BIR Ruling [DA-331-03]

October 1, 2003 BIR RULING [DA-331-03] Sec. 42; BIR Ruling No. 165-99 SGV & Co. 6760 Ayala Avenue 1226 Makati City Attention: Mr. Joel L. Tan-Torres Partner, Tax Division Gentlemen : This refers to your letter dated February 26, 2003 requesting on behalf of your client, Northern Mindanao Transport Co., Inc . ("NMTCI"), for confirmation of your opinion that the charter fees from the Bareboat Charter Agreement between NMTCI and the non-resident foreign owner of the vessel is not subject to the Philippine income tax and hence, NMTCI shall not be liable to withholding tax. It is represented that NMTCI is a corporation duly organized and existing under the laws of the Philippines; that it is engaged in, among others, shipping and carriage of goods of every description both in Philippine coastwise traffic as well as in international routes; that on January 30, 2001, NMTCI entered into a Standard Bareboat Charter Agreement for the vessel MV Alcem Lugait with Tilbury Shipping, Inc., a non-resident foreign corporation registered in Panama; that Tilbury Shipping, Inc. does not maintain any office or do permanent business in the Philippines; that MV Alcem Lugait was initially registered with the Philippine Maritime Industry Authority (MARINA), but registration has since been deleted; that the MARINA has already issued a Certificate of Deletion of MV Alcem Lugait from the Philippine Registry which took effect on January 31, 2001; that the vessel is being used exclusively overseas and not in domestic coastwise trade; that the Charter fees under the Bareboat Charter Agreement shall be paid in US Dollars at the Tilbury Shipping, Inc. account in Singapore; that the MV Alcem Lugait is currently under time charter to Holcim Trading S.A., a corporation registered in Madrid, Spain as provided under the Time Charter Agreement dated October 15, 2001; that under the said Time Charter Agreement, the vessel MV Alcem Lugait is listed as being of Panamian registry; and that the vessel is being used in overseas trade and does not enter or dock in any Philippine port. In reply, please be informed that pursuant to Section 23 of the Tax Code of 1997, viz. : "Sec. 23. General Principles of Income Taxation in the Philippines. Except when otherwise provided in this Code: xxx xxx xxx (F) A foreign corporation whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines." Such being the case, non-resident foreign corporations are subject to income tax only on income derived from all sources within the Philippines. Hence, these corporations are not subject to income tax derived from sources outside the Philippines. Section 42 of the Tax Code of 1997, enumerates what constitutes gross income from sources within the Philippines, to wit: "Section 42. Income From Sources Within the Philippines. "(A) Gross Income From Sources Within the Philippines. the following items of gross income shall be treated as gross income from sources within the Philippines: xxx xxx xxx (4) Rentals and Royalties. Rentals and royalties from property located in the Philippines or from any interest in such property . . ." Likewise Section 42(C)(4) of the same Code enumerates what constitutes gross income from sources without the Philippines. (C) Gross Income from Sources Without the Philippines . The following items of gross income shall be treated as income from sources without the Philippines: xxx xxx xxx (4) Rentals or royalties from property located without the Philippines or from any interest in such property including rentals or royalties for the use of or for the privilege of using without the Philippines, patents, copyrights, secret processes and formulas, goodwill, trademark, trade brands, franchises and other like properties." (Emphasis ours) Since Alcem Lugait is flying the flag of Panama and will not enter Philippine territory but will instead be used exclusively overseas, the vessel is properly located outside the Philippines, hence, any income derived therefrom by the owner should be considered as gross income from sources without the Philippines pursuant to Section 42(C)(4) of the Tax Code of 1997. The charter fee for the bareboat charter of MV Alcem Lugait is income from without the Philippines. Since, Tilbury Shipping, Inc. is a non-resident foreign corporation, the charter fee under the Bareboat Charter Agreement should not be subjected to Philippine tax. Likewise, NMTCI shall not be liable to withhold any tax therefrom. TcEaDS Section 28(B)(3) of the Tax Code of 1997, which provides that a non-resident owner or lessor of vessels shall be subject to a tax of four and one-half percent (4%) of gross rentals, lease or charter fees from leases or charter to Filipino citizens or corporations, does not apply in the instant case. A vessel at sea is regarded, for many purposes, as part of the territory of the country to which it belongs and whose flag it flies, and accordingly, the vessel and all on board will be governed in large measure by the law of the flag wherever the vessel may be (70 Am Jur 2d, 8). In effect, it is the extension of the country under whose flag it operates. Thus, considering that the MV Alcem Lugait has been delisted from the Philippine Registry and presently flies the flag of Panama, the income earned by Tilbury Shipping, Inc. from charter fees under the Bareboat Charter Agreement clearly does not come from sources within the Philippines. As a non-resident foreign corporation, Tilbury Shipping, Inc. is subject only to tax on income derived from sources within the Philippines, hence, the income from charter fees on the MV Alcem Lugait is income sourced from without the Philippines and is not subject to Philippine tax. (BIR Ruling No. 165-99 dated October 21, 1999) Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group