RMC No. 11-2024: Clarifying the tax treatment of lease accounting by lessees under Philippine Financial Reporting Standard 16 in relation to Sections 34(A), 34(K), 106, 108, 179, 194 of the Tax Code, as amended, Revenue Regulations (RR) No. 19-86, as amended, and RR No. 02-98, as amended

Summary

RMC No. 11-2024 clarifies the tax treatment of lease accounting by lessees under PFRS 16, in relation to Sections 34(A), 34(K), 106, 108, 179 and 194 of the Tax Code, RR No. 19-86 and RR No. 02-98.

Key points

1. Operating and finance leases. For income tax, an operating lease is one where the asset is not wholly amortized during the primary period. A finance lease is a full payout lease over an obligatory period of not less than 730 days, with residual value of not less than five percent (5%) of the lessor’s acquisition cost.
2. Lease disguised as sale. A lease that is in substance a conditional sales contract is treated as a conditional sale under Sections 4.03/2 and 4.03/3 of RR No. 19-86. Examples include a lessee option to purchase during the obligatory period, automatic ownership on payment, rentals credited to the purchase price, or receipts showing payments for the asset.
3. Income tax deductions. The depreciation on the right-of-use asset and the interest expense recognized in the books are not deductible. Only the actual rent paid or incurred, with other payments to lessors under the lease, is deductible under Section 34(A)(1)(a)(iii).
4. Other lease items. Initial direct costs are claimed as outright expenses in the year paid or incurred. Short-term and low-value asset leases are treated as operating leases, and lease modification gains or losses are not part of taxable income. Dismantling and restoration costs are deductible only when actually paid or incurred.
5. VAT and withholding. Input VAT is creditable to the lessee upon payment of rentals evidenced by a VAT Official Receipt. For leases, only actual rental paid or accrued is subject to five percent (5%) Expanded Withholding Tax under Section 2.57.2 (B) of RR No. 02-98.
6. Conditional sales and DST. Conditional sales of personal property are sales of goods subject to one percent (1%) EWT on payments by Top Withholding Agents, with interest subject to fifteen percent (15%). Finance leases under RA No. 5980, as amended by RA No. 8556, are subject to DST on debt instruments under Section 179, and other leases to DST under Section 194.

Who is affected

• Lessees accounting for leases under PFRS 16

Summary by Tax Resources PH. It is not a substitute for the full text of the issuance or professional advice.