In the realm of Philippine taxation, administrative precision is as vital as the payment itself. For lessors and lessees, identifying the correct Alphanumeric Tax Code (ATC) is a prerequisite for accurate filing of Bureau of Internal Revenue (BIR) forms. When dealing with advance rental payments, the classification depends primarily on whether the payee is an individual or a corporation.
The Nature of Advance Rentals
Under Philippine tax law, advance rentals are generally taxable in the year received, regardless of the accounting method used (cash or accrual), provided the lessor has unrestricted control over the funds. This triggers the obligation for the lessee (as the withholding agent) to deduct and remit the Creditable Withholding Tax (CWT).
Primary ATCs for Rental Income
The ATC serves as a shorthand for the BIR to categorize the nature of the income and the applicable tax rate. For rentals of real property, the tax rate is consistently 5%, but the code changes based on the legal personality of the lessor:
| Nature of Income | Payee (Lessor) | ATC | Tax Rate |
|---|---|---|---|
| Rentals (Real Property) | Individual | WI100 | 5% |
| Rentals (Real Property) | Corporation | WC100 | 5% |
Note: If the advance payment includes rentals for personal property (machinery, equipment, etc.), the same ATCs (WI100/WC100) are typically applied, as "Rentals" covers both real and personal property under current BIR regulations.
Application in BIR Forms
The ATC must be correctly indicated in the following periodic filings:
- BIR Form 1601-EQ: The Quarterly Remittance Return of Creditable Income Taxes Withheld.
- BIR Form 0619-E: The Monthly Remittance Form for Creditable Income Taxes Withheld (used for the first two months of the quarter).
- BIR Form 2307: The Certificate of Creditable Tax Withheld at Source. This is the document the lessee provides to the lessor so the latter can claim the 5% as a tax credit against their income tax liability.
Key Legal Considerations
Timing of Withholding: Under Revenue Regulations, withholding must occur at the time the income is paid, or when it becomes "payable" (accrued), whichever comes first. For advance rentals, since payment occurs upfront, the tax must be withheld at the moment of payment.
Security Deposits vs. Advance Rent: It is crucial to distinguish between the two.
Advance Rent: Taxable and subject to withholding (WI100/WC100).
Security Deposit: If the deposit is purely to ensure faithful performance of the contract and is refundable, it is not subject to withholding tax. However, if the contract stipulates that the deposit will be applied to the last month's rent, it effectively becomes advance rent and must be withheld upon payment.
Grossed-up Amounts: If the lease agreement states that the rental is "net of taxes," the lessee must "gross up" the amount to ensure the 5% withheld is calculated on the correct base.
Summary Checklist for Lessees
- Identify if the lessor is an individual (Use WI100) or a corporation (Use WC100).
- Apply the 5% withholding rate on the total advance rental amount.
- Issue BIR Form 2307 to the lessor within 20 days following the close of the taxable quarter, or upon request.
- Ensure the advance rental is not confused with a refundable security deposit to avoid over-withholding.
Would you like me to draft a sample computation for an advance rental payment involving both a security deposit and a VAT-inclusive monthly rate?