SGV & Co.

October 6, 2009 BIR RULING [DA-(C-225) 580-09] Sec. 28 (B) (4); RR 2-98; DA-229-06; 438-99; 080-05; 033-01; 149-00 SGV & Co. 6760 Ayala Avenue Makati City Attention: Atty. Jules E. Riego Principal, Tax Services Gentlemen : This refers to your letter dated July 27, 2009, requesting in behalf of your client, Nikko Metals Philippines, Inc. ("NMPH" for brevity), for a confirmation of your opinion that the lease payments of NMPH to Mitsui Bussan Corp. ("MBC") and Permelec Electrode Ltd. ("Permelec") are subject to 7.5% final withholding tax under the Tax Code, as amended. It is represented that NMPH with office address at 177 East Science Avenue, Special Export Processing Zone, Laguna Technopark, Bian, Laguna, is a PEZA-registered enterprise and is a wholly owned subsidiary of Nippon Mining & Metals Co. Ltd. of Japan; that as an export-oriented enterprise, it is primarily engaged in business of the manufacturing, importing, exporting and selling of copper foil which is being used in printed circuit boards, CD players, cameras, etc.; that NMPH makes use of Dimensionally Stable Electrodes (DSE) Model molds which the Company is leasing from Mitsui Bussan Corp. ("MBC") and Permelec Electrode Ltd. ("Permelec"), both nonresident foreign corporations based in Japan, to be able to manufacture and subsequently export the said copper foil; that the said DSE Model molds is being used by NMPH in conjunction with their equipment in the production of the copper foils. In connection therewith, you now request for confirmation of your opinion that lease payments on the DSE Models made by NMPH, a domestic corporation, to MBC and Permelec, both companies organized and existing under the laws of Japan, are subject to the 7.5% Final Withholding Tax. In reply thereto, please be informed that pursuant to Section 28 (B) (1) of the Tax Code of 1997, as amended, provides: aATESD "SEC. 28. Rates of Income Tax on Foreign Corporations. xxx xxx xxx (B) Tax on Nonresident Foreign Corporation. (1) In General. Except as otherwise provided in this Code, a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to thirty-five percent (35%) of the gross income received during each taxable year from all sources within the Philippines, such as interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains subject to tax under subparagraph 5(c): Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." (emphasis ours) However, the same Section also provides that payments received by non-residents owners for the lease of aircrafts machineries and other equipment are subject to a tax of 7 1/2% of gross rentals or fees, thus: "SEC. 28. Rates of Income Tax on Foreign Corporations. xxx xxx xxx (B) Tax on Nonresident Foreign Corporation. xxx xxx xxx (4) Nonresident Owner or Lessor of Aircraft, Machineries and Other Equipment. Rentals, charters and other fees derived by non-resident lessor of aircrafts, machineries and other equipment shall be subject to a tax of seven and one-half percent (7 1/2%) of gross rentals or fees." The above provision is implemented by Section 2.57.1 (I) (4) of Revenue Regulations No. (RR) 2-98, as amended, which states that: "(I) Income Derived from all Sources Within the Philippines by Non-Resident Foreign Corporation The Following shall be subject to final withholding tax based on the gross amount of income and at the rate prescribed therefor: xxx xxx xxx (4) On the gross rentals, charter and other fees derived by non-resident lessor of aircraft, machineries and other equipment Seven and a half percent (7.5%) xxx xxx xxx." This Office had occasion to rule in BIR Ruling [DA-229-06] dated April 11, 2006 that the lease payments of a domestic company to a nonresident corporation for the lease of machineries and equipment is subject to the 7.5% Final Withholding Tax. In clarifying the tax implications of the lease payments, the BIR held that: aCTHEA "In view of the withdrawal of PAGCOR's exemption from income tax, rental payments to RGB under the Agreement are now subject to the 7.5% withholding tax imposed on nonresident lessors of machineries and other equipment under Section 28(B)(4) of the Tax Code, which states: xxx xxx xxx Accordingly, this Office is of the opinion as it hereby holds that payments to RGB under the Agreement which accrued beginning November 1, 2005 are subject to a final withholding tax of 7.5% and the 10% VAT pursuant to Sections 28(B)(4) and 13(2)(b) of Presidential Decree No. 1869 in relation to Section 108 of the Tax Code of 1997. The rate of VAT, however, was increased from 10% to 12% beginning February 1, 2006." Such being the case, and considering that the lease payments of NMPH are being paid to nonresident foreign corporations based in Japan for the lease of machineries, this Office hereby confirms your opinion that the said lease payments are subject to the 7.5% Final Withholding Tax under Section 28 (B) (4) of the Tax Code of 1997, as amended, and as implemented by Section 2.57.1 (I) (4) of RR 2-98, as amended. This ruling is 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service