ROBINSONS MALLS has special mall hours on Nov. 1 to mark All Soul’s Day. The following Robinsons Malls in Luzon will open from noon until regular closing hours. These include Robinsons Galleria, Robinsons Magnolia, Robinsons Place Manila, Robinsons Otis, Robinsons Galleria South, Robinsons Place Dasmariñas, Forum Robinsons, Robinsons Place Gen Trias, Robinsons Place Imus, Robinsons Town Mall Los Baños, Robinsons Place Malolos, Robinsons Metro East, and Robinsons Sta. Rosa. Regular mall hours will be followed in the following malls: Robinsons Angeles, Robinsons Place Antipolo, Robinsons Cainta, Robinsons Place Ilocos Norte, Robinsons Place Las Piñas, Robinsons Place Lipa, Robinsons Luisita, Robinsons Town Mall Malabon, Robinsons Novaliches, Robinsons Place Naga, Robinsons Place Pangasinan, Robinsons Place Santiago, Robinsons Starmills, Robinsons Tagaytay, Robinsons Place Tuguegarao, and Robinsons Place Palawan. In the Visayas, the following malls will be open from noon until regular closing hours: Robinsons Place Bacolod, Robinsons Cybergate Cebu, Robinsons Place Dumaguete, Robinsons Fuente Cebu, Robinsons Galleria Cebu, Robinsons Place Iloilo, Robinsons Place Jaro, Robinsons North Tacloban, Robinsons Place Ormoc, Robinsons Place Pavia, Robinsons Place Tacloban, Robinsons Place Antique, and Robinsons Place Roxas. At Robinsons Cybergate Bacolod, regular mall hours will be implemented. The following Mindanao malls will be open from noon until regular closing hours: Robinsons Place Butuan, Robinsons Cagayan De Oro, Robinsons Cybergate Davao, Robinsons Place Tagum, and Robinsons Place GenSan. Regular mall operations will be implemented at Robinsons Place Valencia and Robinsons Place Iligan. For details visit www.robinsonsmalls.com.
DREAMPLAY at City of Dreams will be holding a Spookfest from Oct. 31 to Nov. 1 again this year. Now on its fourth year, Spookfest 2019 will include adventures, games, prizes, and other surprises. For P1, 499, the Spookfest VIP Package is inclusive of an all-day pass at DreamPlay’s attractions with express check-in and attraction entry; and passes to DreamWorks’ Halloween movie, a pumpkin cookie-making session and other activities such as “Shrek or Treat” Scavenger Hunt pass, Bean Bag Toss Competition, and “Shrek It Out” costume contest. The package also comes with freebies such as a special Spookfest tote bag and an Ogre Scream Milk Shake. The “Shrek or Treat” Scavenger Hunt will be held at 1 and 5 p.m. on both days. Children competing in groups have to solve the mystery of the Missing Pumpkin Puzzle. Each of the puzzle comes with a prize, and the first group to piece together their pumpkin puzzle is in for a bigger surprise. An overnight stay at Nobu Hotel Manila with breakfast for two and a “Best in Costume” DreamPlay plaque are at stake for kids who will come in their scariest and most creative Halloween costumes for the “Shrek It Out” costume contest on Nov. 1 at 3 p.m. For an additional P150 and/or P250, VIP pass holders can also participate in a face-painting session and/or a pumpkin-coloring activity, respectively. DreamPlay is located at the upper ground floor at The Shops at the Boulevard. Meanwhile, The Garage’s VR Zone will hold The Fright Feast from noon to midnight on Nov. 1. Thrill-seekers can play the Hospital Escape Room (which requires a minimum of two players and maximum of four) with the group escaping with the shortest time possible winning P2,500 worth of vouchers valid at City of Dreams Manila’s operated food and beverage outlets. Meanwhile, Chocol8 at The Garage is offering a selection of handcrafted Halloween chocolates until Nov. 3. Choices include a box of Halloween Pralines (P999 net) in shapes such as skulls and Halloween pumpkins; as well as other Halloween-themed treats. For inquiries, call 8800-8080 or e-mail guestservices@cod-manila.com or visit www.cityofdreamsmanila.com.
NEW WORLD Makati Hotel’s Café 1228 offers a fang-tastic buffet feast for lunch and dinner from Nov. 1 to 3. Halloween-themed sweet treats at the dessert station and loot bags with Ovaltine snacks and products will be given to diners for the duration of the promotion. The Fang-tastic Feast is priced at P2,888 inclusive of taxes and service charge. For bookings call 8811-6888 extension 3339 or e-mail FBreservations.manila@newworldhotels.com.
Here’s a quick glance at how PSEi stocks fared on Monday, October 28, 2019.
PRESIDENT Rodrigo R. Duterte will take extreme action against water concessionaires that fail to address the ongoing water crisis, up to and including cancellation of their contracts, his spokesman said.
In a briefing Monday, Salvador S. Panelo said water concessionaires need to “shape up or ship out” if they prolong the water crisis in Metro Manila and the government will be compelled to act against them.
“I suppose the fact that they have not undertaken proper measures that will prevent the evolution of this upcoming crisis again would be a factor that would make the President decide on drastic action against them,” Mr. Panelo said, noting that Mr. Duterte has previously considered a course of action that includes “tanggalin yung kontrata” (contract cancellation).
The two concessionaires responsible for providing water to the capital are Maynilad Water Services, Inc. (Maynilad) and Manila Water Co. (Manila Water).
The crisis began earlier this year when water levels in Angat Dam, the ultimate source of the capital’s water, and La Mesa Dam, which is fed by Angat, fell below critical level. Water levels in Angat Dam continue to recede with the Philippine Atmospheric, Geophysical and Astronomical Services Administration (PAGASA) saying over the weekend that Angat’s water level is at 185.64 meters, down 0.23 meters from the day before but still a little above the critical level of 180 meters. The weather service added that it forecasts a water crisis in the next two months.
The water shortage experienced in Metro Manila and nearby provinces has prompted both service providers to implement daily rationing as long as 12 hours.
The government is currently moving forward on the Kaliwa Dam Project as a long-term solution for Metro Manila’s supply needs, supplementing Angat. The project is set to finish in 2023 and will be built by China Energy Engineering Corp.
Asked about the Kaliwa Dam project at an oath-taking ceremony, the President told reporters in Malacañang that he is considering the use of “police power” including property confiscation to see the project through, if warranted.
The project has been opposed by legislators and non-government organizations, saying that the construction of the dam will affect the homes and livelihood of indigenous peoples in Rizal and Quezon. Some have also raised questions on the process behind the issuance of an environmental clearance certificate (ECC) by the Department of Environment and Natural Resources (DENR) to the Metropolitan Waterworks and Sewerage System (MWSS).
An investigation into Kaliwa Dam is pending in the House.
Mr. Panelo said that if the House investigation shows that it will produce no benefits, the project could be shut down.
“If the findings show that it against the interest of the people there, then it can be rescinded If the findings show that it is against the interest of our country, then the Chinese government will understand as it would do the same if they are placed in the same situation,” he said.
He added that a Japanese firm has written to explain the project’s drawbacks, and that he has forwarded the letter to the agencies concerned. — Gillian M. Cortez
Part 1
Philippine Financial Reporting Standard (PFRS) 16 is the new accounting standard for lease of assets or arrangements that contain a lease. It became effective on Jan. 1. It replaces Philippine Accounting Standard (PAS) 17, which means that entities reporting under PFRS shall apply this new standard in their lease transactions starting on the effectivity date.
On the other hand, taxation for leases generally remains unchanged since the issuance of Revenue Regulations (RR) No. 19-86 on Jan. 1, 1987 which prescribes the rules to govern the tax treatment of lease agreements.
As we all know, accounting standards and tax rules differ in many instances, and PFRS 16 is no exception. The purpose of this article is to provide a useful reference for taxpayers in knowing and dealing with the differences of accounting and tax rules for leases.
SHORT-TERM LEASE AND LEASE FOR LOW VALUE ASSETS
PFRS 16 defines short-term lease as a lease with a lease term of 12 months or less but taking into consideration the renewal options. On the other hand, lease for low-value assets is a lease for which the underlying asset is of low value (i.e., $5,000 or equivalent for a new similar asset).
ACCOUNTING TREATMENT FOR LESSEE AND LESSOR
Leases of these kind are accounted for in a way that is similar to current operating lease accounting — which means that payments are recognized by the lessee as an expense or cost and revenue by the lessor on a straight-line basis or another systematic basis that is more representative of the pattern of the benefits. Simply put, lease expense or revenue is generally reported equally over the lease term. However, for short-term lease, the lessee has the option to recognize right-of-use asset (ROUA) and a corresponding lease liability instead of the straight-line basis. The discussion on accounting and tax treatment for ROUA and lease liability will be tackled in part 2 of this article.
When the lessee pays advance rental and security deposit, the lessee shall account these as asset at the time of payment. These shall be reported as lease expense/cost in the period when applied to lease. On the part of the lessor, the advance/prepaid rental and security deposit shall be recorded as liability in the period of receipt and shall be reported as lease income in the period when applied to lease.
TAX RULES
RR No. 19-86 defines a lease as 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 (which may be definite or indefinite). The equivalent of short-term lease or lease for low value assets for tax purposes is an operating lease.
Operating lease is defined in RR No. 19-86 as a contract under which the asset is not wholly amortized during the primary period of the lease, and where the lessor does not rely solely on the rentals during the primary period for his profits but looks for the recovery of the balance of his costs and for the rest of his profits from the sale or re-lease of the returned asset of the primary lease period.
LESSEE TAXATION
In an operating lease, the lessee may deduct the amount of rental actually due under the lease agreement during the year. This is subject to 5% expanded withholding tax (EWT).
In addition to the rent actually paid or payable to the lessor, the lessee should also report all the expenses/costs which under the terms of the agreement the lessee is required to pay or for the account of the lessor, as additional rental expense/cost which is also subject to 5% EWT. An example is the real property tax on the leased property if paid by the lessee should be claimed by the lessee as rental expense/cost and not as tax expense.
In case the lessee pays advance/prepaid rentals, if the lessee adopts the accrual basis of accounting, according to tax rules, the lessee should treat the advance/prepaid rentals as an asset subject to 5% EWT at the time of payment. These shall be claimed as deductible at the time of its application to the lease.
If the lessee, on the other hand, adopts the cash basis of accounting, the advance/prepaid rentals are deductible items at the time of payment provided the advance/prepaid rentals do not extend beyond 12 months. Otherwise, advance rentals/prepaid rentals corresponding to the period beyond 12 months shall be accounted for as an asset and will be claimed as deductible items at the time of its application to the lease. For withholding tax purposes, the entire advance/prepaid rentals including those for the period beyond 12 months shall be subject to 5% EWT at the time of payment.
With respect to security deposit for the faithful performance of certain obligations of the lessee, the lessee, whether adopting accrual or cash basis of accounting, should treat the same as an asset and not subject to 5% EWT at the time of payment because of its being in the nature of a conditional deposit. These deposits shall be claimed deductions subject to 5% EWT at the time of its application to the lease.
LESSOR TAXATION
Generally, the taxation of the lessor in operating lease is similar to that of the lessee but with opposite effects.
The lessor should report as taxable income only the rental payments that it is entitled to receive for the year, as provided under the lease agreement. For VAT purposes, the lessor shall report the lease income based on gross receipts or on collection basis.
Costs/expenses related to the leased property that are the responsibility of the lessor, if paid by the lessee, are deemed additional rental income of the lessor which is also subject to VAT (e.g., real property taxed on leased property that are paid by the lessee is reported as part of the lessor’s taxable rental income).
For advance/prepaid rentals, lessor taxation is different from the lessee because these are reported as taxable income of the lessor and also for VAT purposes in the year when received whether the lessor is using the accrual or the cash method of accounting.
Security deposit when received by the lessor, whether the lessor is using the accrual or the cash method of accounting, should be treated as a liability at the time of receipt and will be recognized as income which is subject to VAT at the time of application to lease.
DEALING WITH THE DIFFERENCES
For accounting purposes, the lease income/expense will be averaged on a straight-line basis over the lease term such that the monthly or annual lease income/expense is the same for the entire period of the lease including the rent-free period. For tax purposes, the actual lease income/expense for each period indicated in the lease contract should be reported as lease income/expense for that period. The difference between accounting and tax usually happens when there is escalation of the lease amount over the lease term or when a rent-free period is present.
The monthly/annual difference of lease income/expense shall be accounted for by the lessee and lessor as a temporary difference with the recognition of either deferred tax asset or liability as the case maybe. The reason why the difference is just temporary is that at the end of the lease term the total lease income/expense is equal under accounting and tax purposes.
To illustrate, say for example the lease agreement states that the lease term is for six months, the first month of the term is free, the second month’s lease is P20,000 and shall increase by P20,000 every month.
Shown in the table below the monthly lease income/expense for accounting and tax purposes.
The difference in lease income/expense should be reported in the schedule of reconciliation of net income per accounting books against taxable income of the income tax return.
In the same vein, the difference in the accounting and tax treatment of advance/prepaid rentals for both lessee and lessor is considered a temporary difference with the recognition of either deferred tax asset of liability as the case maybe and the difference shall be reported in the reconciliation schedule of the income tax return.
The study of difference on lease contracts other than short-term leases and low value asset particularly the accounting of ROUA and lease liability and its equivalent tax treatment will be discussed in part 2 of this article next week.
Let’s Talk Tax is a weekly newspaper column of P&A Grant Thornton that aims to keep the public informed of various developments in taxation. This article is not intended to be a substitute for competent professional advice.
Nikkolai F. Canceran is a director from the Tax Advisory & Compliance division of P&A Grant Thornton, the Philippine member firm of Grant Thornton International Ltd.
