BIR Ruling

July 28, 1976 Transport Systems of the Philippines, Inc. 669 United Nations Avenue Manila Attention: Mr . Nicolas Katigbak Treasurer Gentlemen : This refers to your letter dated April 24, 1976 requesting a ruling on the income tax payable by you as well as the Trans-Pacific Transport Systems, Inc. (Trans-Pacific for short) of Tokyo, Japan. Investigation conducted by this Office disclosed that you are a 100% Filipino-owned corporation, the principal business of which is to transport persons, cargo, mail, goods, merchandise, materials and property of every kind and description by water, land and by air between points in the Philippines and throughout the world; that for lack of sufficient funds with which to buy vessels, you, instead, chartered the vessel "Malayan" owned by Trans-Pacific under a time charter agreement executed in Japan, in November, 1975 for a period of two (2) years from January 1, 1976 to December 31, 1977; that under the agreement, as charterer you shall pay Trans-Pacific on a monthly basis as hire the sum of $7.50 per long ton capacity of the vessel for the first twelve (12) months and $8.50 for the next twelve (12) months; that under the same agreement, as charterer, you shall provide and pay for all coals, oil fuel and water for boilers, all ports and consular charges including any foreign and local taxes, loading and unloading expenses and other related needs of the vessel; that Trans-Pacific commits to supply on its own account the vessel and gears in seaworthy condition, full crew complement, insurance and deck/engine stores; that during the first five (5) months of operations you used the vessel exclusively for foreign trade, i.e. loading and unloading cargoes between Philippine ports and foreign ports; that during certain months the vessel did not touch Philippine ports because the same was used in foreign cross-trading, i.e. voyages from one foreign port to another foreign port; and that by the resolution of the Board of that Corporation, it was decided that your entire net profit shall be used exclusively to purchase vessels and equipment. On the basis of the foregoing facts, you now posed the following queries: (1) Whether you still qualify under the provisions of R.A. No. 1407 as amended, otherwise known as the "Philippine Overseas Shipping Act of 1955" despite the fact that your only floating equipment is a vessel acquired under a time charter agreement; (2) Whether Trans-Pacific is subject to 2% income tax payable by international carriers or to the 35% withholding tax on the amount received by it under the charter agreement. In reply, I have the honor to inform you as follows: 1. As a domestic shipping company engaged in overseas shipping, you will not lose your character as such by the mere fact of having acquired only a floating equipment under a time charter. You are still engaged exclusively in overseas shipping business, the entire net income of which shall be utilized in the purchase of vessels and equipment. Your income, therefore, is exempt from income tax, pursuant to R.A. No. 1407 as amended; 2. Under the above-stated facts, your contract with Trans-Pacific is not a demise charter but one of affreightment which is a contract of special service to be rendered by the owner of the vessel (Trans-Pacific). "297. Charter of Demise Distinguished from Affreightment Contract . Charters are of two kinds, and they differ from each other every widely in their nature as well as in their terms and legal effect. A charter by whose terms the whole vessel is let to the charterer with a transfer to him of its entire command and possession and consequent control over its navigation amounts to a demise of the vessel, and the charterer will generally be considered as owner for the voyagee or service stipulated. It is like the hiring and leasing of any other kind of property, whether real or personal. The lessor yields and the hirer takes possession, and dominion and control presumably follow the rightful possession. But where the general owner retains the possession, command, and navigation of the ship, and contracts for a specified voyage, as, for example, to carry a cargo from one port to another, the arrangement in contemplation of law is a mere affreightment sounding in contract, and not a demise of the vessel, and the charterer or freighter is not clothed with the character or legal responsibility of ownership . In the first case, the charter party is a contract for the lease of the vessel ; in the other, it is a contract for a special service to be rendered by the owner of the vessel . In brief, there is a demise where the charterer is given the possession and control of the vessel, but not where he acquired merely the right to her services." (48 Am. Jur. pp. 202-203; emphasis ours) Such being the case, Trans-Pacific is considered a resident foreign corporation subject to 2% income tax on gross Philippine billings imposed on international carriers, in accordance with Section 24(b)(2) of the Tax Code, as amended by Presidential Decree No. 69. Said tax shall be based on the entire amount of charter hire corresponding to the voyage originating from the Philippines. (See Revenue Regulations No. 3-76 dated March 15, 1976). Therefore, the amount of charter hire derived from foreign cross-trading, -i.e. voyages from one foreign port to another foreign port is not subject to the 2% income tax. 3. Trans-Pacific is also subject to the 2% common carrier's tax imposed by Section 192 of the Tax Code on the amount of charter hire corresponding to outbound operations. Since you have been designated as the agents of Trans-Pacific, you should file the income and percentage tax returns in behalf of your principal and pay the taxes due from it. 4. On the other hand, you are also subject to the 2% carrier's tax on your outgoing freight receipts, pursuant to Section 192 of the Tax Code. Very truly yours, EFREN I. PLANA Acting Commissioner of Internal Revenue TAN-1456-040-3 "TAXPAYERS SHOULD INDICATE THEIR TAN IN ALL COMMUNICATIONS TO THE BIR."