REVENUE REGULATIONS NO. 02-98 (§2.78)

SECTION 2.78. Withholding Tax on Compensation. — The withholding of tax on compensation income is a method of collecting the income tax at source upon receipt of the income. It applies to all employed individuals whether citizens or aliens, deriving income from compensation for services rendered in the Philippines. The employer is constituted as the withholding agent.SECTION 2.78.1. Withholding of Income Tax on Compensation Income. — (A) Compensation Income Defined. — In general, the term "compensation" means all remuneration for services performed by an employee for his employer under an employer-employee relationship, unless specifically excluded by the Code.The name by which the remuneration for services is designated is immaterial. Thus, salaries, wages, emoluments and honoraria, allowances, commissions (e.g. transportation, representation, entertainment and the like); fees including director's fees, if the director is, at the same time, an employee of the employer/corporation; taxable bonuses and fringe benefits except those which are subject to the fringe benefits tax under Sec. 33 of the Code; taxable pensions and retirement pay; and other income of a similar nature constitute compensation income.The basis upon which the remuneration is paid is immaterial in determining whether the remuneration constitutes compensation. Thus, it may be paid on the basis of piece-work, or a percentage of profits; and may be paid hourly, daily, weekly, monthly or annually. cdrepRemuneration for services constitutes compensation even if the relationship of employer and employee does not exist any longer at the time when payment is made between the person in whose employ the services had been performed and the individual who performed them.(1) Compensation paid in kind. — Compensation may be paid in money or in some medium other than money, as for example, stocks, bonds or other forms of property. If services are paid for in a medium other than money, the fair market value of the thing taken in payment is the amount to be included as compensation subject to withholding. If the services are rendered at a stipulated price, in the absence of evidence to the contrary, such price will be presumed to be the fair market value of the remuneration received. If a corporation transfers to its employees its own stock as remuneration for services rendered by the employee, the amount of such remuneration is the fair market value of the stock at the time the services were rendered. (2) Living quarters or meals. — If a person receives a salary as remuneration for services rendered, and in addition thereto, living quarters or meals are provided, the value to such person of the quarters and meals so furnished shall be added to the remuneration paid for the purpose of determining the amount of compensation subject to withholding. However, if living quarters or meals are furnished to an employee for the convenience of the employer, the value thereof need not be included as part of compensation income.(3) Facilities and privileges of a relatively small value. — Ordinarily, facilities and privileges (such as entertainment, medical services, or so called "courtesy" discounts on purchases), furnished or offered by an employer to his employees generally, are not considered as compensation subject to withholding if such facilities or privileges are of relatively small value and are offered or furnished by the employer merely as a means of promoting the health, goodwill, contentment, or efficiency of his employees.Where compensation is paid in property other than money, the employer shall make necessary arrangements to ensure that the amount of the tax required to be withheld is available for payment to the Commissioner.(4) Tips and gratuities. — Tips or gratuities paid directly to an employee by a customer of the employer which

are not accounted for by the employee to the employer are considered as taxable income but not subject to withholding.(5) Pensions, retirement and separation pay. — Pensions, retirement and separation pay constitute compensation subject to withholding, except those provided under Subsection B of this section.(6) Fixed or variable transportation, representation and other allowances —(a) IN GENERAL, fixed or variable transportation, representation and other allowances which are received by a public officer or employee or officer or employee of a private entity, in addition to the regular compensation fixed for his position or office, is compensation subject to withholding.(b) Any amount paid specifically, either as advances or reimbursements for travelling, representation and other bonafide ordinary and necessary expenses incurred or reasonably expected to be incurred by the employee in the performance of his duties are not compensation subject to withholding, if the following conditions are satisfied:(i) It is for ordinary and necessary travelling and representation or entertainment expenses paid or incurred by the employee in the pursuit of the trade, business or profession; and(ii) The employee is required to account/liquidate for the foregoing expenses in accordance with the specific requirements of substantiation for each category of expenses pursuant to Sec. 34 of the Code. The excess of actual expenses over advances made shall constitute taxable income if such amount is not returned to the employer. Reasonable amounts of reimbursements/ advances for travelling and entertainment expenses which are pre-computed on a daily basis and are paid to an employee while he is on an assignment or duty need not be subject to the requirement of substantiation and to withholding.(7) Vacation and sick leave allowances. — Amounts of "vacation allowances or sick leave credits" which are paid to an employee constitute compensation. Thus, the salary of an employee on vacation or on sick leave, which are paid notwithstanding his absence from work, constitutes compensation. However, the monetized value of unutilized vacation leave credits of ten (10) days or less which were paid to the employee during the year are not subject to income tax and to the withholding tax.(8) Deductions made by employer from compensation of employee. — Any amount which is required by law to be deducted by the employer from the compensation of an employee including the withheld tax is considered as part of the employee's compensation and is deemed to be paid to the employee as compensation at the time the deduction is made.(9) Remuneration for services as employee of a nonresident alien individual or foreign entity. — The term "compensation" includes remuneration for services performed by an employee of a nonresident alien individual, foreign partnership or foreign corporation, whether or not such alien individual or foreign entity is engaged in trade or business within the Philippines. Any person paying compensation on behalf of a non-resident alien individual, foreign partnership, or foreign corporation which is not engaged in trade or business within the Philippines is subject to all provisions of law and regulations applicable to an employer.(10) Compensation for services performed outside the Philippines. — Remuneration for services performed outside the Philippines by a resident citizen for a domestic or a resident foreign corporation or partnership, or for a non-resident corporation or partnership, or for a non-resident individual not engaged in trade or business in the Philippines shall be treated as compensation which is subject to tax.A non-resident citizen as defined in these regulations is taxable only on income derived from sources within the Philippines. In general, the situs of the income whether within or without the Philippines, is determined by the place where the service is rendered.

(B) Exemptions from withholding tax on compensation. — The following income payments are exempted from the requirement of withholding tax on compensation:(1) Remunerations received as an incident of employment, as follows:(a) Retirement benefits received under Republic Act under 7641 and those received by officials and employees of private firms, whether individual or corporate, under a reasonable private benefit plan maintained by the employer which meet the following requirements:(i) The plan must be reasonable;(ii) The benefit plan must be approved by the Bureau;(iii) The retiring official or employee must have been in the service of the same employer for at least ten (10) years and is not less than fifty (50) years of age at the time of retirement; and(iv) The retiring official or employee should not have previously availed of the privilege under the retirement benefit plan of the same or another employer.(b) Any amount received by an official or employee or by his heirs from the employer due to death, sickness or other physical disability or for any cause beyond the control of the said official or employee, such as retrenchment, redundancy, or cessation of business. cdrepThe phrase "for any cause beyond the control of the said official or employee" connotes involuntariness on the part of the official or employee. The separation from the service of the official or employee must not be asked for or initiated by him. The separation was not of his own making. Whether or not the separation is beyond the control of the official or employee, being essentially a question of fact, shall be determined on the basis of prevailing facts and circumstances. It shall be duly established by the employer by competent evidence which should be attached to the monthly return for the period in which the amount paid due to the involuntary separation was made.Amounts received by reason of involuntary separation remain exempt from income tax even if the official or the employee, at the time of separation, had rendered less than ten (10) years of service and/or is below fifty (50) years of age.Any payment made by an employer to an employee on account of dismissal, constitutes compensation regardless of whether the employer is legally bound by contract, statute, or otherwise, to make such payment.(c) Social security benefits, retirement gratuities, pensions and other similar benefits received by residents or non-resident citizens of the Philippines or aliens who come to reside permanently in the Philippines from foreign government agencies and other institutions private or public;(d) Payments of benefits due or to become due to any person residing in the Philippines under the law of the United States administered by the United States Veterans Administration;(e) Payments of benefits made under the Social Security System Act of 1954 as amended; and(f) Benefits received from the GSIS Act of 1937, as amended, and the retirement gratuity received by government officials and employees.(2) Remuneration paid for agricultural labor —(a) Remuneration for services which constitute agricultural labor and paid entirely in products of the farm where the labor is performed is not subject to withholding. In general, however, the term, "agricultural labor" does not include services performed in connection with forestry, lumbering or landscaping.(b) Remuneration paid entirely in products of the farm where the labor is performed by an employee of any person in connection with any of the following activities is excepted as remuneration for agricultural labor:(i) The cultivation of soil;(ii) The raising, shearing, feeding, caring for, training, or management of livestock, bees, poultry, or wildlife; or(iii) The raising or harvesting of any other agricultural or horticultural commodity. The term "farm" as used in this

subsection includes, but is not limited to stock, dairy, poultry, fruits and truck farms, plantations, ranches, nurseries ranges, orchards, and such greenhouse and other similar structures as are used primarily for the raising of agricultural or horticultural commodities.(c) The remuneration paid entirely in products of the farm where labor is performed for the following services in the employ of the owner or tenant or other operator of one or more farms is not considered as remuneration for agricultural labor, provided the major part of such services is performed on a farm:(i) Services performed in connection with the operation, management, conservation, improvement, or maintenance of any such farms or its tools or equipments; or(ii) Services performed in salvaging timber, or clearing land brush and other debris left by a hurricane or typhoon.The services described in (i) above may include for example, services performed by carpenters, painters, mechanics, farm supervisors, irrigation engineers, bookkeepers, and other skilled or semi-skilled workers, which contribute in any way to the conduct of the farm or farms, as such, operated by the person employing them, as distinguished from any other enterprise in which such person may be engaged. Since the services described in this paragraph must be performed in the employ of the owner or tenant or other operator of the farm, the exception does not extend to remuneration paid for services performed by employees of a commercial painting concern, for example, which contracts with a farmer to renovate his farm properties. cdasia(d) Remuneration paid entirely in products of the farm where labor is performed by an employee in the employ of any person in connection with any of the following operations is not considered as remuneration for agricultural labor without regard to the place where such services are performed:(i) The making of copra, stripping of abaca, etc.;(ii) The hatching of poultry;(ii) The raising of fish;(iv) The operation or maintenance of ditches, canals, reservoirs, or waterways used exclusively for supplying or storing water for farming purposes; and(v) The production or harvesting of crude gum from a living tree or the processing of such crude gum into gum spirits or turpentine and gum resin, provided such processing is carried on by the original producer of such crude gum.(e) Remuneration paid entirely in products of the farm where labor is performed by an employee in the employ of a farmer or a farmer's cooperative, organization or group in the handling, planting, drying, packing, packaging, processing, freezing, grading, storing or delivering to storage or to market or to carrier for transportation to market, of any agricultural or horticultural commodity, produced by such farmer or farmer-members of such organization or group, is excepted as remuneration for agricultural labor. Services performed by employees of such farmer or farmer's organization or group in handling, planting, drying, packaging, processing, freezing, grading, storing, or delivering to storage or to market or to carrier for transportation to market of commodities produced by persons other than such farmer or members of such farmer's organization or group are not performed "as an incident to ordinary farming operation".All payments made in cash or other forms other than products of the farm where labor is performed, for services constituting agricultural labor as explained above, are not within the exception.(3) Remuneration for domestic services. — Remuneration paid for services of a household nature performed by an employee in or about the private home of the person by whom he is employed is not subject to withholding. However, the services of household personnel furnished to an employee (except rank and file employees) by an employer shall be subject to the fringe benefits tax pursuant to Sec. 33 of the Code, as amended.

A private home is the fixed place of abode of an individual or family. If the home is utilized primarily for the purpose of supplying board or lodging to the public as a business enterprise, it ceases to be a private home and remuneration paid for services performed therein is not exempted.In general, services of a household nature in or about a private home include services rendered by cooks, maids, butlers, valets, laundresses, gardeners, chauffeurs of automobiles for family use.The remuneration paid for the services above enumerated which are performed in or about rooming or lodging houses, boarding houses, clubs, hotels, hospitals or commercial offices or establishments is considered as compensation;Remuneration paid for services performed as a private secretary, even if they are performed in the employer's home is considered as compensation;(4) Remuneration for casual labor not in the course of an employer's trade or business. — The term "casual labor" includes labor which is occasional, incidental or regular. The expression "not in the course of the employer's trade or business" includes labor that does not promote or advance the trade or business of the employer.Thus, any remuneration paid for labor which is occasional, incidental or irregular, and does not promote or advance the employer's trade or business, is not considered as compensation. cdasiaEXAMPLE: A's business is that of operating a sawmill. He employs B, a carpenter, at an hourly wage to repair his home. B's work is irregular and he spends, the greater part of two days in completing the work. Since B's labor is casual and is not in the course of A's business, the remuneration paid for such services is exempted.Any remuneration paid for casual labor, that is, labor which is occasional, incidental or irregular, but which is rendered in the course of the employer's trade or business, is considered as compensation.EXAMPLE: E is engaged in the business of operating a department store. He employs additional clerks for a short period. While the services of the clerks may be casual, they are rendered in the course of the employer's trade or business and therefore the remuneration paid for such services is considered as compensation.Any remuneration paid for casual labor performed for a corporation is considered as compensation;(5) Compensation for services by a citizen or resident of the Philippines for a foreign government or an international organization. — Remuneration paid for services performed as an employee of a foreign government or an international organization is exempted. The exemption includes not only remuneration paid for services performed by ambassadors, ministers and other diplomatic officers and employees but also remuneration paid for services performed as consular or other officer or employee of a foreign government or as a non-diplomatic representative of such government. (6) Damages. — Actual, moral, exemplary and nominal damages received by an employee or his heirs pursuant to a final judgment or compromise agreement arising out of or related to an employer-employee relationship.(7) Life Insurance. — The proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the insured, whether in a single sum or otherwise, provided however, that interest payments agreed under the policy for the amounts which are held by the insured under such an agreement shall be included in the gross income.(8) Amount received by the insured as a return of premium. — The amount received by the insured, as a return of premium or premiums paid by him under life insurance, endowment, or annuity contracts either during the term or at the maturity of the term mentioned in the contract or upon surrender of the contract.(9) Compensation for injuries or sickness. — Amounts received through Accident or Health Insurance or under Workmen's Compensation Acts, as compensation for personal injuries or sickness, plus the amount of any

damages received whether by suit or agreement on account of such injuries or sickness.(10) Income exempt under treaty. — Income of any kind to the extent required by any treaty obligation binding upon the Government of the Philippines.(11) Thirteenth (13th ) month pay and other benefits. —(a) Thirteenth (13th) month pay equivalent to the mandatory one (1) month basic salary of officials and employees of the government, (whether national or local), including government-owned or controlled corporations, and or private offices received after the twelfth (12th) month pay; and(b) Other benefits such as Christmas bonus, productivity incentive bonus, loyalty award, gifts in cash or in kind and other benefits of similar nature actually received by officials and employees of both government and private offices.The above stated exclusions (a) and (b) shall cover benefits paid or accrued during the year provided that the total amount shall not exceed thirty thousand pesos (P30,000.00) which may be increased through rules and regulations issued by the Secretary of Finance, upon recommendation of the Commissioner, after considering, among others, the effect on the same of the inflation rate at the end of the taxable year.(12) GSIS, SSS, Medicare and other contributions. — GSIS, SSS, Medicare and Pag-Ibig contributions, and union dues of individual employees.SECTION 2.78.2. Payroll Period. — The term "payroll period" means the period of services for which a payment of compensation is ordinarily made to an employee by his employer. It is immaterial that the compensation is not always paid at regular intervals.EXAMPLE: if an employer ordinarily pays the weekly wages of his employees at the end of the week, but if for some reason a particular employee receives payment of his salaries for the past week in the middle of the current week and receives the remainder at the end of the same week, the payroll period is still the calendar week; or if, instead, the employee is sent on a three (3)-week trip by his employer and receives at the end of the trip a single compensation payment for three (3)-week services, the payroll period is still the calendar week, and the compensation payment shall be treated as though it were three (3) separate weekly compensation payments. LLphilFor the purpose of determining the tax, an employee can have but one payroll period with respect to the compensation paid by any one employer. Thus, if an employee is paid a regular compensation for the weekly payroll and in addition thereto is paid supplemental compensation (for example taxable bonuses) determined with respect to a different period, the payroll period is the weekly payroll period.SECTION 2.78.3. Employee. — The term "employee" is an individual performing services under an employer-employee relationship. The term covers all employees, including officers and employees, whether elected or appointed, of the Government of the Philippines, or any political subdivision thereof or any agency or instrumentality.In general, the relationship of the employer and employee exists when the person for whom services were performed has the right to control and direct the individual who performs the services, not only as to the result to be accomplished by the work but also as to the details and means by which the result is accomplished. An employee is subject to the will and control of the employer not only as to what shall be done, but how it shall be done. In this connection, it is not necessary that the employer actually directs or controls the manner in which the services are performed. It is sufficient that he has the right to do so.The right to dismiss an employee is also an important factor indicating that the person possessing that right is an employer. Other factors or characteristics of an employer, which may not be necessarily present in every case, are furnishing the tools and furnishing of a place to work, to the individual who performs the services. In general, an individual is not considered an employee if he is subject to

the control or direction of another merely on to the result to be accomplished by the work, and not on to the means and methods for accomplishing the result.In general, individuals who follow an independent trade, business, or profession, in which the offer their services to the public, are not employees.The measurement, method or designation of compensation is also immaterial if the relationship of employer and employee in fact exists.No distinction is made between classes or grades of employees. Thus superintendents, managers, and others belonging to similar levels are employees. An officer of a corporation is an employee of the corporation. An individual, performing services for a corporation, both as an officer and director, is an employee subject to withholding on compensation, including director's fees.SECTION 2.78.4. Employer. — The term employer means any person for whom an individual performs or performed any service, of whatever nature, under an employer-employee relationship. It is not necessary that the services be continuing at the time the wages are paid in order that the status of employer may exist. Thus for purposes of withholding, a person for whom an individual has performed past services and from whom he is still receiving compensation is an "employee".(A) Person for whom the services are or were performed does not have control. — The term "employer" also refers to the person having control of the payment of the compensation in cases where the services are or were performed for a person who does not exercise such control. For example, where compensation, such as certain types of pensions or retirement pay, are paid by a trust and the person for whom the services were performed has no control over the payment of such compensation, the trust is deemed to be the "employer".(B) Person paying compensation on behalf of a nonresident. — The term "employer" also means any person paying compensation on behalf of a non-resident alien individual, foreign partnership, or foreign corporation, who is not engaged in trade or business within the Philippines.It is the responsibility of the employer to withhold, pay, or refund the tax and furnish the statements required under these Regulations. The term "employer" as defined in (A) and (B) above is intended to determine who is the withholding agent.As a matter of business administration, certain mechanical details of the withholding process may be handled by representatives of the employer. Thus, in the case of a corporate employer with branch offices, the branch manager or other representative may actually, as a matter of internal administration, withhold the tax or prepare the statements required under the law. Nevertheless, the legal responsibility for withholding, paying and returning the tax and furnishing such statements rests with the corporate employer.An employer may be an individual, a corporation, a partnership, a trust, an estate, a joint-stock company, an association, or a syndicate, group, pool, joint venture, or other unincorporated organization, group or entity. A trust or estate, rather than the fiduciary acting for or on behalf of the trust or estate, is generally the employer.The term "employer" embraces not only an individual and an organization engaged in trade or business, but it also includes an organization exempt from income tax, such as charitable and religious organizations, clubs, social organizations and societes, as well as the Government of the Philippines, including its agencies, instrumentalities, and political subdivisions.(C) Compensation paid on behalf of two or more employers. — If a payment of compensation is made to an employee by an employer through an agent, fiduciary, or other person who has the control, receipt, custody, or disposal of, or pays the compensation payable by another employer to such employee, the amount of tax required to be withheld on each compensation payment made through such agent, fiduciary, or person shall, whether the compensation

is paid separately on behalf of each employer or paid in lump-sum on behalf of all such employers, be determined based on the aggregate amount of such compensation payment or payments in the same manner as if such aggregate amount had been paid by one employer. Hence, the tax shall be determined based on the aggregate amount of the compensation paid. prcdIn any such case, each employer shall be liable for the return and payment of a pro-rata portion of the tax so determined in accordance with the ratio of the amount contributed by each employer relative to the aggregate of such compensation.A fiduciary, agent, or other person acting for two or more employers may be authorized to withhold the tax under these regulations with respect to the wages of the employees of such employers. Such fiduciary, agent, or other person may also be authorized to make and file returns of the tax withheld at source on such compensation and to furnish the receipts required under these Regulations. Application for the authorization to perform such act should be addressed to the Commissioner or his duly authorized representative. If such authority is granted by the Commissioner, all provisions of the law (including penalties) and regulations prescribed in pursuance of the law applicable in respect of an employer for whom such fiduciary, agent or other person acts shall remain subject to all provisions of law (including penalties) and regulations prescribed in pursuance of the law applicable in respect of employers.

December 14, 2000REVENUE REGULATIONS NO. 10-00SUBJECT : Further Amendments to Revenue Regulations No. 2-98 and 3-98, as Last Amended by Revenue Regulations No. 8-2000TO : All Internal Revenue Officials and Others ConcernedPursuant to Sections 244 and 4 of the Tax Code of 1997, in relation to the provisions of Executive Order No. 291, these Regulations are hereby promulgated to further amend Revenue Regulations No. 2-98 and Revenue Regulations No. 3-98, as last amended by Revenue Regulations No. 8-2000, with respect to the exemption of Monetized Leave Credits of Government Officials and Employees and the enumeration of "De Minimis" benefits which are exempt from the income tax on compensation as well as from the fringe benefits tax. AEDISCSECTION 1. Section 2.78.1(A)(3), (6)(b)(ii) and (7) of Revenue Regulations No. 2-98, as last amended by Revenue Regulations No. 8-2000, is hereby further amended to read as follows:"Sec. 2.78.1. Withholding of Income Tax on Compensation Income. —"(A) . . ."(1) Compensation paid in kind. — . . ."xxx xxx xxx"(3) Facilities and privileges of relatively small value. —"xxx xxx xxx"The following shall be considered as "de minimis" benefits not subject to INCOME TAX AS WELL AS withholding tax on compensation income of both managerial and rank and file employees:(a) Monetized unused vacation leave credits of PRIVATE employees not exceeding ten (10) days during the year AND THE MONETIZED VALUE OF LEAVE CREDITS PAID TO GOVERNMENT OFFICIALS AND EMPLOYEES; AEcTCD(b) Medical cash allowance to dependents of employees not exceeding P750.00 per employee per semester or P125 per month;(c) Rice subsidy of P1,000.00 or one (1) sack of 50-kg. rice per month amounting to not more than P1,000.00;(d) Uniform and clothing allowance not exceeding P3,000 per annum; EDcIAC(e) Actual yearly medical benefits not exceeding P10,000 per annum;(f) Laundry allowance not exceeding P300 per month;(g) Employees achievement awards, e.g., for length of service or safety achievement, which must be in the form of a tangible personal property other than cash or gift certificate, with an annual monetary value not exceeding P10,000 received by the employee under an established written plan which does not discriminate in favor of highly paid employees;(h) Gifts given during Christmas and major anniversary celebrations not exceeding P5,000 per employee per annum;(i) Flowers, fruits, books, or similar items given to employees under special circumstances, e.g., on account of illness, marriage, birth of a baby, etc., and(j) Daily meal allowance for overtime work not exceeding twenty five percent (25%) of the basic minimum wage." IASEca"xxx xxx xxx"(6) Fixed or variable transportation, representation and other allowances —"xxx xxx xxx"(b) . . ."(i) . . ."(ii) The employee is required to account/liquidate for the expenses in accordance with the specific requirements of substantiation for each category of expenses pursuant to Sec. 34 of the Code. The excess of ADVANCES MADE over ACTUAL EXPENSES shall constitute taxable income if such amount is not returned to the employer. Reasonable amounts of reimbursements/advances for travelling and

entertainment expenses which are pre-computed on a daily basis and are paid to an employee while he is on an assignment or duty need not be subject to the requirements of substantiation and to withholding.""(iii) . . ."(7) Vacation and sick leave allowances. Amounts of "vacation allowances or sick leave credits" which are paid to an employee constitute compensation. Thus, the salary of an employee on vacation or on sick leave, which IS paid notwithstanding his absence from work constitutes compensation. However, the monetized value of unutilized vacation leave credits of ten (10) days or less which ARE paid to PRIVATE employees during the year AND THE MONETIZED VALUE OF LEAVE CREDITS PAID TO GOVERNMENT OFFICIALS AND EMPLOYEES SHALL NOT BE SUBJECT TO INCOME TAX AND CONSEQUENTLY TO WITHHOLDING TAX." aTEScI"xxx xxx xxxSECTION 2. Section 2.33 (C) of Revenue Regulations No. 3-98, as last amended by Revenue Regulations No. 8-2000, is hereby further amended to read as follows:"Sec. 2.33. Special Treatment of Fringe Benefits(A) Imposition of Fringe Benefits Tax —xxx xxx xxx(B) Definition of Fringe Benefit —xxx xxx xxx(C) Fringe Benefits Not Subject to Fringe Benefits Tax — In general, the fringe benefits tax shall not be imposed on the following fringe benefits:(1) . . .(2) . . .(3) . . .(4) De minimis benefits as defined in these Regulations;(5) . . .(6) . . .xxx xxx xxxThe term "DE MINIMIS" benefits which are exempt from the fringe benefits tax shall, in general, be limited to facilities or privileges furnished or offered by an employer to his employees that are of relatively small value and are offered or furnished by the employer merely as a means of promoting the health, goodwill, contentment, or efficiency of his employees such as the following:(a) Monetized unused vacation leave credits of PRIVATE employees not exceeding ten (10) days during the year AND THE MONETIZED VALUE OF LEAVE CREDITS PAID TO GOVERNMENT OFFICIALS AND EMPLOYEES; CcaDHT(b) Medical cash allowance to dependents of employees not exceeding P750.00 per employee per semester or P125 per month;(c) Rice subsidy of P1,000.00 or one (1) sack of 50-kg. rice per month amounting to not more than P1,000.00;(d) Uniform and clothing allowance not exceeding P3,000 per annum;(e) Actual yearly medical benefits not exceeding P10,000 per annum; DTSIEc(f) Laundry allowance not exceeding P300 per month;(g) Employees achievement awards, e.g., for length of service or safety achievement, which must be in the form of a tangible personal property other than cash or gift certificate, with an annual monetary value not exceeding P10,000 received by the employee under an established written in which does not discriminate in favor of highly paid employees;(h) Gifts given during Christmas and major anniversary celebrations not exceeding P5,000 per employee per annum;(i) Flowers, fruits, books, or similar items given to employees under special circumstances, e.g., on account of illness, marriage, birth of a baby, etc., and(j) Daily meal allowance for overtime work not exceeding twenty-five percent (25%) of the basic minimum wage.""xxx xxx xxx"

SECTION 3. Transitory Provision. — The benefits under Executive Order No. 291 as incorporated in these regulations shall apply to income earned for the year 2000.SECTION 4. Repealing Clause. — All existing rules and regulations or parts thereof which are inconsistent with the provisions of these regulations are hereby revoked, repealed or modified accordingly.

November 10, 1986 January 1, 1987REVENUE REGULATIONS NO. 19-86SUBJECT : Taxation of LeasesTO : All Internal Revenue Officers and Others ConcernedSECTION 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 AINCOME TAXSECTION 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.2.01/1 Operating 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.2.01/2 Finance 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. acdSECTION 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.4.03/1 In 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.4.03/2 Compelling 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.4.03/3 Absence 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. casiaPART BGROSS RECEIPTS TAXSECTION 6. Basis of the Gross Receipts Tax6.01 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. casiaSECTION 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." (As amended by Revenue Regulations No. 22-86 dated December 16, 1986.) (SGD.) JAIME V. ONGPINMinister of FinanceRecommending Approval:(SGD.) BIENVENIDO A. TAN, JR.Commissioner of Internal RevenueANNEX "A"SCHEDULE OF DEPRECIATION Asset classification Depreciable Life1. Land Transportation Equipment 4 years2. Water Transport Equipment 8 years3. Air Transport Equipment 8 years4. Industrial Equipment 5 years5. Agricultural Equipment 4 years6. Construction Equipment 5 years7. Telecommunication Equipment 5 years8. Office Machines 3 years9. Main Frame Computer 5 years10. Materials Handling Equipment 5 years11. Auxiliary Equipment 5 years(Please refer to subsequent pages for details of various asset classification)1. LAND TRANSPORT EQUIPMENT1.1 Automotive Vehicles1.2 Passenger Bus AEIHaS1.3 Tourist Bus1.4 Asian Utility Vehicles1.5 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 Locomotives1.9 Trailers (Flatbed & Skeletal)1.10 Tankers (Bulk Carriers)1.11 Motorcycles1.12 And such other similar or related equipment, as may be mutually agreed upon from time to time.2. WATER TRANSPORT EQUIPMENT2.1 Tugboats2.2 Barges2.3 Tankers2.4 Purse Seiner2.5 Reefer Vessels2.6 Container Vessels2.7 Passenger Vessels2.8 And such other similar or related equipment, as may be mutually agreed upon from time to time.3. AIR TRANSPORT EQUIPMENT3.1 Helicopters3.2 Prop Aircraft3.3 Turbo-Prop Aircraft3.4 Jet Aircraft3.5 And such other similar or related equipment, as may be mutually agreed upon from time to time. TaCIDS4. INDUSTRIAL EQUIPMENT4.1 Injection Moulding Machines4.2 Extruding Machines4.3 Foundry Equipment4.3 Metal Fabrication Equipment4.5 Welding Equipment4.6 Logging Equipment4.7 Sawmill Equipment4.8 Woodworking Equipment4.9 Kiln Drying Equipment4.10 Refrigerating Equipment4.11 Mining and Quarrying Equipment4.12 Printing Equipment4.13 Textile Machines4.14 Refractory Equipment4.15 Boilers4.16 Industrial Pumps4.17 Industrial Gas Manufacturing Equipment4.18 Distilling Equipment4.19 Laboratory Testing Equipment AaCTID4.20 Medical Equipment

4.21 Drilling Equipment4.22 And such other similar or related equipment, as may be mutually agreed upon from time to time.5. AGRICULTURAL EQUIPMENT5.1 Threshers5.2 Palay Drilers5.3 Rice Mills5.4 Corn Mills5.5 Feed Mills5.6 4-Wheel Tractors with farm implements5.7 2-Wheel Tractors with farm implements5.8 Track type agricultural tractors with farm implement5.9 Hard Tractors with prime mover and farm implements5.10 Irrigation Pumps/Aerators5.11 Diesel Engines5.12 And such other similar or related equipment, as may be mutually agreed upon from time to time.6. CONSTRUCTION EQUIPMENT6.1 Bulldozers (Track type or wheel)6.2 Loaders (Track type of Wheel)6.3 Compactors6.4 Motor Graders6.5 Tractor-Scrapers6.6 Off-Highway Trucks6.7 Excavators (Track Type or Wheel)6.8 Crushing Plant6.9 Concrete Batching Plant6.10 Asphalt Mixing Plant6.11 Pipelayers6.12 Asphalt Laying Machines6.13 Hydraulic Breakers6.14 And such other similar or related equipment, as may be mutually agreed upon from time to time.7. TELECOMMUNICATIONS EQUIPMENT7.1 PABX Systems7.2 Telex Machines HaTDAE7.3 VFT Equipment7.4 Teleprinters7.5 Broadcasting Equipment7.6 Transmitting Equipment7.7 And such other similar or related equipment, as may be mutually agreed upon from time to time.8. OFFICE MACHINES8.1 Adding Machines8.2 Copiers8.3 Calculators8.4 Typewriters8.5 Mini-Computers8.6 Micro-Computers8.7 Stencil Machines8.8 Mimeographing Machines8.9 Posting Machines8.10 Cash Registers8.11 And such other similar or related equipment, as may be mutually agreed upon from time to time.9. MAINFRAME COMPUTERS10 MATERIALS HANDING EQUIPMENT10.1 Forklifts10.2 Container Vans10.3 Conveyor Systems10.4 Box Cars AEaSTC10.5 Cranes (mounted or overhead)10.6 Loaders with tines10.7 Cement Mixers10.8 And such other similar or related equipment, as may be mutually agreed upon from time to time.11 AUXILIARY EQUIPMENT11.1 Air-conditioning Systems11.2 Generators and Accessories11.3 Elevators11.4 Escalators11.5 Water Tanks11.6 Water Heating Systems11.7 Air Compressors11.8 Cooling Tanks

11.9 Anti-Pollution Equipment11.10 Audio-Visual Equipment11.11 And such other similar or related equipment, as may be mutually agreed upon from time to time. aTcIASANNEX "B"GUIDELINES IN THE DETERMINATION OF THE PRINCIPAL AND LEASE INCOME COMPONENT OF FINANCIAL LEASE RENTALLease rentals received by financial lessor shall be broken down into a principal and lease income component, the latter being subjected to the gross receipt 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 METHODLease income under the annuity method is derived by computing the lease rate on the diminishing outstanding principal of the net lease facility. Explanation follows.SECTION 1. Determination of Lease RateThe 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 outflowr = the lease rate for a period tt = 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 timen = the last period in which a cash flow is expectedFor 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.)SECTION 2. Determination of Lease IncomeLease income component of lease rentals shall be determined by the following formula:Outstanding principal Lease Lease incomebalance of lease X rate = for a specificfacility 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) METHODLease 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:SECTION 1. Determination of SYDThe SYD is computed bya) using the following algebraic equationSYD = N (N+1) ——— 2where 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) ——— 2 = 782) SYD = 1+2+3+4+5+6+ 7+8+9+10+11+12 = 78SECTION 2. Determination of the Total Lease IncomeThe total lease income is derived by deducting the net lease facility (lease facility minus residual value) from the total lease receivables (lease rentals.) HcaDIA

SECTION 3. Determination of Lease IncomeLease income component of lease rentals shall be determined by the following formula: Lease Total incomeNo. 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 1Computational Examples in the Determination of the Lease FactorExample 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 arrearsBased on the above parameters, the resulting cash flows for the lessor and correspondingly lease rate factor, using the formulaWhere r = lease rateare as follows: Present Value DiscountPeriod Net Net Factor at(in Lease Lease Residual Cash 3% lease Presentqtr) Facility Rental Value Inflow Rate 1 Value 20 1,000,000 (1,000,000) 1.00000 (1,000,000)1 93,415.88 93,415.88 .97087 90,694.682 93,415.88 93,415.88 .94260 88,053.813 93,415.88 93,415.88 .91514 85,488.614 93,415.88 93,415.88 .88849 82,999.085 93,415.88 93,415.88 .86261 80,581.476 93,415.88 93,415.88 .83748 78,233.937 93,415.88 93,415.88 .81309 75,955.528 93,415.88 93,415.88 .78941 73,743.439 93,415.88 93,415.88 .76642 71,595.8010 93,415.88 93,415.88 .74409 69,509.8211 93,415.88 93,415.88 .72242 67,485.5012 93,415.88 100,000 193,415.88 .70138 135,658.03 ————— Total cumulative present value 01. 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. TDcCISExample 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 Residual Value : P100,000 Period : 3 years in 12 quarterly installments Lease Rental : P90,415.88 payable quarterly in arrearsGiven the parameters of this lease transaction, the cash flows and the resultant lease rate factor, are as follows: Present Value DiscountPeriod Net Net Factor at(in Lease Lease Residual Cash 3% lease Present

qtr) Facility Rental Value Inflow Rate 1 Value 30 900,000 1 (900,000) 1.00000 (900,000)1 90,415.88 90,415.88 .97087 85,782.062 90,415.88 90,415.88 .94260 85,226.013 90,415.88 90,415.88 .91514 82,743.194 90,415.88 90,415.88 .88849 80,333.615 90,415.88 90,415.88 .86261 77,993.646 90,415.88 90,415.88 .83748 75,721.497 90,415.88 90,415.88 .81309 73,516.258 90,415.88 90,415.88 .78941 71,375.209 90,415.88 90,415.88 .76642 69,296.5410 90,415.88 90,415.88 .74409 67,277.5511 90,415.88 90,415.88 .72242 65,318.2412 93,415.88 0 2 90,415.88 .70138 63,415.89 ————— Total cumulative present value 0Example 4. Same parameters as Example 3 except that lease rental payments 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. TIHCcAExample 5. Lease Facility : P1,000,000 Guaranty Deposit : P100,000 Residual Value : P200,000 Period : 3 years in 12 quarterly installments Lease Rental : P83,369.67 payable quarterly in arrearsThe 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 DiscountPeriod Net Net Factor at(in Lease Lease Residual Cash 3% lease Presentqtr) Facility Rental Value Inflow Rate 1 Value 30 900,000 1 (900,000) 1.00000 (900,000)1 83,369.67 83,369.67 .97087 80,941.112 83,369.67 83,369.67 .94260 78,584.253 83,369.67 83,369.67 .91514 76,294.924 83,369.67 83,369.67 .88849 74,073.125 83,369.67 83,369.67 .86261 71,915.516 83,369.67 83,369.67 .83748 69,820.437 83,369.67 83,369.67 .81309 67,787.048 83,369.67 83,369.67 .78941 65,812.859 83,369.67 83,369.67 .76642 63,896.1810 83,369.67 83,369.67 .74409 62,034.5411 83,369.67 83,369.67 .72242 60,227.9212 83,369.67 100,000 2 183,369.67 .70138 128,611.82 ————— Total cumulative present value 0Example 6. Same parameters as Example 5 except that lease rental payments are in advance. STaCIALease 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 P100,000.3 Figures not exact due to rounding off.Exhibit 2AComputational Examples in the Determination of the Lease Income Component of Lease Rental under the Annuity MethodExample 1. Lease Facility : P1,000,000 Guarantee Deposit : 0 Period : 3 years in 12 quarterly installments Lease Rental : P93,415.88 payable quarterly in arrears

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 theBalance of the Lease Facility X Factor = Subsequent periodof 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 IncomePeriod Balance Value Repayment (A) x .03) Lease Rental0 1,000,000.00 93,415.881 936,584.12 63,415.88 30,000.00 93,415.882 871,265.76 65,318.36 28,097.52 93,415.883 803,987.85 67,277.91 26,137.97 93,415.884 734,691.61 69,296.24 24,119.64 93,415.885 663,316.48 71,375.13 22,040.75 93,415.886 589,800.09 73,516.39 19,899.49 93,415.887 514,078.21 75,721.88 17,694.00 93,415.888 436,084.68 77,993.53 15,422.35 93,415.889 355,751.34 80,333.34 13,082.54 93,415.8810 273,088.00 82,743.34 10,672.54 93,415.8811 187,782.36 85,225.64 8,190.24 93,415.8812 100,000.00 87,782.36 5,663.52 1 93,415.881 Figures not exact due to rounding off.Example 2. Same parameters as Example 1 except that lease rental payments are in advance, thus, lease rate quarterly factor is also .03. caTESD Ending Payment of Outstanding Residual Principal Lease LeasePeriod Balance Value Repayment Income Rental0 936,584.12 63,415.88 30,000.00 93,415.881 871,265.76 65,318.36 28,097.52 93,415.882 803,987.85 67,277.91 26,137.97 93,415.883 734,691.61 69,296.24 24,179.64 93,415.884 663,316.48 71,375.13 22,040.75 93,415.885 589,800.09 73,516.39 19,899.49 93,415.886 514,078.21 75,721.88 17,694.00 93,415.887 436,084.68 77,993.53 15,422.35 93,415.888 355,751.34 80,333.34 13,082.54 93,415.889 273,088.00 82,743.34 10,672.54 93,415.8810 187,782.36 85,225.64 8,190.24 93,415.8811 100,000.00 87,782.36 5,663.52 1 93,415.8812 100,000.00Example 3. Lease Facility : P1,000.000 Guaranty Deposit : P100,000 Residual Value : P100,000 Period : 3 years in 12 quarterly installments Lease Rental : P90,415.88 payable quarterly in arrears1 Figures not exact due to rounding off.Based on Exhibit A, example 3, lease rate quarterly factor is .03. Thus, Ending Payment of Outstanding Residual Principal Lease LeasePeriod Balance Value Repayment Income Rental0 900,000.001 836,584.12 63,415.88 27,000.00 90,415.882 771,265.76 65,318.36 25,097.52 90,415.883 703,987.85 67,277.91 23,137.97 90,415.884 634,691.61 69,296.24 21,119.64 90,415.885 563,316.48 71,375.13 19,040.75 90,415.886 489,800.09 73,516.39 16,899.49 90,415.887 414,078.21 75,821.88 14,694.00 90,415.888 336,084.68 77,993.53 12,422.35 90,415.889 255,751.34 80,333.34 10,082.54 90,415.8810 173,008.00 82,743.34 7,672.54 90,415.8811 87,782.36 85,225.64 5,190.24 90,415.8812 - 0 1 87,782.36 2,633.52 2 90,415.88Example 4. Same parameters as Example 3 except that lease rental payments are in advance, thus, lease rate quarterly factor is also .03. ETIDaH Ending Payment of Outstanding Residual Principal Lease LeasePeriod Balance Value Repayment Income Rental

0 836,584.12 63,415.88 27,000.00 90,415.881 771,265.76 65,318.36 25,097.52 90,415.882 703,987.85 67,277.91 23,137.97 90,415.883 634,691.61 69,296.24 21,119.64 90,415.884 563,316.48 71,375.13 19,040.75 90,415.885 489,800.09 73,516.39 16,899.49 90,415.886 414,078.21 75,721.88 14,694.00 90,415.887 336,084.68 77,993.53 12,422.35 90,415.888 255,751.34 80,333.34 10,082.54 90,415.889 173,008.00 82,743.34 7,672.54 90,415.8810 87,782.36 85,225.64 5,190.24 90,415.8811 - 87,782.36 2,633.52 2 90,415.8812 - 0 11 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 P100,000.2 Figures not exact due to rounding off.Example 5. Lease Facility : P1,000.000 Guaranty Deposit : P100,000 Residual Value : P200,000 Period : 3 years in 12 quarterly installments Lease Rental : P83,369.67 payable quarterly in arrearsBased on Exhibit A, example 3, lease rate quarterly factor is .03. Thus, Ending Payment of Outstanding Residual Principal Lease LeasePeriod Balance Value Repayment Income Rental0 900,000.001 843,630.33 56,369.67 27,000.00 83,369.672 785,569.57 58,060.76 25,308.91 83,369.673 725,766.99 59,802.58 23,567.09 83,369.674 664,170.33 61,596.66 21,773.01 83,369.675 600,725.77 63,444.56 19,925.11 83,369.676 535,377.87 65,347.90 18,021.77 83,369.677 468,069.54 67,308.33 16,061.34 83,369.678 398,741.96 69,327.58 14,042.09 83,369.679 327,334.55 71,407.41 11,962.26 83,369.6710 253,784.92 73,549.63 9,820.04 83,369.6711 178,028.80 75,756.12 7,613.55 83,369.6712 - 100,000.00 1 78,028.80 5,340.87 2 83,369.671 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.2 Figures not exact due to rounding off.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 Outstanding Residual Principal Lease LeasePeriod Balance Value Repayment Income Rental0 843,630.33 56,369.67 27,000.00 83,369.671 785,569.57 58,060.76 25,308.91 83,369.672 725,766.99 59,802.58 23,567.09 83,369.673 664,170.33 61,596.66 21,773.01 83,369.674 600,725.77 63,444.56 19,925.11 83,369.675 535,377.87 65,347.90 18,021.77 83,369.676 468,069.54 67,308.33 16,061.34 83,369.677 398,741.96 69,327.58 14,042.09 83,369.678 327,334.55 71,407.41 11,962.26 83,369.679 253,784.92 73,549.63 9,820.04 83,369.6710 178,028.80 75,756.12 7,613.55 83,369.6711 100,000.00 78,028.80 5,340.87 2 83,369.6712 - 100,000.00 11 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.2 Figures not exact due to rounding off.Exhibit 2BComputational Examples in the Determination of the Lease Income Component of Lease Rentals under the SYD MethodExample 1. Lease Facility : P1,000,000

Guaranty Deposit : 0 Residual Value : P100,000 Period : 3 years in 12 quarterly installments Lease Rental : P93,415.88 payable quarterly in arrearsBased 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 apayments (NRP) X Income = specific period———————— SYDthe 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 RepaymentPeriod Balance Value Rental Income (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 90,582.67Example 2. Same parameters as Example 1 except that lease rental payments 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 PrincipalPeriod Balance Value Rental Income 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 - - -Example 3. Lease Facility : P1,000,000 Guaranty Deposit : P100,000 Residual Value : P100,000 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, Total Lease Lease Income Period NRP/STD x Income = for the period 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 Outstanding Residual Lease Lease PrincipalPeriod Balance Value Rental Income Repayment 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 - 0 1 90,415.88 2,371.67 88,044.211 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 residual value, which in this example, is also P100,000.Example 4. Same parameters as Example 3 except that lease rental payments are in advance, thus, the computation for the lease income is also the same. SDHAEC (A) (B) (C) (D) (E) Payment of Outstanding Residual Lease Lease PrincipalPeriod Balance Value Rental Income Repayment 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 - 0 1 - - -Example 5. Lease Facility : P1,000,000 Guaranty Deposit : P100,000 Residual Value : P200,000 Period : 3 years, 12 quarterly installments Lease Rental : P83,369.67 payable quarterly in arrearsThe 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. Total Lease Lease Income Period NRP/STD x Income = for the period 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 2,569.691 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 residual value, which in this example, is also P100,000. (A) (B) (C) (D) (E) Payment of Outstanding Residual Lease Lease PrincipalPeriod Balance Value Rental Income Repayment 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 80,799.98Example 6. Same parameters as Example 5, except that lease rental payments are in advance, thus, the computation for the lease income is also the same. CDESIA (A) (B) (C) (D) (E) Payment of Outstanding Residual Lease Lease PrincipalPeriod Balance Value Rental Income Repayment 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 P200,000 residual value.

Revenue Regulation No. 5-99Issued March 16, 1999 implements Section 34(E) of the Tax Code of 1997 relative to the requirements for deductibility of bad debts from gross income of a corporation or an individual engaged in trade or business or a professional engaged in the practice of his profession. The requisites for valid deduction of bad debts from gross income are: a) there must be an existing indebtedness due to the taxpayer which must be valid and legally demandable; b) the same must be connected with the taxpayer's trade, business or practice of profession; c) the same must not be sustained in a transaction entered into between related parties enumerated under Section 36(B) of the Tax Code of 1997; d) the same must be actually charged off the books of accounts of the taxpayer as of the end of the taxable year; and e) the same must be actually ascertained to be worthless and uncollectible as of the end of the taxable year. The recovery of bad debts previously allowed as deduction in the preceding year or years will be included as part of the

taxpayer's gross income in the year of such recovery to the extent of the income tax benefit of said deduction.