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Lease Contract Against COD

This document discusses the tax treatment of operating leases and finance leases in the Philippines. For operating leases, the lessee can deduct rental payments from gross income for tax purposes. Depreciation and interest from a finance lease under new accounting standards are not deductible. Only periodic lease payments are treated as deductible expenses for tax purposes. Monthly lease payments for VAT and a 5% withholding tax apply. Finance leases must fully amortize the lessor's costs over a minimum two-year primary period and the residual value must be at least 5% of the acquisition cost.

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61 views2 pages

Lease Contract Against COD

This document discusses the tax treatment of operating leases and finance leases in the Philippines. For operating leases, the lessee can deduct rental payments from gross income for tax purposes. Depreciation and interest from a finance lease under new accounting standards are not deductible. Only periodic lease payments are treated as deductible expenses for tax purposes. Monthly lease payments for VAT and a 5% withholding tax apply. Finance leases must fully amortize the lessor's costs over a minimum two-year primary period and the residual value must be at least 5% of the acquisition cost.

Uploaded by

Antonieto B
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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and provides guidelines for determining whether transactions purporting to be leases are in reality

conditional sales contracts.

Operating lease

Section 2.02/1 of the RR defines an operating lease as “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 [sic] primary lease
period.”

For income tax purposes, the lessee may deduct the amount of rent paid or accrued from gross income,
including all expenses under the lease agreement which the lessee is required to pay to or for the
account of the lessor.

The depreciation expense for the right-to-use asset and the interest expense that are recognized under
PFRS 16 are not deductible expenses for income tax purposes. After all, from the initial recognition of
the asset or liability, the transaction affects neither accounting profit nor taxable profit. Thus, as has
been the longstanding tax treatment, only the periodic lease payments are treated as deductible
expenses given that the substance of the transaction does not change but only the accounting
disclosure.

For Value-Added Tax (VAT) purposes, the monthly payments to the lessor are reported monthly since
this is subject to VAT upon payment, and not at the inception of the lease. For withholding tax purposes,
the transaction remains a lease, which is subject to a 5% withholding tax.

Finance lease

Section 2.02/2 of the RR defines a finance lease or full payout lease as “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 (or two years).
In a finance lease, the lessee (not the lessor) chooses the asset and is normally responsible for the
maintenance, insurance, and other expenses related 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 of the leased
asset shall in no instance be less than 5% of the lessor’s acquisition cost.

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