BIR Ruling No. 023-80

October 17, 1980 BIR RULING NO. 023-80 24 b-v 000-00 23-80 Lapez and Gonzaga Law Office Suite 301-A Trade Center Bldg. P. Faura Corner Mabini Street Ermita, Manila Attention : Atty . Ramon M . Lapez Gentlemen : This refers to your letter dated October 7, 1980 requesting a ruling whether your client, Central Shipping Company, Inc., is subject to the 4 % final tax on the alleged "rentals" being paid by it to a foreign shipowner. You have represented that your client acquired a second hand vessel named M/V "Mercury" under a bareboat lease agreement with Jetstar Navigation S.A. of Panama, for a period of five (5) years at a monthly rental of U.S. $19,500.00; that at the expiration of the lease agreement, your client is obligated to purchase the vessel at the price of P100,000.00; and that upon receipt of the purchase amount from your client, the lessor will take the necessary steps to transfer the title over the vessel to your client. In reply, I have the honor to inform you that under the foregoing facts, the agreement between your client and the foreign shipowner is in reality a contract of purchase and sale. It has been ruled that "the fact that the price of the machine was fixed in the contract makes the latter not a lease but a purchase and sale because in contracts of lease, as distinguished from those of purchase and sale, it is plain redundancy to fix or make any mention of the price of the thing given in lease". (H.E Heacock & Co. vs. Buntal Mfg. Co., 66 Phil. 245) Moreover, contracts in the form of leases either with options to the buyer to purchase for a small consideration at the end of the term, provided the so-called rent has been duly paid, or with stipulations that if the rent throughout the term is paid, title shall thereupon vest upon the lessee, are leases in name only. The so-called rents must necessarily be regarded as payment of the price in installments, since the due payment of the agreed amount results, by the terms of the bargain, in the transfer of title to the lessee. ( Teodorica R. Vda. de Jose vs. Julio Veloso Barrueco, 67 Phil. 191). In view thereof, the so-called "rentals" paid by your client to the foreign shipowner are considered installment payments. Accordingly, they are not subject to the 4 % final tax prescribed by Section 24(b)(v) of the Tax Code which imposes said tax on rentals, lease and charter fees payable to non-resident owners of vessels chartered by Philippine nationals. Very truly yours, ROMULO M. VILLA Acting Commissioner