Universal Shipping Lines, Inc. Subject to 2% Common Carrier's Tax

September 25, 1968 BIR RULING NO. 019-68 Hon. Natalio P. Castillo House of Representatives M a n i l a S i r : This refers to your letter of the 18th instant requesting a ruling on a query stated as follows: cdll "The Universal Shipping Lines, Incorporated, is a corporation organized in accordance with our laws. According to its articles of incorporation, it is organized for the purpose of engaging in foreign or overseas shipping. It owns five boats, namely, the Manila Bay, Subic Bay, Iligan Bay, Dingalan Bay and Tayabas Bay. The Tayabas Bay, however, was chartered by Carlos A. Go Thong and Company which is engaged in domestic or interisland shipping. The other boats, particularly Manila Bay, Subic Bay, Iligan Bay and Dingalan Bay are operated by the corporation and all are engaged entirely in overseas shipping. "Queries: (1) Is the income of the corporation derived from vessels exclusively engaged or used in foreign or overseas shipping subject to the income tax? (2) Are the gross income or gross receipts from its operation in foreign or overseas shipping subject to 2% tax? (3) Is the income of the corporation from the charter of the vessel, Tayabas Bay, by the corporation, subject to the income tax law?" In reply thereto, I have the honor to inform you that for purposes of Republic Act No. 1407 as amended, by Republic Act No. 4146, an ocean-going vessel of Philippine Registry is considered engaged in overseas shipping when it undertakes the carriages of goods and/or passengers from the Philippines to a foreign port, or from a foreign port to either another port or a Philippine port. (B.I.R. Ruling No. 66-055) A domestic shipping company will not lose its character as a corporation engaged in overseas shipping merely because it charters some of its vessels (voyage or time) to foreign shipping companies for the purpose of loading or unloading cargo in the Philippines (Id.). Likewise, a domestic shipping company, like your client, the Universal Shipping Lines, Inc. will not lose its character as a corporation so engaged in overseas shipping by the mere fact of its having allegedly chartered one of its vessels, the Tayabas Bay" to Carlos A. Go Thong and Co., which is another domestic shipping company engaged in interisland shipping. Consequently, the income derived by the Universal Shipping Lines, Inc. from its business of transporting freight and passengers overseas falls within the contemplation of tax-exempt income realized from "exclusive overseas shipping business" under Republic Act No. 1407 as amended. However, the income derived by the Universal Shipping Lines, Inc. from the chartering of its ocean going vessels cannot be considered as income derived from its overseas shipping business within the purview of the said Act, since the possession and control of the vessels chartered are transferred to the person or entity to whom said vessels are leased and therefore, your client could not possibly have used them in its business of transporting freight and passengers overseas. Such income, having been derived by your client from the chartering of one of its ocean-going vessels is subject to income tax. The foregoing ruling is applicable only to taxable years prior to June 30, 1968. By the passage of R. A. No. 5423 on June 15, 1968, the exemption from income tax of overseas shipping companies had been repealed and in accordance with Section 10 of said Act, overseas shipping companies are liable to income tax on income derived by them from taxable years beginning after June 30, 1968. Moreover, while the Universal Shipping Lines, Inc. is exempt from income tax on its income derived from exclusive overseas shipping business, it is nevertheless subject to the 2% common carrier's tax prescribed by Section 192 of the Tax Code, on its monthly gross receipts derived from outgoing freight and passenger service, for the reason that R. A. 1407 as amended does not specifically exempt owners of vessels engaged in foreign trade or overseas shipping from the payment of said tax. Very truly yours, (SGD.) MISAEL P. VERA Commissioner of Internal Revenue