BIR Ruling [DA-625-06]

October 20, 2006 BIR RULING [DA-625-06] RMC 77-2003; 27 (D) (1); 020-2002 Oro Development Corporation 1273 Batangas corner Faraday Streets Makati City Attention: Aurelia Ma. S. Hernandez General Manager/Treasurer Gentlemen : This refers to your letter dated September 19, 2006 stating that Oro Development Corporation (ODC for brevity) is the rightful holder of mining rights granted by the Republic of the Philippines under Mining Lease Contract No. MRD-509 located at Bo. Camaching, Doa Remedios Trinidad, Bulacan; that your company recently entered into a Mines Operating Agreement with Ore Asia Mining & Development Corporation (OAMDC) to operate on your mining claim; that in consideration of the said operating agreement, your company will receive lease/royalty payments from OAMDC; that in view of the facts presented you now request for confirmatory ruling on the following concerns, to wit: 1. That said lease/royalty payment that ODC will receive is subject only to a 20% final tax on royalties; and 2. That said transaction is not subject to the 12% value-added tax. In reply, please be informed that Section 27(D)(l) of the Tax Code of provides that a final tax at the rate of twenty percent (20%) is hereby imposed upon the amount of interest on currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements received by domestic corporations, and royalties, derived from sources within the Philippines . . . . Corollarily, Revenue Memorandum Circular No. 77-2003 defines the term "royalties" in the following manner, thus: "The term "royalties" as generally used, means payment of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, or films or tapes used for radio or television broadcasting, any patent, trade mark, design, or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience." The payment that ODC will receive from OAMDC is for the lease of mining rights. It is worthy to note that mining rights is not among the property rights enumerated above where payments for the use thereof are considered royalty payments. Such being the case, the consideration will be considered as rental income subject to income tax and consequently to the withholding tax pursuant to Revenue Regulations 2-98, as amended, and not the 20% final tax as prescribed under Section 27(D)(1) of the Tax Code of 1997. CDEaAI As represented in the supplemental letter dated September 26, 2006, which is also supported by the Articles of Incorporation, it appears that the same was amended on January 3, 1973 to include among its purposes, the following: "17. To claim, buy, own prospect, conduct, and carry own the business of mining, concentrating, converting, smelting, treating, and otherwise producing and dealing in gold, silver, copper, iron, and all by-products of the foregoing; to search for, prospect and explore for ores and minerals and to locate mining claims, grounds, or lode, and record the same pursuant to the laws of the Philippines, and to bore, drill, prospect and mine in such mining claims, grounds, or lodes for metals and mineral of all kinds." Pursuant to Section 105 of the National Internal Revenue Code of 1997, as amended by R.A. No. 9337, the value-added tax is imposed on any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and to any person who imports goods. The phrase "in the course of trade or business" means the regular conduct or pursuit of a commercial activity, including transactions incidental thereto ( BIR Ruling No. 020-2002 dated May 13, 2002 ). Since ODC is leasing its mining rights that have become part of its corporate objective and existence, this Office is of the considered opinion, that its transaction with OAMDC is subject to VAT pursuant to the abovecited provision of the Tax Code and its implementing rules and regulations. WHEREFORE, both propositions being requested for confirmation of this Office are both answered in the negative. 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