REVENUE REGULATIONS NO. 02-98 (§2.
78) are not accounted for by the employee to the employer are
SECTION 2.78. Withholding Tax on Compensation. — The
withholding of tax on compensation income is a method of
collecting the income tax at source upon receipt of the
income. It applies to all employed individuals whether
citizens or aliens, deriving income from compensation for
services rendered in the Philippines. The employer is
constituted as the withholding agent.
SECTION 2.78.1. Withholding of Income Tax on
Compensation Income. —
(A) Compensation Income Defined. — In general, the
term "compensation" means all remuneration for services
performed by an employee for his employer under an
employer-employee relationship, unless specifically excluded
by the Code.
The name by which the remuneration for services is
designated is immaterial. Thus, salaries, wages, emoluments
and honoraria, allowances, commissions (e.g. transportation,
representation, entertainment and the like); fees including
director's fees, if the director is, at the same time, an
employee of the employer/corporation; taxable bonuses and
fringe benefits except those which are subject to the fringe
benefits tax under Sec. 33 of the Code; taxable pensions and
retirement pay; and other income of a similar nature
constitute compensation income.
The basis upon which the remuneration is paid is immaterial
in determining whether the remuneration constitutes
compensation. Thus, it may be paid on the basis of piece-
work, or a percentage of profits; and may be paid hourly,
daily, weekly, monthly or annually. cdrep
Remuneration for services constitutes compensation even if
the relationship of employer and employee does not exist any
longer at the time when payment is made between the person
in whose employ the services had been performed and the
individual who performed them.
(1) Compensation paid in kind. — Compensation may
be paid in money or in some medium other than money, as
for example, stocks, bonds or other forms of property. If
services are paid for in a medium other than money, the fair
market value of the thing taken in payment is the amount to
be included as compensation subject to withholding. If the
services are rendered at a stipulated price, in the absence of
evidence to the contrary, such price will be presumed to be
the fair market value of the remuneration received. If a
corporation transfers to its employees its own stock as
remuneration for services rendered by the employee, the
amount of such remuneration is the fair market value of the
stock at the time the services were rendered.
(2) Living quarters or meals. — If a person receives a
salary as remuneration for services rendered, and in addition
thereto, living quarters or meals are provided, the value to
such person of the quarters and meals so furnished shall be
added to the remuneration paid for the purpose of
determining the amount of compensation subject to
withholding. However, if living quarters or meals are
furnished to an employee for the convenience of the
employer, the value thereof need not be included as part of
compensation income.
(3) Facilities and privileges of a relatively small value.
— Ordinarily, facilities and privileges (such as entertainment,
medical services, or so called "courtesy" discounts on
purchases), furnished or offered by an employer to his
employees generally, are not considered as compensation
subject to withholding if such facilities or privileges are of
relatively small value and are offered or furnished by the
employer merely as a means of promoting the health,
goodwill, contentment, or efficiency of his employees.
Where compensation is paid in property other than money,
the employer shall make necessary arrangements to ensure
that the amount of the tax required to be withheld is
available for payment to the Commissioner.
(4) Tips and gratuities. — Tips or gratuities paid
directly to an employee by a customer of the employer which
considered as taxable income but not subject to withholding.
(5) Pensions, retirement and separation pay. —
Pensions, retirement and separation pay constitute
compensation subject to withholding, except those provided
under Subsection B of this section.
(6) Fixed or variable transportation, representation and
other allowances —
(a) IN GENERAL, fixed or variable transportation,
representation and other allowances which are received by a
public officer or employee or officer or employee of a private
entity, in addition to the regular compensation fixed for his
position or office, is compensation subject to withholding.
(b) Any amount paid specifically, either as advances or
reimbursements for travelling, representation and other
bonafide ordinary and necessary expenses incurred or
reasonably expected to be incurred by the employee in the
performance of his duties are not compensation subject to
withholding, if the following conditions are satisfied:
(i) It is for ordinary and necessary travelling and
representation or entertainment expenses paid or incurred
by the employee in the pursuit of the trade, business or
profession; and
(ii) The employee is required to account/liquidate for
the foregoing expenses in accordance with the specific
requirements of substantiation for each category of expenses
pursuant to Sec. 34 of the Code. The excess of actual
expenses over advances made shall constitute taxable income
if such amount is not returned to the employer. Reasonable
amounts of reimbursements/ advances for travelling and
entertainment expenses which are pre-computed on a daily
basis and are paid to an employee while he is on an
assignment or duty need not be subject to the requirement of
substantiation and to withholding.
(7) Vacation and sick leave allowances. — Amounts of
"vacation allowances or sick leave credits" which are paid to
an employee constitute compensation. Thus, the salary of an
employee on vacation or on sick leave, which are paid
notwithstanding his absence from work, constitutes
compensation. However, the monetized value of unutilized
vacation leave credits of ten (10) days or less which were paid
to the employee during the year are not subject to income tax
and to the withholding tax.
(8) Deductions made by employer from compensation
of employee. — Any amount which is required by law to be
deducted by the employer from the compensation of an
employee including the withheld tax is considered as part of
the employee's compensation and is deemed to be paid to the
employee as compensation at the time the deduction is
made.
(9) Remuneration for services as employee of a
nonresident alien individual or foreign entity. — The term
"compensation" includes remuneration for services
performed by an employee of a nonresident alien individual,
foreign partnership or foreign corporation, whether or not
such alien individual or foreign entity is engaged in trade or
business within the Philippines. Any person paying
compensation on behalf of a non-resident alien individual,
foreign partnership, or foreign corporation which is not
engaged in trade or business within the Philippines is subject
to all provisions of law and regulations applicable to an
employer.
(10) Compensation for services performed outside the
Philippines. — Remuneration for services performed outside
the Philippines by a resident citizen for a domestic or a
resident foreign corporation or partnership, or for a non-
resident corporation or partnership, or for a non-resident
individual not engaged in trade or business in the Philippines
shall be treated as compensation which is subject to tax.
A non-resident citizen as defined in these regulations is
taxable only on income derived from sources within the
Philippines. In general, the situs of the income whether
within or without the Philippines, is determined by the place
where the service is rendered.
(B) Exemptions from withholding tax on compensation.
— The following income payments are exempted from the
requirement of withholding tax on compensation:
(1) Remunerations received as an incident of
employment, as follows:
(a) Retirement benefits received under Republic Act
under 7641 and those received by officials and employees of
private firms, whether individual or corporate, under a
reasonable private benefit plan maintained by the employer
which meet the following requirements:
(i) The plan must be reasonable;
(ii) The benefit plan must be approved by the Bureau;
(iii) The retiring official or employee must have been in
the service of the same employer for at least ten (10) years
and is not less than fifty (50) years of age at the time of
retirement; and
(iv) The retiring official or employee should not have
previously availed of the privilege under the retirement
benefit plan of the same or another employer.
(b) Any amount received by an official or employee or
by his heirs from the employer due to death, sickness or
other physical disability or for any cause beyond the control
of the said official or employee, such as retrenchment,
redundancy, or cessation of business. cdrep
The phrase "for any cause beyond the control of the said
official or employee" connotes involuntariness on the part of
the official or employee. The separation from the service of
the official or employee must not be asked for or initiated by
him. The separation was not of his own making. Whether or
not the separation is beyond the control of the official or
employee, being essentially a question of fact, shall be
determined on the basis of prevailing facts and
circumstances. It shall be duly established by the employer
by competent evidence which should be attached to the
monthly return for the period in which the amount paid due
to the involuntary separation was made.
Amounts received by reason of involuntary separation
remain exempt from income tax even if the official or the
employee, at the time of separation, had rendered less than
ten (10) years of service and/or is below fifty (50) years of
age.
Any payment made by an employer to an employee on
account of dismissal, constitutes compensation regardless of
whether the employer is legally bound by contract, statute, or
otherwise, to make such payment.
(c) Social security benefits, retirement gratuities,
pensions and other similar benefits received by residents or
non-resident citizens of the Philippines or aliens who come
to reside permanently in the Philippines from foreign
government agencies and other institutions private or public;
(d) Payments of benefits due or to become due to any
person residing in the Philippines under the law of the
United States administered by the United States Veterans
Administration;
(e) Payments of benefits made under the Social
Security System Act of 1954 as amended; and
(f) Benefits received from the GSIS Act of 1937, as
amended, and the retirement gratuity received by
government officials and employees.
(2) Remuneration paid for agricultural labor —
(a) Remuneration for services which constitute
agricultural labor and paid entirely in products of the farm
where the labor is performed is not subject to withholding. In
general, however, the term, "agricultural labor" does not
include services performed in connection with forestry,
lumbering or landscaping.
(b) Remuneration paid entirely in products of the farm
where the labor is performed by an employee of any person
in connection with any of the following activities is excepted
as remuneration for agricultural labor:
(i) The cultivation of soil;
(ii) The raising, shearing, feeding, caring for, training,
or management of livestock, bees, poultry, or wildlife; or
(iii) The raising or harvesting of any other agricultural
or horticultural commodity. The term "farm" as used in this
subsection includes, but is not limited to stock, dairy,
poultry, fruits and truck farms, plantations, ranches,
nurseries ranges, orchards, and such greenhouse and other
similar structures as are used primarily for the raising of
agricultural or horticultural commodities.
(c) The remuneration paid entirely in products of the
farm where labor is performed for the following services in
the employ of the owner or tenant or other operator of one or
more farms is not considered as remuneration for
agricultural labor, provided the major part of such services is
performed on a farm:
(i) Services performed in connection with the
operation, management, conservation, improvement, or
maintenance of any such farms or its tools or equipments; or
(ii) Services performed in salvaging timber, or clearing
land brush and other debris left by a hurricane or typhoon.
The services described in (i) above may include for example,
services performed by carpenters, painters, mechanics, farm
supervisors, irrigation engineers, bookkeepers, and other
skilled or semi-skilled workers, which contribute in any way
to the conduct of the farm or farms, as such, operated by the
person employing them, as distinguished from any other
enterprise in which such person may be engaged. Since the
services described in this paragraph must be performed in
the employ of the owner or tenant or other operator of the
farm, the exception does not extend to remuneration paid for
services performed by employees of a commercial painting
concern, for example, which contracts with a farmer to
renovate his farm properties. cdasia
(d) Remuneration paid entirely in products of the farm
where labor is performed by an employee in the employ of
any person in connection with any of the following
operations is not considered as remuneration for agricultural
labor without regard to the place where such services are
performed:
(i) The making of copra, stripping of abaca, etc.;
(ii) The hatching of poultry;
(ii) The raising of fish;
(iv) The operation or maintenance of ditches, canals,
reservoirs, or waterways used exclusively for supplying or
storing water for farming purposes; and
(v) The production or harvesting of crude gum from a
living tree or the processing of such crude gum into gum
spirits or turpentine and gum resin, provided such
processing is carried on by the original producer of such
crude gum.
(e) Remuneration paid entirely in products of the farm
where labor is performed by an employee in the employ of a
farmer or a farmer's cooperative, organization or group in
the handling, planting, drying, packing, packaging,
processing, freezing, grading, storing or delivering to storage
or to market or to carrier for transportation to market, of any
agricultural or horticultural commodity, produced by such
farmer or farmer-members of such organization or group, is
excepted as remuneration for agricultural labor. Services
performed by employees of such farmer or farmer's
organization or group in handling, planting, drying,
packaging, processing, freezing, grading, storing, or
delivering to storage or to market or to carrier for
transportation to market of commodities produced by
persons other than such farmer or members of such farmer's
organization or group are not performed "as an incident to
ordinary farming operation".
All payments made in cash or other forms other than
products of the farm where labor is performed, for services
constituting agricultural labor as explained above, are not
within the exception.
(3) Remuneration for domestic services. —
Remuneration paid for services of a household nature
performed by an employee in or about the private home of
the person by whom he is employed is not subject to
withholding. However, the services of household personnel
furnished to an employee (except rank and file employees) by
an employer shall be subject to the fringe benefits tax
pursuant to Sec. 33 of the Code, as amended.
A private home is the fixed place of abode of an individual or
family. If the home is utilized primarily for the purpose of
supplying board or lodging to the public as a business
enterprise, it ceases to be a private home and remuneration
paid for services performed therein is not exempted.
In general, services of a household nature in or about a
private home include services rendered by cooks, maids,
butlers, valets, laundresses, gardeners, chauffeurs of
automobiles for family use.
The remuneration paid for the services above enumerated
which are performed in or about rooming or lodging houses,
boarding houses, clubs, hotels, hospitals or commercial
offices or establishments is considered as compensation;
Remuneration paid for services performed as a private
secretary, even if they are performed in the employer's home
is considered as compensation;
(4) Remuneration for casual labor not in the course of
an employer's trade or business. — The term "casual labor"
includes labor which is occasional, incidental or regular. The
expression "not in the course of the employer's trade or
business" includes labor that does not promote or advance
the trade or business of the employer.
Thus, any remuneration paid for labor which is occasional,
incidental or irregular, and does not promote or advance the
employer's trade or business, is not considered as
compensation. cdasia
EXAMPLE: A's business is that of operating a sawmill. He
employs B, a carpenter, at an hourly wage to repair his home.
B's work is irregular and he spends, the greater part of two
days in completing the work. Since B's labor is casual and is
not in the course of A's business, the remuneration paid for
such services is exempted.
Any remuneration paid for casual labor, that is, labor which
is occasional, incidental or irregular, but which is rendered in
the course of the employer's trade or business, is considered
as compensation.
EXAMPLE: E is engaged in the business of operating a
department store. He employs additional clerks for a short
period. While the services of the clerks may be casual, they
are rendered in the course of the employer's trade or
business and therefore the remuneration paid for such
services is considered as compensation.
Any remuneration paid for casual labor performed for a
corporation is considered as compensation;
(5) Compensation for services by a citizen or resident of
the Philippines for a foreign government or an international
organization. — Remuneration paid for services performed
as an employee of a foreign government or an international
organization is exempted. The exemption includes not only
remuneration paid for services performed by ambassadors,
ministers and other diplomatic officers and employees but
also remuneration paid for services performed as consular or
other officer or employee of a foreign government or as a
non-diplomatic representative of such government.
(6) Damages. — Actual, moral, exemplary and nominal
damages received by an employee or his heirs pursuant to a
final judgment or compromise agreement arising out of or
related to an employer-employee relationship.
(7) Life Insurance. — The proceeds of life insurance
policies paid to the heirs or beneficiaries upon the death of
the insured, whether in a single sum or otherwise, provided
however, that interest payments agreed under the policy for
the amounts which are held by the insured under such an
agreement shall be included in the gross income.
(8) Amount received by the insured as a return of
premium. — The amount received by the insured, as a return
of premium or premiums paid by him under life insurance,
endowment, or annuity contracts either during the term or at
the maturity of the term mentioned in the contract or upon
surrender of the contract.
(9) Compensation for injuries or sickness. — Amounts
received through Accident or Health Insurance or under
Workmen's Compensation Acts, as compensation for
personal injuries or sickness, plus the amount of any
damages received whether by suit or agreement on account
of such injuries or sickness.
(10) Income exempt under treaty. — Income of any kind
to the extent required by any treaty obligation binding upon
the Government of the Philippines.
(11) Thirteenth (13th ) month pay and other benefits. —
(a) Thirteenth (13th) month pay equivalent to the
mandatory one (1) month basic salary of officials and
employees of the government, (whether national or local),
including government-owned or controlled corporations, and
or private offices received after the twelfth (12th) month pay;
and
(b) Other benefits such as Christmas bonus,
productivity incentive bonus, loyalty award, gifts in cash or
in kind and other benefits of similar nature actually received
by officials and employees of both government and private
offices.
The above stated exclusions (a) and (b) shall cover benefits
paid or accrued during the year provided that the total
amount shall not exceed thirty thousand pesos (P30,000.00)
which may be increased through rules and regulations issued
by the Secretary of Finance, upon recommendation of the
Commissioner, after considering, among others, the effect on
the same of the inflation rate at the end of the taxable year.
(12) GSIS, SSS, Medicare and other contributions. —
GSIS, SSS, Medicare and Pag-Ibig contributions, and union
dues of individual employees.
SECTION 2.78.2. Payroll Period. — The term "payroll
period" means the period of services for which a payment of
compensation is ordinarily made to an employee by his
employer. It is immaterial that the compensation is not
always paid at regular intervals.
EXAMPLE: if an employer ordinarily pays the weekly wages
of his employees at the end of the week, but if for some
reason a particular employee receives payment of his salaries
for the past week in the middle of the current week and
receives the remainder at the end of the same week, the
payroll period is still the calendar week; or if, instead, the
employee is sent on a three (3)-week trip by his employer
and receives at the end of the trip a single compensation
payment for three (3)-week services, the payroll period is still
the calendar week, and the compensation payment shall be
treated as though it were three (3) separate weekly
compensation payments. LLphil
For the purpose of determining the tax, an employee can
have but one payroll period with respect to the compensation
paid by any one employer. Thus, if an employee is paid a
regular compensation for the weekly payroll and in addition
thereto is paid supplemental compensation (for example
taxable bonuses) determined with respect to a different
period, the payroll period is the weekly payroll period.
SECTION 2.78.3. Employee. — The term "employee" is an
individual performing services under an employer-employee
relationship. The term covers all employees, including
officers and employees, whether elected or appointed, of the
Government of the Philippines, or any political subdivision
thereof or any agency or instrumentality.
In general, the relationship of the employer and employee
exists when the person for whom services were performed
has the right to control and direct the individual who
performs the services, not only as to the result to be
accomplished by the work but also as to the details and
means by which the result is accomplished. An employee is
subject to the will and control of the employer not only as to
what shall be done, but how it shall be done. In this
connection, it is not necessary that the employer actually
directs or controls the manner in which the services are
performed. It is sufficient that he has the right to do so.
The right to dismiss an employee is also an important factor
indicating that the person possessing that right is an
employer. Other factors or characteristics of an employer,
which may not be necessarily present in every case, are
furnishing the tools and furnishing of a place to work, to the
individual who performs the services. In general, an
individual is not considered an employee if he is subject to
the control or direction of another merely on to the result to is paid separately on behalf of each employer or paid in
be accomplished by the work, and not on to the means and lump-sum on behalf of all such employers, be determined
methods for accomplishing the result. based on the aggregate amount of such compensation
In general, individuals who follow an independent trade, payment or payments in the same manner as if such
business, or profession, in which the offer their services to aggregate amount had been paid by one employer. Hence,
the public, are not employees. the tax shall be determined based on the aggregate amount
The measurement, method or designation of compensation is of the compensation paid. prcd
also immaterial if the relationship of employer and employee In any such case, each employer shall be liable for the return
in fact exists. and payment of a pro-rata portion of the tax so determined
No distinction is made between classes or grades of in accordance with the ratio of the amount contributed by
employees. Thus superintendents, managers, and others each employer relative to the aggregate of such
belonging to similar levels are employees. An officer of a compensation.
corporation is an employee of the corporation. An individual, A fiduciary, agent, or other person acting for two or more
performing services for a corporation, both as an officer and employers may be authorized to withhold the tax under these
director, is an employee subject to withholding on regulations with respect to the wages of the employees of
compensation, including director's fees. such employers. Such fiduciary, agent, or other person may
SECTION 2.78.4. Employer. — The term employer means also be authorized to make and file returns of the tax
any person for whom an individual performs or performed withheld at source on such compensation and to furnish the
any service, of whatever nature, under an employer- receipts required under these Regulations. Application for
employee relationship. It is not necessary that the services be the authorization to perform such act should be addressed to
continuing at the time the wages are paid in order that the the Commissioner or his duly authorized representative. If
status of employer may exist. Thus for purposes of such authority is granted by the Commissioner, all provisions
withholding, a person for whom an individual has performed of the law (including penalties) and regulations prescribed in
past services and from whom he is still receiving pursuance of the law applicable in respect of an employer for
compensation is an "employee". whom such fiduciary, agent or other person acts shall remain
(A) Person for whom the services are or were performed subject to all provisions of law (including penalties) and
does not have control. — The term "employer" also refers to regulations prescribed in pursuance of the law applicable in
the person having control of the payment of the respect of employers.
compensation in cases where the services are or were
performed for a person who does not exercise such control.
For example, where compensation, such as certain types of
pensions or retirement pay, are paid by a trust and the
person for whom the services were performed has no control
over the payment of such compensation, the trust is deemed
to be the "employer".
(B) Person paying compensation on behalf of a
nonresident. — The term "employer" also means any person
paying compensation on behalf of a non-resident alien
individual, foreign partnership, or foreign corporation, who
is not engaged in trade or business within the Philippines.
It is the responsibility of the employer to withhold, pay, or
refund the tax and furnish the statements required under
these Regulations. The term "employer" as defined in (A) and
(B) above is intended to determine who is the withholding
agent.
As a matter of business administration, certain mechanical
details of the withholding process may be handled by
representatives of the employer. Thus, in the case of a
corporate employer with branch offices, the branch manager
or other representative may actually, as a matter of internal
administration, withhold the tax or prepare the statements
required under the law. Nevertheless, the legal responsibility
for withholding, paying and returning the tax and furnishing
such statements rests with the corporate employer.
An employer may be an individual, a corporation, a
partnership, a trust, an estate, a joint-stock company, an
association, or a syndicate, group, pool, joint venture, or
other unincorporated organization, group or entity. A trust
or estate, rather than the fiduciary acting for or on behalf of
the trust or estate, is generally the employer.
The term "employer" embraces not only an individual and an
organization engaged in trade or business, but it also
includes an organization exempt from income tax, such as
charitable and religious organizations, clubs, social
organizations and societes, as well as the Government of the
Philippines, including its agencies, instrumentalities, and
political subdivisions.
(C) Compensation paid on behalf of two or more
employers. — If a payment of compensation is made to an
employee by an employer through an agent, fiduciary, or
other person who has the control, receipt, custody, or
disposal of, or pays the compensation payable by another
employer to such employee, the amount of tax required to be
withheld on each compensation payment made through such
agent, fiduciary, or person shall, whether the compensation
December 14, 2000 entertainment expenses which are pre-computed on a daily
REVENUE REGULATIONS NO. 10-00 basis and are paid to an employee while he is on an
SUBJECT : Further Amendments to Revenue assignment or duty need not be subject to the requirements
Regulations No. 2-98 and 3-98, as Last Amended by Revenue of substantiation and to withholding."
Regulations No. 8-2000 "(iii) ...
TO : All Internal Revenue Officials and Others "(7) Vacation and sick leave allowances. Amounts of
Concerned "vacation allowances or sick leave credits" which are paid to
Pursuant to Sections 244 and 4 of the Tax Code of 1997, in an employee constitute compensation. Thus, the salary of an
relation to the provisions of Executive Order No. 291, these employee on vacation or on sick leave, which IS paid
Regulations are hereby promulgated to further amend notwithstanding his absence from work constitutes
Revenue Regulations No. 2-98 and Revenue Regulations No. compensation. However, the monetized value of unutilized
3-98, as last amended by Revenue Regulations No. 8-2000, vacation leave credits of ten (10) days or less which ARE paid
with respect to the exemption of Monetized Leave Credits of to PRIVATE employees during the year AND THE
Government Officials and Employees and the enumeration of MONETIZED VALUE OF LEAVE CREDITS PAID TO
"De Minimis" benefits which are exempt from the income tax GOVERNMENT OFFICIALS AND EMPLOYEES SHALL
on compensation as well as from the fringe benefits tax. NOT BE SUBJECT TO INCOME TAX AND
AEDISC CONSEQUENTLY TO WITHHOLDING TAX." aTEScI
SECTION 1. Section 2.78.1(A)(3), (6)(b)(ii) and (7) of "xxx xxx xxx
Revenue Regulations No. 2-98, as last amended by Revenue SECTION 2. Section 2.33 (C) of Revenue Regulations
Regulations No. 8-2000, is hereby further amended to read No. 3-98, as last amended by Revenue Regulations No. 8-
as follows: 2000, is hereby further amended to read as follows:
"Sec. 2.78.1. Withholding of Income Tax on "Sec. 2.33. Special Treatment of Fringe Benefits
Compensation Income. — (A) Imposition of Fringe Benefits Tax —
"(A) ... xxx xxx xxx
"(1) Compensation paid in kind. — . . . (B) Definition of Fringe Benefit —
"xxx xxx xxx xxx xxx xxx
"(3) Facilities and privileges of relatively small value. — (C) Fringe Benefits Not Subject to Fringe Benefits Tax
"xxx xxx xxx — In general, the fringe benefits tax shall not be imposed on
"The following shall be considered as "de minimis" benefits the following fringe benefits:
not subject to INCOME TAX AS WELL AS withholding tax (1) ...
on compensation income of both managerial and rank and (2) ...
file employees: (3) ...
(a) Monetized unused vacation leave credits of (4) De minimis benefits as defined in these
PRIVATE employees not exceeding ten (10) days during the Regulations;
year AND THE MONETIZED VALUE OF LEAVE CREDITS (5) ...
PAID TO GOVERNMENT OFFICIALS AND EMPLOYEES; (6) ...
AEcTCD xxx xxx xxx
(b) Medical cash allowance to dependents of employees The term "DE MINIMIS" benefits which are exempt from the
not exceeding P750.00 per employee per semester or P125 fringe benefits tax shall, in general, be limited to facilities or
per month; privileges furnished or offered by an employer to his
(c) Rice subsidy of P1,000.00 or one (1) sack of 50-kg. employees that are of relatively small value and are offered
rice per month amounting to not more than P1,000.00; or furnished by the employer merely as a means of
(d) Uniform and clothing allowance not exceeding promoting the health, goodwill, contentment, or efficiency of
P3,000 per annum; EDcIAC his employees such as the following:
(e) Actual yearly medical benefits not exceeding (a) Monetized unused vacation leave credits of
P10,000 per annum; PRIVATE employees not exceeding ten (10) days during the
(f) Laundry allowance not exceeding P300 per month; year AND THE MONETIZED VALUE OF LEAVE CREDITS
(g) Employees achievement awards, e.g., for length of PAID TO GOVERNMENT OFFICIALS AND EMPLOYEES;
service or safety achievement, which must be in the form of a CcaDHT
tangible personal property other than cash or gift certificate, (b) Medical cash allowance to dependents of employees
with an annual monetary value not exceeding P10,000 not exceeding P750.00 per employee per semester or P125
received by the employee under an established written plan per month;
which does not discriminate in favor of highly paid (c) Rice subsidy of P1,000.00 or one (1) sack of 50-kg.
employees; rice per month amounting to not more than P1,000.00;
(h) Gifts given during Christmas and major anniversary (d) Uniform and clothing allowance not exceeding
celebrations not exceeding P5,000 per employee per annum; P3,000 per annum;
(i) Flowers, fruits, books, or similar items given to (e) Actual yearly medical benefits not exceeding
employees under special circumstances, e.g., on account of P10,000 per annum; DTSIEc
illness, marriage, birth of a baby, etc., and (f) Laundry allowance not exceeding P300 per month;
(j) Daily meal allowance for overtime work not (g) Employees achievement awards, e.g., for length of
exceeding twenty five percent (25%) of the basic minimum service or safety achievement, which must be in the form of a
wage." IASEca tangible personal property other than cash or gift certificate,
"xxx xxx xxx with an annual monetary value not exceeding P10,000
"(6) Fixed or variable transportation, representation and received by the employee under an established written in
other allowances — which does not discriminate in favor of highly paid
"xxx xxx xxx employees;
"(b) ... (h) Gifts given during Christmas and major anniversary
"(i) ... celebrations not exceeding P5,000 per employee per annum;
"(ii) The employee is required to account/liquidate for (i) Flowers, fruits, books, or similar items given to
the expenses in accordance with the specific requirements of employees under special circumstances, e.g., on account of
substantiation for each category of expenses pursuant to Sec. illness, marriage, birth of a baby, etc., and
34 of the Code. The excess of ADVANCES MADE over (j) Daily meal allowance for overtime work not
ACTUAL EXPENSES shall constitute taxable income if such exceeding twenty-five percent (25%) of the basic minimum
amount is not returned to the employer. Reasonable wage."
amounts of reimbursements/advances for travelling and "xxx xxx xxx"
SECTION 3. Transitory Provision. — The benefits under
Executive Order No. 291 as incorporated in these regulations
shall apply to income earned for the year 2000.
SECTION 4. Repealing Clause. — All existing rules and
regulations or parts thereof which are inconsistent with the
provisions of these regulations are hereby revoked, repealed
or modified accordingly.
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
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 written on or after the said date." (As amended by Revenue
higher than the current fair market value of the asset; Regulations No. 22-86 dated December 16, 1986.)
(B) The lessee acquires automatic ownership of the asset (SGD.) JAIME V. ONGPIN
upon payment of the stated amount of "rentals" which under Minister of Finance
the contract he is required to make; Recommending Approval:
(C) Portions of the periodic rental payments are credited to (SGD.) BIENVENIDO A. TAN, JR.
the purchase price of the asset; cdtai Commissioner of Internal Revenue
(D) The receipts of payment indicate that the payment made ANNEX "A"
were partial or full payments of the asset. SCHEDULE OF DEPRECIATION
4.03/3 Absence of compelling persuasive factors. — In the Asset classification Depreciable Life
absence of the above compelling persuasive factors or 1. Land Transportation Equipment 4 years
contrary implication, an intent warranting treatment of a 2. Water Transport Equipment 8 years
transaction for tax purposes as a purchase and sale rather 3. Air Transport Equipment 8 years
than as a lease or rental agreement, may in general be said to 4. Industrial Equipment 5 years
exist if, for example, one or more of the following conditions 5. Agricultural Equipment 4 years
are present: 6. Construction Equipment 5 years
(a) Portions of the periodic payments are made specifically 7. Telecommunication Equipment 5 years
applicable to an equity to be acquired by the lessee. 8. Office Machines 3 years
(b) The property may be acquired under a purchase option, 9. Main Frame Computer 5 years
at a price which is nominal in relation to the value of the 10. Materials Handling Equipment 5 years
property at the time when the option may be exercised, as 11. Auxiliary Equipment 5 years
determined at the time entering into the original agreement, (Please refer to subsequent pages for details of various asset
or which is a relatively small amount when compared with classification)
the total payments which are required to be made. 1. LAND TRANSPORT EQUIPMENT
SECTION 5. Advance Ruling Required to Recognize 1.1 Automotive Vehicles
Existence of a lease. — The parties to a lease agreement may 1.2 Passenger Bus AEIHaS
secure from the Commissioner an advance ruling recognizing 1.3 Tourist Bus
the fact that an agreement actually constitutes a lease for tax 1.4 Asian Utility Vehicles
purposes. In cases where a lessor is engaged in the leasing 1.5 Light-Duty Trucks (Such as Pick-ups)
business and frequently enters into a contract with various 1.6 Medium-Duty Trucks (Such as Dump Trucks)
lessees under the same or essentially similar terms and 1.7 Heavy-Duty Trucks (Prime Mover)
conditions, the lessor may submit a model lease agreement 1.8 Locomotives
on which to base an advance ruling. Thereafter, any specific 1.9 Trailers (Flatbed & Skeletal)
lease agreement entered into by the lessor and a lessee which 1.10 Tankers (Bulk Carriers)
does not substantially deviate from the terms and conditions 1.11 Motorcycles
of the model contract on the basis which the advance ruling 1.12 And such other similar or related equipment, as may be
had been secured, need not be submitted for advance ruling. mutually agreed upon from time to time.
casia 2. WATER TRANSPORT EQUIPMENT
PART B 2.1 Tugboats
GROSS RECEIPTS TAX 2.2 Barges
SECTION 6. Basis of the Gross Receipts Tax 2.3 Tankers
6.01 The rental amounts received by a lessor from a lessee 2.4 Purse Seiner
under an agreement qualifying as a finance lease as defined 2.5 Reefer Vessels
in Section 2.01/2 of these Regulations shall be divided into 2.6 Container Vessels
two components, namely principal and interest to be arrived 2.7 Passenger Vessels
at using either the Annuity or the Sum-of-the-Years-Digits 2.8 And such other similar or related equipment, as may be
method of accounting. The amount representing interest mutually agreed upon from time to time.
shall be determined in accordance with the formulae 3. AIR TRANSPORT EQUIPMENT
prescribed in Annex "B". 3.1 Helicopters
6.02 The amount of interest, if the same is derived by a 3.2 Prop Aircraft
finance and leasing company registered under R.A. 5980 3.3 Turbo-Prop Aircraft
shall be subject to the gross receipts tax prescribed in 3.4 Jet Aircraft
Sections 260 and 261 (as amended by PD 1739) of the 3.5 And such other similar or related equipment, as may be
National Internal Revenue Code based on the remaining mutually agreed upon from time to time. TaCIDS
maturity of the lease. Amounts which the lessee, under the 4. INDUSTRIAL EQUIPMENT
agreement, pays to the lessor (in addition to a stipulated 4.1 Injection Moulding Machines
rental) for certain other expenses properly payable by the 4.2 Extruding Machines
lessor (as described in Section 2.01) shall be excluded for 4.3 Foundry Equipment
purposes of the gross receipts tax determined under this 4.3 Metal Fabrication Equipment
subparagraph. 4.5 Welding Equipment
6.03 If the lessor is a person other than a finance and leasing 4.6 Logging Equipment
company registered under R.A. 5980, then the rentals 4.7 Sawmill Equipment
resulting from the lease agreement shall be subjected too the 4.8 Woodworking Equipment
4% contractor's tax imposed under Section 205 of the 4.9 Kiln Drying Equipment
National Internal Revenue Code. 4.10 Refrigerating Equipment
6.04 If the lessor is a finance and leasing company registered 4.11 Mining and Quarrying Equipment
under R.A. 5980 and sells its lease contract or merely sells its 4.12 Printing Equipment
receivables (and therefore retains title to the equipment), the 4.13 Textile Machines
rental amount received by the buyer shall be subjected to the 4.14 Refractory Equipment
pertinent provisions governing corporate taxation under the 4.15 Boilers
NIRC without prejudice to the exemptions and benefits 4.16 Industrial Pumps
allowed by special laws. casia 4.17 Industrial Gas Manufacturing Equipment
SECTION 7. Effectivity. — These regulations shall take effect 4.18 Distilling Equipment
on January 1, 1987 and shall be applicable to all leases 4.19 Laboratory Testing Equipment AaCTID
4.20 Medical Equipment
4.21 Drilling Equipment 11.9 Anti-Pollution Equipment
4.22 And such other similar or related equipment, as may be 11.10 Audio-Visual Equipment
mutually agreed upon from time to time. 11.11 And such other similar or related equipment, as may be
5. AGRICULTURAL EQUIPMENT mutually agreed upon from time to time. aTcIAS
5.1 Threshers ANNEX "B"
5.2 Palay Drilers GUIDELINES IN THE DETERMINATION OF THE
5.3 Rice Mills PRINCIPAL AND LEASE INCOME COMPONENT OF
5.4 Corn Mills FINANCIAL LEASE RENTAL
5.5 Feed Mills Lease rentals received by financial lessor shall be broken
5.6 4-Wheel Tractors with farm implements down into a principal and lease income component, the latter
5.7 2-Wheel Tractors with farm implements being subjected to the gross receipt tax under Sections 260
5.8 Track type agricultural tractors with farm implement and 261 of NIRC, as amended by Section 15 of P.D. 1739.
5.9 Hard Tractors with prime mover and farm implements Recognition of lease income shall be based either on the
5.10 Irrigation Pumps/Aerators annuity methods or the sum-of-the years'-digits (SYD)
5.11 Diesel Engines method.
5.12 And such other similar or related equipment, as may be PART A: ANNUITY METHOD
mutually agreed upon from time to time. Lease income under the annuity method is derived by
6. CONSTRUCTION EQUIPMENT computing the lease rate on the diminishing outstanding
6.1 Bulldozers (Track type or wheel) principal of the net lease facility. Explanation follows.
6.2 Loaders (Track type of Wheel) SECTION 1. Determination of Lease Rate
6.3 Compactors The lease rate is a function of the basic parameters that
6.4 Motor Graders normally comprise a lease transactions, namely: the lease
6.5 Tractor-Scrapers amount, guarantee deposit, lease rental, periodic payment,
6.6 Off-Highway Trucks the term of the lease and the residual value. The lease rate is
6.7 Excavators (Track Type or Wheel) defined as the internal rate of return of a specific lease
6.8 Crushing Plant transaction such that:
6.9 Concrete Batching Plant Where Ct = cash flow or period t, whether it be a net cash
6.10 Asphalt Mixing Plant inflow
6.11 Pipelayers of outflow
6.12 Asphalt Laying Machines r = the lease rate for a period t
6.13 Hydraulic Breakers t = the periodic time involved in the lease transaction
6.14 And such other similar or related equipment, as may be which may be monthly, quarterly, semi-annually or yearly.
mutually agreed upon from time to time. å = the summation of the series of
7. TELECOMMUNICATIONS EQUIPMENT cash flow over a period of time
7.1 PABX Systems n = the last period in which a cash flow is expected
7.2 Telex Machines HaTDAE For purposes of computing the lease rate factor, the cash
7.3 VFT Equipment flows accruing for a period, whether paid in advance is
7.4 Teleprinters immaterial and shall be treated as any other in arrears
7.5 Broadcasting Equipment payments. DTIcSH
7.6 Transmitting Equipment (Please refer to Exhibit I for computational examples in the
7.7 And such other similar or related equipment, as may be determination of the lease rate factor.)
mutually agreed upon from time to time. SECTION 2. Determination of Lease Income
8. OFFICE MACHINES Lease income component of lease rentals shall be determined
8.1 Adding Machines by the following formula:
8.2 Copiers Outstanding principal Lease Lease income
8.3 Calculators balance of lease X rate = for a specific
8.4 Typewriters facility factor period t
8.5 Mini-Computers (Please refer to Exhibit 2A for computational examples in the
8.6 Micro-Computers determination of the lease income component.)
8.7 Stencil Machines PART B: SUM-OF-THE-YEARS'-DIGITS (SYD) METHOD
8.8 Mimeographing Machines Lease income under the SYD method is derived by
8.9 Posting Machines computing the SYD factor (number of remaining periodic
8.10 Cash Registers payments divided by the sum-of-the-years'-digits) on the
8.11 And such other similar or related equipment, as may be total lease income. Explanation follows:
mutually agreed upon from time to time. SECTION 1. Determination of SYD
9. MAINFRAME COMPUTERS The SYD is computed by
10 MATERIALS HANDING EQUIPMENT a) using the following algebraic equation
10.1 Forklifts SYD = N (N+1)
10.2 Container Vans ———
10.3 Conveyor Systems 2
10.4 Box Cars AEaSTC where N represents the number of periodic payments;
10.5 Cranes (mounted or overhead) b) or, simply adding all the digits representing the periodic
10.6 Loaders with tines payments. Thus, for a transaction involving twelve (12)
10.7 Cement Mixers periodic payments, SYD may be computed as follows:
10.8 And such other similar or related equipment, as may be 1) SYD = 12 (12+1)
mutually agreed upon from time to time. ———
11 AUXILIARY EQUIPMENT 2
11.1 Air-conditioning Systems = 78
11.2 Generators and Accessories 2) SYD = 1+2+3+4+5+6+
11.3 Elevators 7+8+9+10+11+12
11.4 Escalators = 78
11.5 Water Tanks SECTION 2. Determination of the Total Lease Income
11.6 Water Heating Systems The total lease income is derived by deducting the net lease
11.7 Air Compressors facility (lease facility minus residual value) from the total
11.8 Cooling Tanks lease receivables (lease rentals.) HcaDIA
SECTION 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
Residual Value : P100,000
Period : 3 years in 12 quarterly installments
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
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 0 2 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
Example 5. Lease Facility : P1,000,000
Guaranty Deposit : P100,000
Residual Value : P200,000
Period : 3 years in 12 quarterly installments
Lease Rental : P83,369.67 payable
quarterly in arrears
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
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 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
—————
Total cumulative present value 0
Example 6. Same parameters as Example 5 except that lease
rental payments are in advance. STaCIA
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.
3 Figures not exact due to rounding off.
Exhibit 2A
Computational Examples in the Determination of the Lease
Income Component of Lease Rental under the Annuity
Method
Example 1. Lease Facility : P1,000,000
Guarantee Deposit : 0
Period : 3 years in 12 quarterly installments
Lease Rental : P93,415.88 payable
quarterly in arrears
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
1 Figures not exact due to rounding off.
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
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
Guaranty Deposit : P100,000
Residual Value : P100,000
Period : 3 years in 12 quarterly installments
Lease Rental : P90,415.88 payable
quarterly in arrears
1 Figures not exact due to rounding off.
Based on Exhibit A, example 3, lease rate quarterly factor is .
03. Thus,
Ending Payment of
Outstanding Residual Principal Lease Lease
Period Balance Value Repayment Income Rental
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 - 0 1 87,782.36 2,633.52 2 90,415.88
Example 4. Same parameters as Example 3 except that lease
rental payments are in advance, thus, lease rate quarterly
factor is also .03. ETIDaH
Ending Payment of
Outstanding Residual Principal Lease Lease
Period Balance Value Repayment Income Rental
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 - 0 1
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.
2 Figures not exact due to rounding off.
Example 5. Lease Facility : P1,000.000
Guaranty Deposit : P100,000
Residual Value : P200,000
Period : 3 years in 12 quarterly installments
Lease Rental : P83,369.67 payable
quarterly in arrears
Based on Exhibit A, example 3, lease rate quarterly factor is .
03. Thus,
Ending Payment of
Outstanding Residual Principal Lease Lease
Period Balance Value Repayment Income Rental
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.
2 Figures not exact due to rounding off.
Example 6. Same parameters as Example 5, except that lease
rental payments are in advance; thus, lease rate quarterly
factor is also .03. AcHCED
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.
2 Figures not exact due to rounding off.
Exhibit 2B
Computational Examples in the Determination of the Lease
Income Component of Lease Rentals under the SYD Method
Example 1. Lease Facility : P1,000,000
 Guaranty Deposit : 0
Residual Value : P100,000
Period : 3 years in 12 quarterly installments
Lease Rental : P93,415.88 payable
quarterly in arrears
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
Example 2. Same parameters as Example 1 except that lease
rental payments are in 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 - - -
Example 3. Lease Facility : 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 Lease Income
Period NRP/STD x Income = for the period
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
Outstanding Residual Lease Lease Principal
Period Balance Value Rental Income Repayment
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 - 0 1 90,415.88 2,371.67 88,044.21
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.
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. SDHAEC
(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 - 0 1 - - -
Example 5. Lease Facility : P1,000,000
Guaranty Deposit : P100,000
Residual Value : P200,000
Period : 3 years, 12 quarterly installments
Lease Rental : P83,369.67 payable
quarterly in arrears
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 Lease Income
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 taxpayer's gross income in the year of such recovery to the
5 8/78 200,436.04 20,557.54 extent of the income tax benefit of said deduction.
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. CDESIA
(A) (B) (C) (D) (E)
Payment of
Outstanding Residual Lease Lease Principal
Period Balance Value Rental Income Repayment
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.

Revenue Regulation No. 5-99

Issued March 16, 1999 implements Section 34(E) of the Tax
Code of 1997 relative to the requirements for deductibility of
bad debts from gross income of a corporation or an
individual engaged in trade or business or a professional
engaged in the practice of his profession. The requisites for
valid deduction of bad debts from gross income are: a) there
must be an existing indebtedness due to the taxpayer which
must be valid and legally demandable; b) the same must be
connected with the taxpayer's trade, business or practice of
profession; c) the same must not be sustained in a
transaction entered into between related parties enumerated
under Section 36(B) of the Tax Code of 1997; d) the same
must be actually charged off the books of accounts of the
taxpayer as of the end of the taxable year; and e) the same
must be actually ascertained to be worthless and
uncollectible as of the end of the taxable year. The recovery
of bad debts previously allowed as deduction in the
preceding year or years will be included as part of the