BIR Ruling [DA-241-96]

July 15, 1996 BIR RULING [DA-241-96] Lorenzo Shipping Corporation Pier 6/10, North Harbor Manila Attention: Mr. Jose Go, Jr. Executive Vice-President Gentlemen : This refers to your letter dated July 9, 1996 requesting for a ruling as to whether you are subject to a withholding tax of 4.5% on the rental of a vessel to be paid by you to a foreign shipowner. It is represented that you are a domestic corporation engaged in the shipping industry; that you have entered into a Bareboat Charter with Milky Way Shipping, Inc. of Panama for the lease of "MV Lorcon Davao" for a period of eighty four (84) months or seven (7) years at a monthly rental of U.S. $144,000.00; that at the end of the lease period you have the option to purchase the said vessel at U.S. $100,000.00; and that the vessel had been registered with the Maritime Industry Authority (MARINA) and is serving some Mindanao Ports. DSIaAE In reply, please be informed that the Bareboat Charter entered into by you with Milky Way Shipping, Inc. of Panama is in reality a contract of purchase and sale. It has been ruled that "the fact that the price of the machine was fixed in the contract makes the latter not a lease but a purchase and sale because in contracts of lease, as distinguished from those of purchase and sale, it is plain redundancy to fix or make any mention of the price of the things given in lease, (H.E. Heacock & Co., vs. Buntal Manufacturing Co., 66 Phil. 245) Moreover, contracts in the form of leases either with options to the buyer to purchase for a small consideration at the end of the term, provided the so-called rent has been duly paid, or with stipulations that if the rent throughout the term is paid, title shall thereupon vest upon the lessee, are leases in name only. The so-called rents must necessarily be regarded as payment of the price in installments, since the due payment of the agreed amount results by the terms of the bargain, in the transfer of title to the lessee. ( Teodorica R. vda. de Jose vs. Julio Veloso Barrucco , 67, Phil. 191) In view thereof, the so-called "rentals" to be paid by you 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 which imposes said tax on rentals, lease and charter fees payable to non-resident owners of vessels chartered by Philippine Nationals, (BIR Ruling No. 046-91 dated March 20, 1991) In this connection, however, should you fail to exercise the options 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, you are requested to file within ten (10) days from receipt hereof a surety bond the amount of which shall be determined by the Bureau; and for this purposes, you may get in touch with the Chief, Law Division. 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. DCcHIS Very truly yours, (SGD.) ALICIA P. CLEMENO Assistant Commissioner (Legal Service)