RR 19 86

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.
2.01/1Operating 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.
2.01/2Finance 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.
4.03/1In 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.
4.03/2Compelling persuasive factors. A contract or agreement purported to be a

lease shall be treated as conditional sales contract if one or more of the following
compelling persuasive factors are present:
(A) The lessee is given the option to purchase the asset at anytime during the
obligatory period of the lease, notwithstanding that the option price is equivalent
to or higher than the current fair market value of the asset;
(B) The lessee acquires automatic ownership of the asset upon payment of
the stated amount of "rentals" which under the contract he is required to make;
(C) Portions of the periodic rental payments are credited to the purchase price
of the asset; cdtai
(D) The receipts of payment indicate that the payment made were partial or
full payments of the asset.
4.03/3Absence of compelling persuasive factors. — In the absence of the above

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

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

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

agreement qualifying as a finance lease as defined in Section 2.01/2 of these
Regulations shall be divided into two components, namely principal and interest
to be arrived at using either the Annuity or the Sum-of-the-Years-Digits method
of accounting. The amount representing interest shall be determined in
accordance with the formulae prescribed in Annex "B".
6.02 The amount of interest, if the same is derived by a finance and leasing
company registered under R.A. 5980 shall be subject to the gross receipts tax
prescribed in Sections 260 and 261 (as amended by PD 1739 ) of the National
Internal Revenue Code based on the remaining maturity of the lease. Amounts
which the lessee, under the agreement, pays to the lessor (in addition to a
stipulated rental) for certain other expenses properly payable by the lessor (as
described in Section 2.01) shall be excluded for purposes of the gross receipts
tax determined under this subparagraph.
6.03 If the lessor is a person other than a finance and leasing company
registered under R.A. 5980, then the rentals resulting from the lease agreement
shall be subjected too the 4% contractor's tax imposed under Section 205 of the
National Internal Revenue Code.
6.04 If the lessor is a finance and leasing company registered under R.A. 5980
and sells its lease contract or merely sells its receivables (and therefore retains
title to the equipment), the rental amount received by the buyer shall be
subjected to the pertinent provisions governing corporate taxation under the
NIRC without prejudice to the exemptions and benefits allowed by special laws.
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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:
(SGD.) BIENVENIDO A. TAN, JR.
Commissioner of Internal Revenue
ANNEX "A"
SCHEDULE OF DEPRECIATION
Asset classification Depreciable Life
1. Land Transportation Equipment 4 years
2. Water Transport Equipment 8 years
3. Air Transport Equipment 8 years
4. Industrial Equipment 5 years
5. Agricultural Equipment 4 years
6. Construction Equipment 5 years
7. Telecommunication Equipment 5 years
8. Office Machines 3 years
9. Main Frame Computer 5 years

10. Materials Handling Equipment 5 years
11. Auxiliary Equipment 5 years
(Please refer to subsequent pages for details of various asset classification)
1. LAND TRANSPORT EQUIPMENT
1.1 Automotive Vehicles
1.2 Passenger Bus AEIHaS
1.3 Tourist Bus
1.4 Asian Utility Vehicles
1.5 Light-Duty Trucks (Such as Pick-ups)
1.6 Medium-Duty Trucks (Such as Dump Trucks)
1.7 Heavy-Duty Trucks (Prime Mover)
1.8 Locomotives
1.9 Trailers (Flatbed & Skeletal)
1.10 Tankers (Bulk Carriers)
1.11 Motorcycles
1.12 And such other similar or related equipment, as may be mutually agreed
upon from time to time.
2. WATER TRANSPORT EQUIPMENT
2.1 Tugboats
2.2 Barges
2.3 Tankers
2.4 Purse Seiner
2.5 Reefer Vessels
2.6 Container Vessels
2.7 Passenger Vessels
3. AIR TRANSPORT EQUIPMENT
3.1 Helicopters
3.2 Prop Aircraft
3.3 Turbo-Prop Aircraft
3.4 Jet Aircraft
upon from time to time. TaCIDS
4. INDUSTRIAL EQUIPMENT
4.1 Injection Moulding Machines
4.2 Extruding Machines
4.3 Foundry Equipment
4.3 Metal Fabrication Equipment
4.5 Welding Equipment
4.6 Logging Equipment
4.7 Sawmill Equipment
4.8 Woodworking Equipment
4.9 Kiln Drying Equipment
4.10 Refrigerating Equipment
4.11 Mining and Quarrying Equipment
4.12 Printing Equipment
4.13 Textile Machines
4.14 Refractory Equipment
4.15 Boilers
4.16 Industrial Pumps
4.17 Industrial Gas Manufacturing Equipment
4.18 Distilling Equipment
4.19 Laboratory Testing Equipment AaCTID
4.20 Medical Equipment
4.21 Drilling Equipment
5. AGRICULTURAL EQUIPMENT
5.1 Threshers
5.2 Palay Drilers
5.3 Rice Mills
5.4 Corn Mills
5.5 Feed Mills
5.6 4-Wheel Tractors with farm implements
5.7 2-Wheel Tractors with farm implements
5.8 Track type agricultural tractors with farm implement
5.9 Hard Tractors with prime mover and farm implements
5.10 Irrigation Pumps/Aerators
5.11 Diesel Engines
6. CONSTRUCTION EQUIPMENT
6.1 Bulldozers (Track type or wheel)
6.2 Loaders (Track type of Wheel)
6.3 Compactors
6.4 Motor Graders
6.5 Tractor-Scrapers
6.6 Off-Highway Trucks
6.7 Excavators (Track Type or Wheel)
6.8 Crushing Plant
6.9 Concrete Batching Plant
6.10 Asphalt Mixing Plant
6.11 Pipelayers
6.12 Asphalt Laying Machines
6.13 Hydraulic Breakers

7. TELECOMMUNICATIONS EQUIPMENT
7.1 PABX Systems
7.2 Telex Machines HaTDAE
7.3 VFT Equipment
7.4 Teleprinters
7.5 Broadcasting Equipment
7.6 Transmitting Equipment
8. OFFICE MACHINES
8.1 Adding Machines
8.2 Copiers
8.3 Calculators
8.4 Typewriters
8.5 Mini-Computers
8.6 Micro-Computers
8.7 Stencil Machines
8.8 Mimeographing Machines
8.9 Posting Machines
8.10 Cash Registers
9. MAINFRAME COMPUTERS
10 MATERIALS HANDING EQUIPMENT
10.1 Forklifts
10.2 Container Vans
10.3 Conveyor Systems

10.4 Box Cars AEaSTC
10.5 Cranes (mounted or overhead)
10.6 Loaders with tines
10.7 Cement Mixers
11 AUXILIARY EQUIPMENT
11.1 Air-conditioning Systems
11.2 Generators and Accessories
11.3 Elevators
11.4 Escalators
11.5 Water Tanks
11.6 Water Heating Systems
11.7 Air Compressors
11.8 Cooling Tanks
11.9 Anti-Pollution Equipment
11.10 Audio-Visual Equipment
upon from time to time. aTcIAS
ANNEX "B"
GUIDELINES IN THE DETERMINATION OF THE PRINCIPAL AND LEASE INCOME

COMPONENT OF FINANCIAL LEASE RENTAL
Lease rentals received by financial lessor shall be broken down into a principal
and lease income component, the latter being subjected to the gross receipts tax
under Sections 260 and 261 of NIRC, as amended by Section 15 of P.D. 1739.
Recognition of lease income shall be based either on the annuity methods or the
sum-of-the years'-digits (SYD) method.
PART A: ANNUITY METHOD
Lease income under the annuity method is derived by computing the lease rate
on the diminishing outstanding principal of the net lease facility. Explanation
follows.
SEC. 1. Determination of Lease Rate

The lease rate is a function of the basic parameters that normally comprise a
lease transactions, namely: the lease amount, guarantee deposit, lease rental,
periodic payment, the term of the lease and the residual value. The lease rate is
defined as the internal rate of return of a specific lease transaction such that:
Where Ct = cash flow or period t, whether it be a net cash inflow
of outflow
r = the lease rate for a period t
t = the periodic time involved in the lease transaction
which may be monthly, quarterly, semi-annually or yearly.
å = the summation of the series of
cash flow over a period of time
n = the last period in which a cash flow is expected
For purposes of computing the lease rate factor, the cash flows accruing for a
period, whether paid in advance is immaterial and shall be treated as any other
in arrears payments. DTIcSH
(Please refer to Exhibit I for computational examples in the determination of the

lease rate factor.)
SEC. 2. Determination of Lease Income
Lease income component of lease rentals shall be determined by the following

formula:
Outstanding principal Lease Lease income
balance of lease X rate = for a specific
facility factor period t
(Please refer to Exhibit 2A for computational examples in the determination of

the lease income component.)
PART B: SUM-OF-THE-YEARS'-DIGITS (SYD) METHOD
Lease income under the SYD method is derived by computing the SYD factor
(number of remaining periodic payments divided by the sum-of-the-years'-digits)
on the total lease income. Explanation follows:
SEC. 1. Determination of SYD
The SYD is computed by

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

formula:
Lease
Total income
No. of remaining periodic payments (NRP) X Lease = for a
—————————————————— Income specific
SYD period
(Please refer to Exhibit 28 for computational examples in the determination of

the lease income component.)
Exhibit 1
Computational Examples in the Determination of the Lease Factor

Example 1. Lease Facility : P1,000,000
Guarantee Deposit : 0
Residual Value : P100,000
Period : 3 years in 12 quarterly installments
Lease Rentals : P93,415.88 payable quarterly in arrears
Based on the above parameters, the resulting cash flows for the lessor and
correspondingly lease rate factor, using the formula
Where r = lease rate
are as follows:
Present
Value Discount
Period Net Net Factor at
(in Lease Lease Residual Cash 3% lease Present
qtr) Facility RentalValue Inflow Rate 1Value 2
0 1,000,000 (1,000,000) 1.00000 (1,000,000)
1 93,415.88 93,415.88 .97087 90,694.68
2 93,415.88 93,415.88 .94260 88,053.81
3 93,415.88 93,415.88 .91514 85,488.61
4 93,415.88 93,415.88 .88849 82,999.08
5 93,415.88 93,415.88 .86261 80,581.47
6 93,415.88 93,415.88 .83748 78,233.93
7 93,415.88 93,415.88 .81309 75,955.52
8 93,415.88 93,415.88 .78941 73,743.43
9 93,415.88 93,415.88 .76642 71,595.80
10 93,415.88 93,415.88 .74409 69,509.82
11 93,415.88 93,415.88 .72242 67,485.50
12 93,415.88 100,000 193,415.88 .70138 135,658.03
—————
Total cumulative present value 0
1. Discount factor at a certain rate need not be computed since this could be
acquired from present value tables.
2. Figures not exact due to rounding off.
The above example has shown that the lease rate factor for this specific lease
transaction with the given parameters above is 3% per quarter or 12% per
annum. Normally, finding the lease rate factor is a tedious process of trial and
error, which would necessitate at times, the process of interpolation. This
however could be determined with greater ease with the use of a financial
calculator with the capability of imputing the internal rate of return. TDcCIS
Example 2. Same parameters as Example 1 except that lease rental payments

are in advance.
For purposes of determining the lease rate factor to be used for computing the
lease income component of a lease rental, timing differences of whether a
periodic lease rental payment is payable in advance or in arrears, is immaterial.
Consequently, example 2 would have the same cash flows as example 1 and
thus, the lease rate factor in determining lease income is also .03.
Example 3 Lease Facility : P1,000,000
Guaranty Deposit : P100,000
Lease Rental: P90,415.88 payable
quarterly in arrears
Given the parameters of this lease transaction, the cash flows and the resultant
lease rate factor, are as follows:
Present
Value Discount
0 900,000 1 (900,000) 1.00000 (900,000)
1 90,415.88 90,415.88 .97087 85,782.06
2 90,415.88 90,415.88 .94260 85,226.01

3 90,415.88 90,415.88 .91514 82,743.19
4 90,415.88 90,415.88 .88849 80,333.61
5 90,415.88 90,415.88 .86261 77,993.64
6 90,415.88 90,415.88 .83748 75,721.49
7 90,415.88 90,415.88 .81309 73,516.25
8 90,415.88 90,415.88 .78941 71,375.20
9 90,415.88 90,415.88 .76642 69,296.54
10 90,415.88 90,415.88 .74409 67,277.55
11 90,415.88 90,415.88 .72242 65,318.24
12 93,415.88 02 90,415.88 .70138 63,415.89
—————

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
The lease rate factor for this transaction is 3% per quarter or 12% per annum as
shown by the following table:
1 Lease facility minus guarantee deposit is the net cash outflow of the
lessor.
2 The residual value for this transaction, cashflow wise, is 0, since the
guarantee deposit, which is in the amount of P100,000, is given back at the end
of the lease term and is netted out with the residual value, which in this
example, is also P100,000.
3 Figures not exact due to rounding off.
Present
Value Discount
0 900,000 1 (900,000) 1.00000 (900,000)
1 83,369.67 83,369.67 .97087 80,941.11
2 83,369.67 83,369.67 .94260 78,584.25
3 83,369.67 83,369.67 .91514 76,294.92
4 83,369.67 83,369.67 .88849 74,073.12
5 83,369.67 83,369.67 .86261 71,915.51
6 83,369.67 83,369.67 .83748 69,820.43
7 83,369.67 83,369.67 .81309 67,787.04
8 83,369.67 83,369.67 .78941 65,812.85
9 83,369.67 83,369.67 .76642 63,896.18
10 83,369.67 83,369.67 .74409 62,034.54
11 83,369.67 83,369.67 .72242 60,227.92
12 83,369.67 100,000 2 183,369.67 .70138 128,611.82
—————

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.
Exhibit 2A
Computational Examples in the Determination of the Lease Income Component

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

10 273,088.00 82,743.34 10,672.54 93,415.88
11 187,782.36 85,225.64 8,190.24 93,415.88
12 100,000.00 87,782.36 5,663.52 1 93,415.88

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

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

are in advance, thus, lease rate quarterly factor is also .03. ETIDaH
Ending Payment of
0 836,584.12 63,415.88 27,000.00 90,415.88
1 771,265.76 65,318.36 25,097.52 90,415.88
2 703,987.85 67,277.91 23,137.97 90,415.88
3 634,691.61 69,296.24 21,119.64 90,415.88
4 563,316.48 71,375.13 19,040.75 90,415.88
5 489,800.09 73,516.39 16,899.49 90,415.88
6 414,078.21 75,721.88 14,694.00 90,415.88

7 336,084.68 77,993.53 12,422.35 90,415.88
8 255,751.34 80,333.34 10,082.54 90,415.88
9 173,008.00 82,743.34 7,672.54 90,415.88
10 87,782.36 85,225.64 5,190.24 90,415.88
11 - 87,782.36 2,633.52 2 90,415.88
12 - 01
1 Cashflow-wise, residual value is 0 since guarantee deposit, in the amount

of P100,000, is given back at the end of the lease term and is netted out with the
residual value, which in this example, is also P100,000.
Example 5. Lease Facility : P1,000.000
Based on Exhibit A, example 3, lease rate quarterly factor is .03. Thus,
Ending Payment of
0 900,000.00
1 843,630.33 56,369.67 27,000.00 83,369.67
2 785,569.57 58,060.76 25,308.91 83,369.67
3 725,766.99 59,802.58 23,567.09 83,369.67
4 664,170.33 61,596.66 21,773.01 83,369.67
5 600,725.77 63,444.56 19,925.11 83,369.67
6 535,377.87 65,347.90 18,021.77 83,369.67
7 468,069.54 67,308.33 16,061.34 83,369.67
8 398,741.96 69,327.58 14,042.09 83,369.67

9 327,334.55 71,407.41 11,962.26 83,369.67
10 253,784.92 73,549.63 9,820.04 83,369.67
11 178,028.80 75,756.12 7,613.55 83,369.67
12 - 100,000.00 1 78,028.80 5,340.87 2 83,369.67
1 Cashflow-wise, residual value is P100,000, since guarantee deposit which

is also in the amount of P100,000, is netted out at the end of lease term from the
P200,000 residual value.
Example 6. Same parameters as Example 5, except that lease rental payments

are in advance; thus, lease rate quarterly factor is also .03. AcHCED
Ending Payment of
0 843,630.33 56,369.67 27,000.00 83,369.67
1 785,569.57 58,060.76 25,308.91 83,369.67
2 725,766.99 59,802.58 23,567.09 83,369.67
3 664,170.33 61,596.66 21,773.01 83,369.67
4 600,725.77 63,444.56 19,925.11 83,369.67
5 535,377.87 65,347.90 18,021.77 83,369.67
6 468,069.54 67,308.33 16,061.34 83,369.67
7 398,741.96 69,327.58 14,042.09 83,369.67
8 327,334.55 71,407.41 11,962.26 83,369.67
9 253,784.92 73,549.63 9,820.04 83,369.67
10 178,028.80 75,756.12 7,613.55 83,369.67
11 100,000.00 78,028.80 5,340.87 2 83,369.67
12 - 100,000.00 1
1 Cashflow-wise, residual value is P100,000, since guarantee deposit which

is also in the amount of P100,000, is netted out at the end of lease term from the

Exhibit 2B
Computational Examples in the Determination of the Lease Income Component

of Lease Rentals under the SYD Method
Guaranty Deposit : 0
Based on the above parameters, the total lease income is P220,990.56

[(93,415.88 x 12) - (P1,000,000-P100,000)], while the SYD is equal to 78. Thus,
using the formula:
No. of remaining periodic Total Lease Lease income for a
payments (NRP) X Income = specific period
————————
SYD
the lease income for periods 1 to 12 are computed as follows:
Total Lease Lease Income
Period NRP/STD x Income = for the period
1 12/78 P220,990.56 P33,998.55
2 11/78 220,990.56 31,165.34
3 10/78 220,990.56 28,332.12
4 9/78 220,990.56 25,498.91
5 8/78 220,990.56 22,665.70
6 7/78 220,990.56 19,832.49
7 6/78 220,990.56 16,999.27
8 5/78 220,990.56 14,166.06
9 4/78 220,990.56 11,332.85
10 3/78 220,990.56 8,499.64

11 2/78 220,990.56 5,666.42
12 1/78 220,990.56 2,833.21
——————
P220,990.56
===========
Using the figures above, we arrive at the following table:
(A) (B) (C) (D) (E)
Payment of Principal
Outstanding Residual Lease Lease Repayment
Period Balance Value RentalIncome (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

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 RentalIncome Repayment
0 940,582.67 93,415.88 33,998.55 59,417.33
1 878,332.13 93,415.88 31,165.34 62,250.54
2 813,248.37 93,415.88 28,332.12 65,083.76
3 745,331.40 93,415.88 25,498.91 67,916.97
4 674,581.22 93,415.88 22,665.70 70,750.18
5 600,997.83 93,415.88 19,832.49 73,583.39
6 524,581.22 93,415.88 16,999.27 76,416.61
7 445,331.40 93,415.88 14,166.06 79,249.82
8 363,248.37 93,415.88 11,332.85 82,083.03
9 278,332.13 93,415.88 8,499.64 84,916.24
10 190,582.67 93,415.88 5,666.42 87,749.46
11 100,000.00 93,415.88 2,833.21 90,582.67
12 - 100,000.00 - - -
Period : 3 years payable in 12
quarterly installments
Lease Rental: P93,415.88 payable quarterly
in arrears
Based on the given parameters, the total lease income is P184,990.56

[(P90,415.88 x 12) - (P1,000,000-P100,000)], and the SYD is also 78. Thus,
1 12/78 P184,990.56 P28,460.09
2 11/78 184,990.56 26,088.41
3 10/78 184,990.56 23,716.74
4 9/78 184,990.56 21,345.06

5 8/78 184,990.56 18,973.39
6 7/78 184,990.56 16,601.72
7 6/78 184,990.56 14,230.04
8 5/78 184,990.56 11,858.37
9 4/78 184,990.56 9,486.70
10 3/78 184,990.56 7,115.02
11 2/78 184,990.56 4,743.35
12 1/78 184,990.56 2,371.67
——————
P184,990.56
===========
(A) (B) (C) (D) (E)
Payment of
0 900,00.00
1 838,044.21 90,415.88 28,460.09 61,955.79
2 773,716.74 90,415.88 26,088.41 64,327.47
3 707,017.60 90,415.88 23,716.74 66,699.14
4 637,946.78 90,415.88 21,345.06 69,070.82
5 566,504.29 90,415.88 18,973.39 71,442.49
6 492,690.13 90,415.88 16,601.72 73,814.16
7 416,504.29 90,415.88 14,230.04 76,185.84
8 337,946.78 90,415.88 11,858.37 78,557.51
9 257,017.60 90,415.88 9,486.70 80,929.18
10 173,716.74 90,415.88 7,115.02 83,300.86
11 88,044.21 90,415.88 4,743.35 85,672.53
12 - 01 90,415.88 2,371.67 88,044.21

1 Cashflow-wise, residual value is 0 since guaranty deposit, in the amount of
P100,000, is given back at the end of the lease term and is netted out with the

SDHAEC
(A) (B) (C) (D) (E)
Payment of
0 838,044.21 90,415.88 P28,460.09 61,955.79
1 773,716.74 90,415.88 26,088.41 64,327.47
2 707,017.60 90,415.88 23,716.74 66,699.14
3 637,946.78 90,415.88 21,345.06 69,070.82
4 566,504.29 90,415.88 18,973.39 71,442.49
5 492,690.13 90,415.88 16,601.72 73,814.16
6 416,504.29 90,415.88 14,230.04 76,185.84
7 337,946.78 90,415.88 11,858.37 78,557.51
8 257,017.60 90,415.88 9,486.70 80,929.18
9 173,716.74 90,415.88 7,115.02 83,300.86
10 88,044.21 90,415.88 4,743.35 85,672.53
11 - 90,415.88 2,371.67 88,044.21
12 - 01 - - -
Period : 3 years, 12 quarterly installments
The total lease income in this example is P200,436.04 [(P83,369.67 x 12) -
(P1,000,000.00-P200,000)], while the SYD is also 78.
1 12/78 P200,436.04 P30,836.31
2 11/78 200,436.04 28,266.62
3 10/78 200,436.04 25,696.93
4 9/78 200,436.04 23,127.24
5 8/78 200,436.04 20,557.54
6 7/78 200,436.04 17,987.85
7 6/78 200,436.04 15,418.16
8 5/78 200,436.04 12,848.46
9 4/78 200,436.04 10,278.77
10 3/78 200,436.04 7,709.08
11 2/78 200,436.04 5,139.39
12 1/78 200,436.04 2,569.69
1 Cashflow-wise, residual value is 0 since guaranty deposit, in the amount of

P100,000, is given back at the end of the lease term and is netted out with the
(A) (B) (C) (D) (E)
Payment of
0 900,00.00
1 847,466.64 83,369.67 30,836.31 52,533.36
2 792,363.59 83,369.67 28,266.62 55,103.05
3 734,690.85 83,369.67 25,696.93 57,672.74
4 674,448.42 83,369.67 23,127.24 50,242.43
5 611,636.29 83,369.67 20,557.54 62,812.13

6 546,254.47 83,369.67 17,987.85 65,381.82
7 478,302.96 83,369.67 15,418.16 67,951.51
8 407,781.75 83,369.67 12,848.46 70,521.21
9 334,690.85 83,369.67 10,278.77 73,090.90
10 259,030.26 83,369.67 7,709.08 75,660.59
11 180,799.98 83,369.67 5,139.39 78,230.28
12 - 100,000.00 1 83,369.67 2,569.69 80,799.98
Example 6. Same parameters as Example 5, except that lease rental payments

CDESIA
(A) (B) (C) (D) (E)
Payment of
0 847,466.64 83,369.67 30,836.31 52,533.36
1 792,363.59 83,369.67 28,266.62 55,103.05
2 734,690.85 83,369.67 25,696.93 57,672.74
3 674,448.42 83,369.67 23,127.24 50,242.43
4 611,636.29 83,369.67 20,557.54 62,812.13
5 546,254.47 83,369.67 17,987.85 65,381.82
6 478,302.96 83,369.67 15,418.16 67,951.51
7 407,781.75 83,369.67 12,848.46 70,521.21
8 334,690.85 83,369.67 10,278.77 73,090.90
9 259,030.26 83,369.67 7,709.08 75,660.59
10 180,799.98 83,369.67 5,139.39 78,230.28
11 100,000.00 83,369.67 2,569.69 70,799.98
12 - 100,000.00 - - -
1 Cashflow-wise, residual value is 100,000 since guaranty deposit, in the

amount of P100,000, is given back at the end of the lease term from the
C o p y r i g h t 2 0 0 8 C D T e c h n o l o g i e s A s i a, I n c.

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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

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

2.01/1Operating lease defined — An "operating lease" is a contract under which

2.01/2Finance lease defined — "Finance lease" or full payout lease is a contract

2.02 "Packaged lease" not taxable as a corporation — A "package lease" or

2.03 "Packaged Lease" or "Lease Package" defined — A lease package refers to

2.05 Vendor, if contract is a conditional sale — If the agreement is determined

SECTION 3. Deductions Allowable to Lessee or Purchaser.

SECTION 4. General criteria for characterizing an agreement as a conditional

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

4.03 Factors to be considered.

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

4.03/2Compelling persuasive factors. A contract or agreement purported to be a

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

(a) Portions of the periodic payments are made specifically applicable to an

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

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

SECTION 7. Effectivity. — These regulations shall take effect on January 1, 1987

(SGD.) JAIME V. ONGPIN

(SGD.) BIENVENIDO A. TAN, JR.

Commissioner of Internal Revenue

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

11. Auxiliary Equipment 5 years

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

1. LAND TRANSPORT EQUIPMENT

1.1 Automotive Vehicles

1.2 Passenger Bus AEIHaS

1.3 Tourist Bus

1.4 Asian Utility Vehicles

1.5 Light-Duty Trucks (Such as Pick-ups)

1.6 Medium-Duty Trucks (Such as Dump Trucks)

1.7 Heavy-Duty Trucks (Prime Mover)

1.9 Trailers (Flatbed & Skeletal)

1.10 Tankers (Bulk Carriers)

2. WATER TRANSPORT EQUIPMENT

2.4 Purse Seiner

2.5 Reefer Vessels

2.6 Container Vessels

2.7 Passenger Vessels

3. AIR TRANSPORT EQUIPMENT

3.3 Turbo-Prop Aircraft

3.4 Jet Aircraft

4.1 Injection Moulding Machines

4.2 Extruding Machines

4.3 Foundry Equipment

4.3 Metal Fabrication Equipment

4.5 Welding Equipment

4.6 Logging Equipment