,415.88
93,415.88
93,415.88
93,415.88
93,415.88
93,415.88
93,415.88
advance, thus, lease rate quarterly factor is also .03.
caTESD
Period
0
1
2
3
4
5
6
7
8
9
10
11
12
Ending
Outstanding
Balance
Payment of
Residual
Value
936,584.12
871,265.76
803,987.85
734,691.61
663,316.48
589,800.09
514,078.21
436,084.68
355,751.34
273,088.00
187,782.36
100,000.00
Lease
Income
Lease
Rental
63,415.88
65,318.36
67,277.91
69,296.24
71,375.13
73,516.39
75,721.88
77,993.53
80,333.34
82,743.34
85,225.64
87,782.36
30,000.00
28,097.52
26,137.97
24,179.64
22,040.75
19,899.49
17,694.00
15,422.35
13,082.54
10,672.54
8,190.24
5,663.52 1
93,415.88
93,415.88
93,415.88
93,415.88
93,415.88
93,415.88
93,415.88
93,415.88
93,415.88
93,415.88
93,415.88
93,415.88
100,000.00
Copyright 2015
Principal
Repayment
P1,000.000
Guaranty Deposit
P100,000
Residual Value
P100,000
Period
18
Lease Rental
1
P90,415.88 payable
Based on Exhibit A, example 3, lease rate quarterly factor is .03. Thus,
Period
0
1
2
3
4
5
6
7
8
9
10
11
12
Ending
Outstanding
Balance
900,000.00
836,584.12
771,265.76
703,987.85
634,691.61
563,316.48
489,800.09
414,078.21
336,084.68
255,751.34
173,008.00
87,782.36
-
Payment of
Residual
Value
01
Principal
Repayment
Lease
Income
Lease
Rental
63,415.88
65,318.36
67,277.91
69,296.24
71,375.13
73,516.39
75,821.88
77,993.53
80,333.34
82,743.34
85,225.64
87,782.36
27,000.00
25,097.52
23,137.97
21,119.64
19,040.75
16,899.49
14,694.00
12,422.35
10,082.54
7,672.54
5,190.24
2,633.52 2
90,415.88
90,415.88
90,415.88
90,415.88
90,415.88
90,415.88
90,415.88
90,415.88
90,415.88
90,415.88
90,415.88
90,415.88
advance, thus, lease rate quarterly factor is also .03.
Period
0
1
2
3
4
5
6
7
8
9
10
11
Copyright 2015
Ending
Outstanding
Balance
Payment of
Residual
Value
836,584.12
771,265.76
703,987.85
634,691.61
563,316.48
489,800.09
414,078.21
336,084.68
255,751.34
173,008.00
87,782.36
Principal
Repayment
Lease
Income
Lease
Rental
63,415.88
65,318.36
67,277.91
69,296.24
71,375.13
73,516.39
75,721.88
77,993.53
80,333.34
82,743.34
85,225.64
87,782.36
27,000.00
25,097.52
23,137.97
21,119.64
19,040.75
16,899.49
14,694.00
12,422.35
10,082.54
7,672.54
5,190.24
2,633.52 2
90,415.88
90,415.88
90,415.88
90,415.88
90,415.88
90,415.88
90,415.88
90,415.88
90,415.88
90,415.88
90,415.88
90,415.88
19
12
01
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.
P1,000.000
Guaranty Deposit
P100,000
Residual Value
P200,000
Period
Lease Rental
P83,369.67 payable
Based on Exhibit A, example 3, lease rate quarterly factor is .03. Thus,

Ending
Outstanding
Balance
Period
0
1
2
3
4
5
6
7
8
9
10
11
12
900,000.00
843,630.33
785,569.57
725,766.99
664,170.33
600,725.77
535,377.87
468,069.54
398,741.96
327,334.55
253,784.92
178,028.80
-
Payment of
Residual
Value
100,000.00 1
Principal
Repayment
Lease
Income
Lease
Rental
56,369.67
58,060.76
59,802.58
61,596.66
63,444.56
65,347.90
67,308.33
69,327.58
71,407.41
73,549.63
75,756.12
78,028.80
27,000.00
25,308.91
23,567.09
21,773.01
19,925.11
18,021.77
16,061.34
14,042.09
11,962.26
9,820.04
7,613.55
5,340.87 2
83,369.67
83,369.67
83,369.67
83,369.67
83,369.67
83,369.67
83,369.67
83,369.67
83,369.67
83,369.67
83,369.67
83,369.67
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
Copyright 2015
20
advance; thus, lease rate quarterly factor is also .03.

Ending
Outstanding
Balance
Period
0
1
2
3
4
5
6
7
8
9
10
11
12
843,630.33
785,569.57
725,766.99
664,170.33
600,725.77
535,377.87
468,069.54
398,741.96
327,334.55
253,784.92
178,028.80
100,000.00
-
Payment of
Residual
Value
Principal
Repayment
Lease
Income
Lease
Rental
56,369.67
58,060.76
59,802.58
61,596.66
63,444.56
65,347.90
67,308.33
69,327.58
71,407.41
73,549.63
75,756.12
78,028.80
27,000.00
25,308.91
23,567.09
21,773.01
19,925.11
18,021.77
16,061.34
14,042.09
11,962.26
9,820.04
7,613.55
5,340.87 2
83,369.67
83,369.67
83,369.67
83,369.67
83,369.67
83,369.67
83,369.67
83,369.67
83,369.67
83,369.67
83,369.67
83,369.67
100,000.00 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
P1,000,000
Guaranty Deposit
Residual Value
P100,000
Period
Lease Rental
P93,415.88 payable
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
Copyright 2015
Total Lease
Lease income for a
21
payments (NRP)
SYD
Income
specific period
the lease income for periods 1 to 12 are computed as follows:

Period
1
2
3
4
5
6
7
8
9
10
11
12
NRP/STD
12/78
11/78
10/78
9/78
8/78
7/78
6/78
5/78
4/78
3/78
2/78
1/78
Total Lease
Income
P220,990.56
220,990.56
220,990.56
220,990.56
220,990.56
220,990.56
220,990.56
220,990.56
220,990.56
220,990.56
220,990.56
220,990.56
Lease Income
for the period
P33,998.55
31,165.34
28,332.12
25,498.91
22,665.70
19,832.49
16,999.27
14,166.06
11,332.85
8,499.64
5,666.42
2,833.21
P220,990.56
===========
Using the figures above, we arrive at the following table:

(A)
Period
0
1
2
3
4
5
6
7
8
9
10
11
Copyright 2015
Outstanding
Balance
(B)
Payment of
Residual
Value
1,000,000.00
940,582.67
878,332.13
813,248.37
745,331.40
674,581.22
600,997.83
524,581.22
445,331.40
363,248.37
278,332.13
190,582.67
(C)
(D)
Lease
Rental
Lease
Income
(E)
Principal
Repayment
(C-D-E)
33,998.55
31,165.34
28,332.12
25,498.91
22,665.70
19,832.49
16,999.27
14,166.06
11,332.85
8,499.64
5,666.42
59,417.33
62,250.54
65,083.76
67,916.97
70,750.18
73,583.39
76,416.61
79,249.82
82,083.03
84,916.24
87,749.46
93,415.88
93,415.88
93,415.88
93,415.88
93,415.88
93,415.88
93,415.88
93,415.88
93,415.88
93,415.88
93,415.88
22
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)
Period
Outstanding
Balance
0
1
2
3
4
5
6
7
8
9
10
11
12
940,582.67
878,332.13
813,248.37
745,331.40
674,581.22
600,997.83
524,581.22
445,331.40
363,248.37
278,332.13
190,582.67
100,000.00
-
(B)
Payment of
Residual
Value
(C)
(D)
(E)
Lease
Rental
Lease
Income
Principal
Repayment
100,000.00
93,415.88
93,415.88
93,415.88
93,415.88
93,415.88
93,415.88
93,415.88
93,415.88
93,415.88
93,415.88
93,415.88
93,415.88
-
33,998.55
31,165.34
28,332.12
25,498.91
22,665.70
19,832.49
16,999.27
14,166.06
11,332.85
8,499.64
5,666.42
2,833.21
-
59,417.33
62,250.54
65,083.76
67,916.97
70,750.18
73,583.39
76,416.61
79,249.82
82,083.03
84,916.24
87,749.46
90,582.67
-
P1,000,000
Guaranty Deposit
P100,000
Residual Value
P100,000
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,
Total Lease
Period
1
2
3
4
Copyright 2015
NRP/STD
12/78
11/78
10/78
9/78
Income
P184,990.56
184,990.56
184,990.56
184,990.56
Lease Income
for the period
P28,460.09
26,088.41
23,716.74
21,345.06
23
5
6
7
8
9
10
11
12
8/78
7/78
6/78
5/78
4/78
3/78
2/78
1/78
Period
Outstanding
Balance
(B)
Payment of
Residual
Value
0
1
2
3
4
5
6
7
8
9
10
11
12
900,00.00
838,044.21
773,716.74
707,017.60
637,946.78
566,504.29
492,690.13
416,504.29
337,946.78
257,017.60
173,716.74
88,044.21
-
(A)
01
184,990.56
184,990.56
184,990.56
184,990.56
184,990.56
184,990.56
184,990.56
184,990.56
(C)
Lease
Rental
90,415.88
90,415.88
90,415.88
90,415.88
90,415.88
90,415.88
90,415.88
90,415.88
90,415.88
90,415.88
90,415.88
90,415.88
18,973.39
16,601.72
14,230.04
11,858.37
9,486.70
7,115.02
4,743.35
2,371.67
P184,990.56
===========
(D)
(E)
Lease
Income
Principal
Repayment
28,460.09
26,088.41
23,716.74
21,345.06
18,973.39
16,601.72
14,230.04
11,858.37
9,486.70
7,115.02
4,743.35
2,371.67
61,955.79
64,327.47
66,699.14
69,070.82
71,442.49
73,814.16
76,185.84
78,557.51
80,929.18
83,300.86
85,672.53
88,044.21
Cashflow-wise, residual value is 0 since guaranty deposit, in the amount of

(A)
Period
Outstanding
Balance
838,044.21
Copyright 2015
(B)
Payment of
Residual
Value
(C)
(D)
(E)
Lease
Rental
Lease
Income
Principal
Repayment
90,415.88
P28,460.09
61,955.79
24
1
2
3
4
5
6
7
8
9
10
11
12
773,716.74
707,017.60
637,946.78
566,504.29
492,690.13
416,504.29
337,946.78
257,017.60
173,716.74
88,044.21
-
01
90,415.88
90,415.88
90,415.88
90,415.88
90,415.88
90,415.88
90,415.88
90,415.88
90,415.88
90,415.88
90,415.88
-
26,088.41
23,716.74
21,345.06
18,973.39
16,601.72
14,230.04
11,858.37
9,486.70
7,115.02
4,743.35
2,371.67
-
64,327.47
66,699.14
69,070.82
71,442.49
73,814.16
76,185.84
78,557.51
80,929.18
83,300.86
85,672.53
88,044.21
-
P1,000,000
Guaranty Deposit
P100,000
Residual Value
P200,000
Period
3 years, 12 quarterly installments
Lease Rental
P83,369.67 payable
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.
Total Lease
Period
1
2
3
4
5
6
7
8
9
10
11
12
1
Copyright 2015
NRP/STD
12/78
11/78
10/78
9/78
8/78
7/78
6/78
5/78
4/78
3/78
2/78
1/78
Income
P200,436.04
200,436.04
200,436.04
200,436.04
200,436.04
200,436.04
200,436.04
200,436.04
200,436.04
200,436.04
200,436.04
200,436.04
Lease Income
for the period
P30,836.31
28,266.62
25,696.93
23,127.24
20,557.54
17,987.85
15,418.16
12,848.46
10,278.77
7,709.08
5,139.39
2,569.69
Cashflow-wise, residual value is 0 since guaranty deposit, in the amount of

25

(A)
Period
Outstanding
Balance
0
1
2
3
4
5
6
7
8
9
10
11
12
900,00.00
847,466.64
792,363.59
734,690.85
674,448.42
611,636.29
546,254.47
478,302.96
407,781.75
334,690.85
259,030.26
180,799.98
-
(B)
Payment of
Residual
Value
100,000.00 1
(C)
(D)
(E)
Lease
Rental
Lease
Income
Principal
Repayment
30,836.31
28,266.62
25,696.93
23,127.24
20,557.54
17,987.85
15,418.16
12,848.46
10,278.77
7,709.08
5,139.39
2,569.69
52,533.36
55,103.05
57,672.74
50,242.43
62,812.13
65,381.82
67,951.51
70,521.21
73,090.90
75,660.59
78,230.28
80,799.98
83,369.67
83,369.67
83,369.67
83,369.67
83,369.67
83,369.67
83,369.67
83,369.67
83,369.67
83,369.67
83,369.67
83,369.67
Example 6. Same parameters as Example 5, except that lease rental payments are in
(A)
Period
Outstanding
Balance
0
1
2
3
4
5
6
7
8
9
10
11
12
847,466.64
792,363.59
734,690.85
674,448.42
611,636.29
546,254.47
478,302.96
407,781.75
334,690.85
259,030.26
180,799.98
100,000.00
-
1
Copyright 2015
(B)
Payment of
Residual
Value
(C)
(D)
(E)
Lease
Rental
Lease
Income
Principal
Repayment
100,000.00
83,369.67
83,369.67
83,369.67
83,369.67
83,369.67
83,369.67
83,369.67
83,369.67
83,369.67
83,369.67
83,369.67
83,369.67
-
30,836.31
28,266.62
25,696.93
23,127.24
20,557.54
17,987.85
15,418.16
12,848.46
10,278.77
7,709.08
5,139.39
2,569.69
-
52,533.36
55,103.05
57,672.74
50,242.43
62,812.13
65,381.82
67,951.51
70,521.21
73,090.90
75,660.59
78,230.28
70,799.98
-
Cashflow-wise, residual value is 100,000 since guaranty deposit, in the amount
26
of P100,000, is given back at the end of the lease term from the P200,000
residual value.
Copyright 2015
27
Endnotes
1 (Popup - Popup)
Annex A
Annex B
Copyright 2015
28

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(1)

November 10, 1986

REVENUE REGULATIONS NO. 19-86

All Internal Revenue Officers and Others Concerned

Reporting of Income and Deductions by a Lessor or a

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Philippine Taxation Encyclopedia First Release 2015

CD Technologies Asia, Inc. and Accesslaw, Inc.

Philippine Taxation Encyclopedia First Release 2015

Consequently, two or more lessors may have co-ownership of a

Deductions Allowable to Lessee or Purchaser.

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

General criteria for characterizing an agreement as a

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Philippine Taxation Encyclopedia First Release 2015

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

CD Technologies Asia, Inc. and Accesslaw, Inc.

Philippine Taxation Encyclopedia First Release 2015

of the asset upon payment of the stated amount of

(D) The receipts of payment indicate that the

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Philippine Taxation Encyclopedia First Release 2015

GROSS RECEIPTS TAX

Basis of the Gross Receipts Tax

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

(SGD.) JAIME V. ONGPIN

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(SGD.) BIENVENIDO A. TAN, JR.

Land Transportation Equipment

Water Transport Equipment

Air Transport Equipment

Main Frame Computer

Materials Handling Equipment

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

LAND TRANSPORT EQUIPMENT

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Philippine Taxation Encyclopedia First Release 2015

WATER TRANSPORT EQUIPMENT

AIR TRANSPORT EQUIPMENT

Injection Moulding Machines

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Philippine Taxation Encyclopedia First Release 2015

Bulldozers (Track type or wheel)

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MATERIALS HANDING EQUIPMENT

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Philippine Taxation Encyclopedia First Release 2015

GUIDELINES IN THE DETERMINATION OF THE PRINCIPAL AND LEASE INCOME

Determination of Lease Rate

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

the lease rate for a period t

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the periodic time involved in the lease transaction

the summation of the series of

the last period in which a cash flow is expected

Determination of Lease Income

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

(Please refer to Exhibit 2A for computational examples in the determination of the

The SYD is computed by

using the following algebraic equation

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