BIR Ruling [DA-120-03]

April 15, 2003 BIR RULING [DA-120-03] R.A. No. 7471; RR No. 15-93; 175-95 Aurora Shipping, Incorporated 3rd Floor Prudential Bank Building 1377 A. Mabini Street Ermita, Manila Attention: Bibiano O. Reynoso Chief Executive Officer Gentlemen : This refers to your letter dated November 28, 2002 requesting for an exemption from payment of income tax for the year 2001, which was forwarded to this Office by the Department of Finance on December 23, 2002, for appropriate action. It is represented that Aurora Shipping, Inc. is a Philippine shipping enterprise with one (1) beneficially owned ship and four (4) disponently owned ships that are all Philippine-registered and engaged in the international trade. The company is accredited under MARINA Memorandum Circular No. 33-A, series of 1990. Per indorsement letter of the Maritime Industry Authority (MARINA) dated December 4, 2002, Aurora Shipping, Inc. is qualified to secure exemption from income tax under Section 4.05 Implementing Rules & Regulations of Republic Act No. 7471 (R.A. 7471). In reply, please be informed of the provisions of Section 7 of R.A. 7471, which provides: "Section 7. Exemption from Income Tax. A Philippine Shipping enterprise shall be exempt from payment of income tax on income derived from Philippine overseas shipping for a period of ten (10) years from the date of approval of this Act: Provided, That: (a) The entire net income, after deducting not more than ten percent (10%) thereof for distribution of profits or declaration of dividends, which would otherwise be taxable under the provisions of Title II of the National Internal Revenue Code, is reinvested for the construction, purchase, or acquisition of vessels and related equipment and/or in the improvement of modernization of its vessels and related equipment in accordance with the regulations; and (b) The cumulative amount so reinvested shall not be withdrawn for a period of ten (10) years after the expiration of the period of income tax exemption or until the vessel or related equipment so acquired have been fully paid, whichever date comes earlier. Any amount not so invested or withdrawn prior to the expiration of the period stipulated herein shall be subject to the corresponding income tax, including penalties, surcharges and interests. In connection with this Act, Revenue Regulations No. 15-93 was formulated to prescribe the guidelines for availment of the tax incentives enunciated therein. Pertinent provision is found in Section 6 of the said Regulations, viz. : "Section 6. Requirements for exemption from income tax. (a) Conditions for Exemption. A Philippine shipping enterprise shall be exempt from the payment of income tax on income derived directly from Philippine overseas shipping up to May 5, 2002, provided that (1) The entire net income, after deducting not more than ten percent (10%) thereof for distribution of profits or declaration of dividends, which would otherwise be taxable under the provisions of Title II of the National Internal Revenue Code, is actually reinvested in accordance with these Regulations not later than May 5, 2002 for: (i) The construction, purchase or acquisition of vessels and related equipment; and/or (ii) The improvement or modernization of its vessels and related equipment. SHTaID (2) The cumulative amount so reinvested shall not be distributed as profits or dividends until May 5, 2012, or until the vessel or related equipment so acquired have been fully paid, whichever date comes earlier. (b) Coverage of income which is exempt from income tax. The income derived from Philippine overseas shipping entitled to exemption from the payment of income tax hereunder, is limited to income from the transport of goods and/or passengers overseas. It does not include income not directly related to transport of goods and passengers overseas, such as, but not limited to, interest income, gain from sale of vessels, or charter fee/lease income. xxx xxx xxx (e) Tax Compliance Requirements. The Philippine shipping enterprise shall continue to file the prescribed income tax return(s) showing the tax exempt income and taxable income, if any, and corresponding deductions. The Philippine shipping enterprise shall also annually file with MARINA an application for income tax exemption, which shall then be forwarded to the Bureau of Internal Revenue not later than the April 15 of each year, for the issuance of the "Certificate of Income Tax Exemption", if warranted. Any income item which has been exempted from income tax pursuant to this Act cannot be subsequently deducted as bad debt or any similar deduction, against any taxable income earned after May 5, 2002." It is clear from the aforequoted provision of Revenue Regulations No. 15-93 that the exemption from payment of income tax granted to a Philippine shipping enterprise is limited only to its income derived from the transport of goods and/or passengers overseas. Further, this exemption from the payment of income tax is for a period of ten (10) years from the approval of R.A. 7471. This law was approved on May 5, 1992. In other words, the Philippine shipping enterprise can enjoy the exemption privilege until May 5, 2002. Since it is clear that the exemption from income tax on income derived directly from Philippine overseas shipping business is ten (10) years from the date of approval of the Act on May 5, 1992, you are exempt from the payment of income tax otherwise due from you effective May 5, 1992 to May 5, 2002 ( BIR Ruling No. 175-95 dated October 25, 1995 ). But the income, in order that it may be exempted from income tax, should be actually reinvested for: (1) the construction, purchase or acquisition of vessels and related equipment; and/or (2) the improvement of its vessels and related equipment, not later than May 5, 2005. However, you are required to file the prescribed income tax return(s) showing the tax exempt income and taxable income, if any, pursuant to paragraph (e) of Section 6 of Revenue Regulations 15-93. 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.) JOSE MARIO C. BUAG Deputy Commissioner