BIR Ruling [DA-031-98]

February 3, 1998 BIR RULING [DA-031-98] Clarence D. Guerrero Law Office 10th Floor TMBC Building 6772 Ayala Avenue Makati City Attention: Atty . Clarence D . Guerrero Gentlemen : This refers to your letter dated August 18, 1997 requesting on behalf of your client, EAGA SHIP MANAGEMENT COMPANY, INCORPORATED for ruling as to whether it is subject to a withholding tax of 4.5% on the rental of a vessel to be paid by it to a foreign shipowner. cdti It is represented that Eaga Ship Management Company, Inc. (EAGA) is a corporation organized on June 4, 1996 to engage in inter-island shipping, specializing on transporting livestock animals from Mindanao to Manila; that in order to serve best its clientele, Eaga arranged for the importation of its second vessel, but, because of its limited capital, Eaga decided to enter into a Lease-Purchase Agreement for M.V. Irish Provider with Vroon International B.V. of Netherlands; that the pertinent provisions of the aforementioned agreement, are as follows: "xxx xxx xxx "(9) HIRE "(1) The Charterers shall pay the Owners' a monthly hire of USD 25,000.00 plus interest calculated in accordance with Annex I. Payment shall (subject to Clause 9(3) hereof) be made by the Charterers to the Owners monthly in arrears, time commencing on the date and time of delivery of the Vessel by the Owners to the Charterers, with continuing payments every month from the date of delivery until the date and time of termination of this Charter. "(2) All payments hereunder will be deemed to have been made when payment is received at the bank designated in Box 24. "(3) Should the Vessel be lost or missing or become an actual total loss or a constructive total loss, hire shall cease from the date and time when she was lost or last heard of or the date and time when such total loss or constructive total loss is deemed to have occurred under Clause 11(4). "(4) In the event of any default in payment of hire beyond a period of seven (7) business days in London, the Owners shall notify the Charterers accordingly, in writing. If within seven (7) business days in London thereafter the Owners have not received Charter hire by this means then the Owners shall, subject to Clause 24 hereof, have the right of withdrawing the Vessel from the service of the Charterers without noting a protest and without interference from any court or any formality whatsoever and without prejudice to any claim the Owners may otherwise have against the Charterers under this Charter. "(5) Any delay in payment of hire shall entitle the owners to an interest on the unpaid amount of hire of labor + four percent (4%) per annum at that time calculated on a day to day basis. xxx xxx xxx "(28) HIRE/PURCHASE AGREEMENT On the expiration of this Charter it is agreed that the Charterers will purchase the vessel with everything belonging to her against payment of the Principal Outstanding in accordance with Annex 1 provided the Charterers have (subject to the terms of Clause 6) paid in full all installments of the Charter hire and all interest (if any) accrued thereon. If the payment of the last installment due is delayed for less than 7 running days or for any reason beyond the Charterers' control, the right of withdrawal under the terms of Clause 9(4) shall not be exercised. However, any delay in payment of the last installment due shall entitle the Owners to an interest on the unpaid amount at the rate calculated in accordance with Clause 9(5). xxx xxx xxx" In reply, please be informed that the so-called "rentals" to be paid by your client to the foreign shipowner are considered installments if the sale will be ultimately consummated. Accordingly, they are not subject to the 4.5% final tax prescribed by Section 25(b)(3) of the Tax Code, as amended, [now Section 28(B)(3) of the Tax Code of 1997] which imposes said tax on rentals, lease and charter fees payable to non-resident owners of vessels chartered by Philippine nationals. (BIR Ruling No. 384-92 dated December 28, 1992) In this connection, however, should your client fail to exercise the option to purchase and, therefore, the foregoing transaction shall remain a lease agreement, the rentals shall be subject to 4.5% final tax. To guarantee the payments of said tax, your client is requested to file within ten (10) days from receipt hereof a surety bond the amount of which shall be determined by the Bureau. If you fail to do so, we shall require you to pay the aforesaid 4.5% tax prescribed by Section 25(b)(3) of the Tax Code, as amended. [now Section 28(B)(3) of the Tax Code of 1997] cdta Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal & Enforcement Group