BIR Ruling [DA-114-06]

March 16, 2006 BIR RULING [DA-114-06] 241-93 Punongbayan & Araullo 20th Floor, Tower The Enterprise Center 6766 Ayala Avenue Makati City Attention: Atty. Benedicta Du-Baladad Tax Partner Gentlemen : This refers to your letter dated October 26, 2005 stating that your client, BOT Lease and Finance Phils., Inc. (BOT Lease) is a registered Financing Company duly organized and existing under and by virtue of Republic Act (R.A.) No. 8665 or the Financing Company Act of 1998 and with Registration No. ASO96-003399; that Olympus Optical Technology Phils., Inc. (Olympus) is likewise a corporation organized and existing under Philippine laws; that BOT Lease and Olympus entered into a Sale and Leaseback Agreement wherein Olympus sold to BOT Lease its equipment, as evidenced by the Deed of Sale executed by the parties, then leased back the same from BOT Lease; that on May 28, 2002, BOT Lease entered into a Lease Agreement with Olympus; that according to the Lease Agreement, BOT shall lease to Olympus, three (3) sets of equipment, particularly described as Citizen Cincom FL42-IV; that the terms of the lease is for sixty (60) months or five (5) years wherein Olympus shall pay BOT Lease quarterly rentals throughout the term in the amount of Y2,483,899, which shall be payable in continuous and successive installment payments commencing from June 18, 2005, and thereafter every due date, until the same is fully paid, or until the termination or expiration of the Lease Agreement; and that the Agreement also provides for a residual value of the lease in the amount of Y5,690,300. Based on the foregoing representations, you now request confirmation of your opinion that the Lease Agreement entered into by and between BOT Lease and Olympus is a finance lease as defined in Republic Act (R.A.) No. 8556, otherwise known as the "Financing Company Act of 1998", and therefore the lease payments are not subject to the expanded withholding tax of 5% as imposed under Section 2.57.2 of Revenue Regulations No. 17-03, amending Revenue Regulations No. 2-98. In reply thereto, please be informed that Section 2.57.2(C) of Revenue Regulations No. 17-03 provides "(C) Rentals xxx xxx xxx (2) Personal properties. On gross rental or lease in excess of Ten Thousand Pesos (P10,000.00) annually for the continued use or possession of personal property used in business which the payor or obligor has not taken or is not taking title, or in which he has no equity, except those under financial lease arrangements with leasing and finance companies authorized to operate under Republic Act No. 8556 (Financing Company Act of 1998). Five percent (5%) xxx xxx xxx" The term "Financial leasing" is a mode of extending credit through a non-cancelable lease contract under which the lessor purchases or acquires, at the instance of the lessee, machinery, equipment, motor vehicles, appliances, business and office machines, and other movable or immovable property in consideration of the periodic payment by the lessee of a fixed amount of money sufficient to amortize at least seventy percent (70%) of the purchase price or acquisition cost, including any incidental expenses and a margin of profit over an obligatory period of not less than two (2) years during which the lessee has the right to hold and use the leased property with the right to expense the lease rentals paid to the lessor and bear the cost of repairs, maintenance, insurance and preservation thereof, but with no obligation or option on his part to purchase the leased property from the owner-lessor at the end of the lease contract. ((R.A. No. 8556) llcd It is clear from the above-cited regulations that in order to be subject to the 5% expanded withholding tax, the lease of personal property refers merely to operating lease. Conversely, if the lease of personal property is under financial lease arrangements with leasing and finance companies authorized to operate under R.A. No. 8556, the same is exempt from the 5% expanded withholding tax. The lease agreement entered into by and between BOT Lease and Olympus is indeed a financial lease as the requisites for a financing lease as defined in R.A. No. 8556 are present, to wit: 1. The contract must be a non-cancelable lease; 2. Lessor purchases machineries, equipment, motor vehicles, appliances, business and office machines, and other movable or immovable property at the instance of the lessee; 3. Consideration for the said purchase is the periodic payment by lessee of a fixed amount of money; 4. Said amount must be sufficient to amortize at least 70% of the purchase price or acquisition cost over an obligatory period of not less than 2 years; 5. During the period of lease, the lessee has the right to hold and use the leased property with the right to expense the lease rentals paid to the lessor, as well as bear the cost of repairs, maintenance, insurance and preservation of the property leased; and 6. At the end of the lease contract, the lessee has no obligation or option to purchase the lease property from the owner-lessor. IN VIEW OF THE FOREGOING, this Office hereby confirms your opinion that the lease agreement between BOT Lease and Olympus is a financing lease and therefore not subject to the 5% expanded withholding tax prescribed in Section 2.57.2(C) of Revenue Regulations No. 17-03, as amending Revenue Regulations No. 2-98. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service