THE KEY in determining the taxability of a transaction is to know the nature of said transaction. This is definitely important in determining the taxability of a lease.
A finance lease should be differentiated from an operating lease. Recently, the Bureau of Internal Revenue (BIR) clarified that a finance lease is subject to documentary stamp tax (DST) as a loan transaction instead of a lease transaction.
Revenue Memorandum Circular No. (RMC) 46-14 started its clarification by stating that, under Revenue Regulations No. (RR) 9-04, a finance lease was defined as a mode of extending credit through a non-cancellable lease contract, under which the lessor purchases or acquires -- at the instance of the lessee -- machinery, equipment, motor vehicles, appliances, business and office machines, and other movable or immovable property in consideration of the periodic payment by the lessee of a fixed amount of money sufficient to amortize at least 70% of the purchase price or acquisition cost, including any incidental expenses and a margin of profit over an obligatory period of not less than two years, during which the lessee has the right to hold and use the leased property with the right to expense the lease rentals paid to the lessor and bears the cost of repairs and maintenance, insurance and preservation thereof, but with no obligation or option on his part to purchase the leased property from the owner-lessor at the end of the lease contract.
Moreover, it was defined as a lease that transfers substantially all the risks and rewards incident to ownership of an asset whose title may or may not eventually be transferred. This definition is similar to the accounting treatment which even requires a liability to be recognized in the books of the lessee.
With the definition provided, RMC 46-14 reiterated that a finance lease is a loan since it is in the form of extending credit to the lessee. For DST purposes, the transaction will fall under Section 179 of the Tax Code, as debt instruments, which are subject to tax of P1 on each P200 or fractional part thereof. Debt instruments were further defined to be instruments representing borrowing and lending transactions that are not limited to the transactions enumerated in Section 179.
On the other hand, RR 19-86 and BIR Ruling 009-2007 further differentiated a conditional sale from a lease. The distinction made an impact on the taxes that were not covered by RMC 46-14. The intent of the parties and the provisions of the agreement will help determine if the transaction is considered a conditional sale.
RR 19-86 listed compelling factors to determine a conditional sale: a) there is an option to purchase the asset at any time; b) the lessee acquires automatic ownership of the asset upon payment of the rentals under the contract; c) portions of the periodic rental payments are credited to the purchase price; and d) the receipts of payment indicate that the payment made were partial of full payments of the asset.
As a caution, the RR further emphasized that there is no single test or combination of tests that would absolutely determine conditional sale.
The discussion of RR 19-86 ended with a suggestion of securing an advanced tax ruling to ascertain if the lease model offered is a conditional sale.
Based on BIR Ruling 009-2007, for income tax purposes, a conditional sale is to be reported in the books of the vendor/lessor in accordance with the method of accounting it regularly employs in keeping its books of accounts or in accordance with the installment basis. For value-added tax purposes, since the transaction is, in substance, a sale of goods rather than a sale of service, the VAT amount is to be paid at the onset of the transaction, unless it qualifies under installment sale. Thus, for withholding tax purposes, since the transaction is considered a sale of goods, then the lessee is only required to withhold 1% on the transaction if it has been classified by the BIR as a large taxpayer or as one of the top 20,000 corporations in the Philippines.
On the other hand, if the transaction is simply a lease, then for income tax purposes, the lessor may depreciate the leased equipment during the lease period but such period should not be less than 60 percent of the depreciable life. For VAT purposes, the monthly payments received from the lessee are to be reported on a monthly basis since this is subject to VAT as they are actually or constructively received, and not at the inception of the lease. Thus, for withholding tax purposes, the transaction remains to be a lease/rent which, is subject to 5% withholding tax.
For purposes of clarity and to avoid confusion on the proper treatment for income tax, VAT, and withholding taxes in relation to finance leases, it would be best for the BIR to issue another clarificatory circular on this.
The author is a senior with the tax advisory and compliance division of Punongbayan & Araullo. P&A is a leading audit, tax, advisory and outsourcing services firm and is the Philippine member of Grant Thornton International Ltd.
source: Businessworld
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