BIR Ruling [DA-168-99]

March 19, 1999 BIR RULING [DA-168-99] Dolphin Carriers, Inc. Suite 405 BF Condominium Bldg. A. Soriano cor. Solana Sts. Intramuros, Manila Attention: Mr . Ericson M . Marquez Treasurer/Director Gentlemen : This refers to your letter dated August 21, 1998 and referred to this Office by the Regional Director, Revenue Region No. 6, Manila, requesting for a ruling as to whether the Dolphin Carriers, Inc. is under obligation to pay the 4.5% withholding tax on the Bareboat Charter Hire from December 15, 1997 to May 15, 1998. LLpr It is represented that Dolphin Carriers, Inc. (DCI) was established in July 1997 primarily to operate cargo vessels in the domestic trade, particularly Pure Car Carriers; that DCI was duly registered with the Securities and Exchange Commission on August 14, 1997 and was accredited with the Maritime Industry Authority (MARINA), as a domestic shipping business on August 21, 1997; that DCI saw a business opportunity when it learned about the Pure Car Carrier, "M.V. Feng Tian" which has remained anchored in Lay-Up condition at the shipyard of Tsuneishi Heavy Industries, Inc. (THII) at Balamban, Cebu for over a year; that DCI offered to put the vessel into domestic service to major car assemblers, specifically Nissan Phils. and Honda Phils. which expressed their interest to charter the vessel to ferry their cars to the Visayas and Mindanao; that on October 15, 1997, DCI entered into an agreement with Chijin Shipping Panama S.A. (Chijin) for the bareboat charter of said vessel under the new name, "M.V. Visayan Trader", for USD 30,000.00 a month; that the agreement and the other necessary documents were filed with the MARINA; that, however, during this period, the vessel underwent extensive repairs at THII to enable the vessel to engage efficiently and safely in the domestic trade; that the local currency has devalued during the latter part of July 1997; that this event resulted in the drastic decrease of the demand for cars. and other motor vehicles in the local market; that the repair of the vessel was completed in the early part of December 1997 and sailed for delivery to DCI from Balamban, Cebu on December 14, 1997 under ballast with a full crew complement; that the vessel arrived at the Manila South Harbor on December 15, 1997 where it was officially delivered to DCI; that during this time, the local currency further devalued and the local demand for cars and other motor vehicles had dropped further; that during the said period, the local assemblers decided to withhold their decision to charter the vessel and study the market conditions; that they can only commit to ship a few units of vehicles per month which were not enough to recover the monthly cost; that due to the turnabout in the economy, DCI decided to look for potential cargoes like cement in bags and roll paper; that in view of the vessel's hold carrying limitation, the vessel was found capable of carrying only cars and other small motor vehicles like motorcycles; that the vessel remained idle and non-operational at Pier 13 of the Manila South Harbor until May 16, 1998 when the vessel sailed back under ballast to Balamban, Cebu where it remains in Lay-Up anchor with only maintenance crew on board; that in view of the aforementioned circumstances, DCI and Chijin were constrained to execute a Pre-Termination Agreement cancelling the bareboat charter effective May 15, 1998; that DCI secured the approval of MARINA of the pretermination agreement due to the non-operation of the vessel; that since DCI was unable to pay and remit any bareboat charter hire to Chijin from the time the vessel was delivered to DCI and, as a precondition to MARINA's approval, the latter required DCI to submit proof of payment of the 4.5% withholding tax on the agreed bareboat charter hire of USD 30,000.00 per month from December 15, 1997 to May 15, 1998. In reply, please be informed that pursuant to Section 28(B)(3) in relation to Section 57(A) of the Tax Code of 1997, rentals, lease and charter fees derived by non-resident owners of vessels chartered by Philippine nationals and which charter or lease has been duly approved by the Maritime Industry Authority are subject to the 4.5% final tax. However, since Dolphin Carriers, Inc. was unable to pay and remit any bareboat charter hire to Chijin Shipping Panama S.A. from December 15, 1997 to May 15, 1998, Dolphin Carriers, Inc. has nothing from which it could withhold the 4.5% final tax on said charter fees. Such being the case, Dolphin Carriers, Inc. is under no legal obligation to withhold the said tax. (BIR Ruling No. 308-87 dated October 1, 1987) prLL 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, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal and Enforcement Group)