Tax Consequences of Rental Payments from Offshore Lease of Container Vans

February 16, 2001 BIR RULING NO. 004-01 KPMG-Laya Mananghaya & Co . 22/F Antel 1000 Corporate Centre 139 Valero Street, Makati City Attention: Atty . Francisco G . Tagao and Atty . Ma . Louella M . Aranas Gentlemen : This refers to your letter dated November 21, 2000 stating that a Philippine corporation engaged in the logistics business (PLC) and is a member of a group of companies will purchase container vans; that for purposes of financing the purchase of the container vans, PLC will obtain a Japanese Yen loan from a Japanese branch of Standard Chartered Bank (SCB), which is a banking institution incorporated under the laws of the United Kingdom; that the loan is payable in installments with interest based on market rate; that subsequently, PLC will enter into a lease agreement for the said container vans with a non-resident offshore entity which will in turn sublease to a foreign international shipping company; that said container vans will not be imported into the Philippines and will be primarily used outside the Philippines; that PLC estimates the useful life of the container vans to be five (5) years and on this basis, the company will claim the corresponding depreciation allowance; that rental payments received by PLC from the offshore lessee shall be remitted to SCB Japanese branch as payment for the loan and interest; and that at the end of the lease agreement, the container vans will be sold to a third party to pay partly for the loan obtained to acquire the container vans; that in your supplemental letter request dated January 30, 2001, it is represented that the rental income to be derived from the lease of the container vans as well as the income that will be derived from the sale of the same at the expiry of the lease agreement, is greater than the amount of depreciation and interest expense taken out of the said transaction; that in other words, PLC would have income from the said transaction. Based on the foregoing representations you now request for confirmation of your opinion as follows: 1. The rental payments received by PLC from the offshore lessee of the container vans are subject to income tax at the rate of 32% based on net income pursuant to Section 27 (A) of the Tax Code of 1997. 2. PLC will be able to claim a depreciation deduction against its rental income based on the five year estimated useful life of the container vans in accordance with Section 34 (F) (1) of the Tax Code. DHAcET 3. The interest payment made by PLC could be claimed as a deduction from its gross income subject to its reduction by an amount equivalent to 38% of its interest income subjected to final tax, pursuant to Section 34 (B) (1) of the Tax Code. 4. The interest payment made by PLC to the SCB Japanese branch on the Japanese Yen loan is subject to withholding tax at the rate of 15% pursuant to Article 11 (2) of the RP-UK Tax Treaty considering that SCB is a banking institution incorporated under the laws of the United Kingdom. 5. Rentals received by PLC for the lease of the container vans to an offshore entity which in turn will sublease to a foreign international shipping company which will be primarily used outside the Philippines are not subject to the 10% value added tax for being beyond the Philippine taxing jurisdiction as the services are rendered outside the Philippines. 6. The foreign loan extended by SCB Japanese branch to PLC is subject to documentary stamp tax at the rate of P0.30 for every P200 or fractional part thereof based on the face amount of the loan under Section 180 of the Tax Code. 7. The income derived by PLC from the subsequent sale of the container vans is subject to Philippine income tax at the rate of 32% based on net income. In reply, please be informed as follows: 1. The rental payments received by PLC from the offshore lessee of the container vans are subject to income tax at the rate of 32% based on net income pursuant to Section 27 (A) of the Tax Code of 1997 because being a domestic corporation, it will be taxable on income derived from all sources within and without the Philippines. 2. The PLC will be able to claim a depreciation deduction against its rental income based on the estimated useful life of the container vans of five (5) years in accordance with Section 34 (F)(1) of the 1997 Tax Code. 3. The interest payment made by PLC on the loan for the purchase of the container vans is an item of deduction from its gross income subject to its reduction by an amount equivalent to 38% of its interest income subjected to final tax, pursuant to Section 34 (B)(1) of the Tax Code because the loan was incurred in connection with the trade or business of PLC. 4. The interest payments made by PLC to the SCB Japanese branch on the Japanese Yen loan is subject to withholding tax at the rate of 15% pursuant to Article 11 (2) of the RP-Japan Tax Treaty (BIR Ruling No. 142-95 dated September 13, 1995). 5. The rentals received by PLC for the lease of the container vans to an offshore entity which in turn will sublease to a foreign international shipping company which will be primarily used outside the Philippines are not subject to the 10% value added tax for being beyond the Philippines taxing jurisdiction. (BIR Ruling No. 110-97 dated October 23, 1997) 6. The foreign loan extended by SCB Japanese affiliate is subject to the documentary stamp tax of P0.30 for every P200 or fractional part thereof based on the face amount of the loan under Section 180 of the Tax Code. 7. The income derived by PLC from the subsequent sale of the container vans abroad is subject to Philippine income tax at the rate of 32% based on net income because it is a domestic corporation which is subject to income tax on income derived from all sources. This ruling is being issued based in the foregoing facts as represented. However, if upon investigation it will be disclosed that the facts are different, then this ruling shall be null and void. Very truly yours, (SGD.) RENE G. BAEZ Commissioner of Internal Revenue