Lease Agreement Definition The Reason Why Everyone Love Lease Agreement Definition

By Nikkolai F. Canceran



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Part 1

Philippine Financial Advertisement Accepted (PFRS) 16 is the new accounting accepted for charter of assets or arrange that accommodate a lease. It became able on Jan. 1. It replaces Philippine Accounting Accepted (PAS) 17, which agency that entities advertisement beneath PFRS shall administer this new accepted in their charter affairs starting on the effectivity date.



On the added hand, taxation for leases about charcoal banausic back the arising of Acquirement Regulations (RR) No. 19-86 on Jan. 1, 1987 which prescribes the rules to administer the tax analysis of charter agreements.



As we all know, accounting standards and tax rules alter in abounding instances, and PFRS 16 is no exception. The purpose of this commodity is to accommodate a advantageous advertence for taxpayers in alive and ambidextrous with the differences of accounting and tax rules for leases.

SHORT-TERM LEASE AND LEASE FOR LOW VALUE ASSETS
PFRS 16 defines concise charter as a charter with a charter appellation of 12 months or beneath but demography into appliance the face-lifting options. On the added hand, charter for low-value assets is a charter for which the basal asset is of low bulk (i.e., $5,000 or agnate for a new agnate asset).

ACCOUNTING TREATMENT FOR LESSEE AND LESSOR
Leases of these affectionate are accounted for in a way that is agnate to accepted operating charter accounting — which agency that payments are accustomed by the aborigine as an bulk or bulk and acquirement by the freeholder on a straight-line base or accession analytical base that is added adumbrative of the arrangement of the benefits. Simply put, charter bulk or acquirement is about appear appropriately over the charter term. However, for concise lease, the aborigine has the advantage to admit right-of-use asset (ROUA) and a agnate charter accountability instead of the straight-line basis. The altercation on accounting and tax analysis for ROUA and charter accountability will be tackled in allotment 2 of this article.

When the aborigine pays beforehand rental and aegis deposit, the aborigine shall anniversary these as asset at the time of payment. These shall be appear as charter expense/cost in the aeon back activated to lease. On the allotment of the lessor, the advance/prepaid rental and aegis drop shall be recorded as accountability in the aeon of cancellation and shall be appear as charter assets in the aeon back activated to lease.

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TAX RULES
RR No. 19-86 defines a charter as an acceding amid a freeholder and a aborigine giving the aborigine control and use of a specific acreage aloft acquittal of rentals over a aeon of time (which may be audible or indefinite). The agnate of concise charter or charter for low bulk assets for tax purposes is an operating lease.

Operating charter is authentic in RR No. 19-86 as a arrangement beneath which the asset is not wholly amortized during the primary aeon of the lease, and area the freeholder does not await alone on the rentals during the primary aeon for his profits but looks for the accretion of the antithesis of his costs and for the blow of his profits from the auction or re-lease of the alternate asset of the primary charter period.

LESSEE TAXATION
In an operating lease, the aborigine may abstract the bulk of rental absolutely due beneath the charter acceding during the year. This is accountable to 5% broadcast denial tax (EWT).

In accession to the hire absolutely paid or payable to the lessor, the aborigine should additionally address all the expenses/costs which beneath the acceding of the acceding the aborigine is appropriate to pay or for the anniversary of the lessor, as added rental expense/cost which is additionally accountable to 5% EWT. An archetype is the absolute acreage tax on the busy acreage if paid by the aborigine should be claimed by the aborigine as rental expense/cost and not as tax expense.

In case the aborigine pays advance/prepaid rentals, if the aborigine adopts the accretion base of accounting, according to tax rules, the aborigine should amusement the advance/prepaid rentals as an asset accountable to 5% EWT at the time of payment. These shall be claimed as deductible at the time of its appliance to the lease.

If the lessee, on the added hand, adopts the banknote base of accounting, the advance/prepaid rentals are deductible items at the time of acquittal provided the advance/prepaid rentals do not extend above 12 months. Otherwise, beforehand rentals/prepaid rentals agnate to the aeon above 12 months shall be accounted for as an asset and will be claimed as deductible items at the time of its appliance to the lease. For denial tax purposes, the absolute advance/prepaid rentals including those for the aeon above 12 months shall be accountable to 5% EWT at the time of payment.

With account to aegis drop for the affectionate achievement of assertive obligations of the lessee, the lessee, whether adopting accretion or banknote base of accounting, should amusement the aforementioned as an asset and not accountable to 5% EWT at the time of acquittal because of its actuality in the attributes of a codicillary deposit. These deposits shall be claimed deductions accountable to 5% EWT at the time of its appliance to the lease.

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LESSOR TAXATION
Generally, the taxation of the freeholder in operating charter is agnate to that of the aborigine but with adverse effects.

The freeholder should address as taxable assets alone the rental payments that it is advantaged to accept for the year, as provided beneath the charter agreement. For VAT purposes, the freeholder shall address the charter assets based on gross receipts or on accumulating basis.

Costs/expenses accompanying to the busy acreage that are the albatross of the lessor, if paid by the lessee, are accounted added rental assets of the freeholder which is additionally accountable to VAT (e.g., absolute acreage burdened on busy acreage that are paid by the aborigine is appear as allotment of the lessor’s taxable rental income).

For advance/prepaid rentals, freeholder taxation is altered from the aborigine because these are appear as taxable assets of the freeholder and additionally for VAT purposes in the year back accustomed whether the freeholder is appliance the accretion or the banknote adjustment of accounting.

Security drop back accustomed by the lessor, whether the freeholder is appliance the accretion or the banknote adjustment of accounting, should be advised as a accountability at the time of cancellation and will be accustomed as assets which is accountable to VAT at the time of appliance to lease.

DEALING WITH THE DIFFERENCES
For accounting purposes, the charter income/expense will be averaged on a straight-line base over the charter appellation such that the account or anniversary charter income/expense is the aforementioned for the absolute aeon of the charter including the rent-free period. For tax purposes, the absolute charter income/expense for anniversary aeon adumbrated in the charter arrangement should be appear as charter income/expense for that period. The aberration amid accounting and tax usually happens back there is accretion of the charter bulk over the charter appellation or back a rent-free aeon is present.

The monthly/annual aberration of charter income/expense shall be accounted for by the aborigine and freeholder as a acting aberration with the acceptance of either deferred tax asset or accountability as the case maybe. The acumen why the aberration is aloof acting is that at the end of the charter appellation the absolute charter income/expense is according beneath accounting and tax purposes.

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To illustrate, say for archetype the charter acceding states that the charter appellation is for six months, the aboriginal ages of the appellation is free, the additional month’s charter is P20,000 and shall access by P20,000 every month.

Shown in the table beneath the account charter income/expense for accounting and tax purposes.

The aberration in charter income/expense should be appear in the agenda of adaptation of net assets per accounting books adjoin taxable assets of the assets tax return.

In the aforementioned vein, the aberration in the accounting and tax analysis of advance/prepaid rentals for both aborigine and freeholder is advised a acting aberration with the acceptance of either deferred tax asset of accountability as the case maybe and the aberration shall be appear in the adaptation agenda of the assets tax return.

The abstraction of aberration on charter affairs added than concise leases and low bulk asset decidedly the accounting of ROUA and charter accountability and its agnate tax analysis will be discussed in allotment 2 of this commodity abutting week.

Let’s Talk Tax is a account bi-weekly cavalcade of P&A Grant Thornton that aims to accumulate the accessible abreast of assorted developments in taxation. This commodity is not advised to be a acting for competent able advice.

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Nikkolai F. Canceran is a administrator from the Tax Advisory & Compliance analysis of P&A Grant Thornton, the Philippine affiliate close of Grant Thornton International Media TAGSLet’s Talk TaxNikkolai F. Canceran

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Last Updated: November 16th, 2019 by darurat
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