Antonio A. Aluquin

December 7, 2009 BIR RULING [DA-(C-300) 741-09] Section 122; BIR RULING NO. 002-06 Antonio A. Aluquin 5B Thereon Condominium Nicanor Garcia Street Makati City Sir : This refers to your letter dated May 20, 2009 requesting for a ruling as to the treatment of rental income from Operating Lease Financing Schemes. It is represented that DBP-Maritime Leasing Corporation [(DBP-MLC), formerly NDC-MLC] is a Government Owned and Controlled Corporation (GOCC) which is presently engaged in financing the importation and leasing of vessels under a Finance Lease Agreement. The company would like to engage in Operating Lease Financing Schemes for which the tax component is a determining factor. In reply, please be informed that income derived from a finance leasing activity by a finance leasing company registered under the Financing Company Act is subject to the Gross Receipts Tax (GRT) applicable to financing companies in general. In computing the taxable gross receipts from a finance leasing arrangement that is subject to GRT, only the interest income or the interest component of the lease payment is included. The portion of the mental or periodic payment that pertains to the recovery of the principal or amortization for the cost of the property being leased is not considered taxable gross receipts subject to GRT. In contrast, payments made under an operating lease arrangement are subject to GRT for the full amount. The amounts paid by the lessee for certain expenses, which are properly for the account of the lessor, are deemed to have been received by the lessor as part of its rental income which is subject to GRT. Previously, this was excluded from GRT under Revenue Regulations No. 19-86. The new law, however, impliedly removed this exclusion by including a catch-all provision that imposes a GRT on practically all items of income received by finance leasing companies. The rate of GRT applicable to this type of income may follow the rate that is applicable to the stipulated rental. HcSCED Revenue Regulations 9-2004 provides in part: "SECTION 2. Definition of Terms. For purposes of these Regulations, the terms enumerated hereunder shall have the following meaning: xxx xxx xxx 2.7. Financing Companies shall refer to corporations except banks, investments houses, savings and loan associations, insurance companies, cooperatives, and other financial institutions organized or operating under other special laws, which are primarily organized for the purpose of extending credit facilities to consumers and to industrial, commercial, or agricultural enterprises, by direct lending or by discounting or factoring commercial papers or accounts receivables, or by buying and selling contracts, leases, chattel mortgages, or other evidences of indebtedness, or by financial leasing of movable as well as immovable properties (R.A. No. 5980 as amended by R.A. No. 8556) xxx xxx xxx SECTION 4. Imposition of Gross Receipts Tax on Other Non-bank Financial Intermediaries. Gross receipts of other non-bank financial intermediaries (non-bank financial intermediary not performing quasi-banking functions) doing business in the Philippines shall be subject to GRT at rates and on items of income provided hereunder: (a) From interest, commissions, discounts and all other items treated as gross income under the Code 5% (b) On interests, commissions and discounts from lending activities as well as income from financial leasing, on the basis of remaining maturities of the instruments from which such receipts are derived: Maturity period is five (5) years or less 5% Maturity period is more than five (5) years 1% In the case of financial leasing, the taxable gross receipts shall consist only of interest income (recovery of principal not included). However, in the case of transactions under operating lease agreements, the gross receipts is the gross rental amount. Whether the lease transaction is "finance lease" or "operating lease" shall be determined by the contents of the document evidencing the lease agreement or, in short, the substance of the agreement rather than the form used to evidence such agreement between the lessor and the lessee. Provided, however, that in case the maturity period referred to in paragraph (b) is shortened thru pretermination, then the maturity period shall be reckoned to end as of the date of pretermination for purposes of classifying the transaction and the application of the correct tax rate. DcaECT Provided, further, that the generally accepted accounting principles as may be prescribed by the Securities and Exchange Commission for other non-bank financial intermediaries (non-bank financial intermediaries not performing quasi-banking functions) shall be the basis for the calculation of the taxable gross receipts. Provided, finally, that the financial statements from which the basis for deriving the taxable gross receipts is to be determined must be prepared likewise in accordance with the generally accepted accounting principles as may be prescribed by the Securities and Exchange Commission (SEC) for other non-bank financial intermediaries (Non-bank financial intermediaries not performing quasi-banking functions). Nothing in these Regulations shall preclude the Commissioner from imposing the same tax herein provided on persons performing similar activities." The GRT rate applicable to the interest income received by finance leasing companies varies depending on the remaining maturity of the lease: 5% if the remaining lease period is five years or less, or 1% if the remaining lease period is more than five years. 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service