Rentals to be Paid to the Foreign Shipowner are Considered Installment Payments if the Sale will be Ultimately Consummated; Hence, They are Not Subject to the 4.5% Final Tax

March 20, 1991 BIR RULING NO. 046-91 25 (b) (3) 148-83 046-91 Gentlemen : This refers to your letters both dated November 26, 1990 requesting a ruling as to whether you are subject to a withholding tax of 41/2% on the rentals of vessels to be paid by you to a foreign shipowner. It is represented that you are a domestic corporation engaged in the shipping industry; that you have entered into a Bareboat Charter with Milky Way Shipping, Inc. Panama, of "M.V. Lorcon Mindanao" and "M.V. Lorcon Luzon" for a period of sixty (60) months or five (5) years at a monthly rental of U.S. $87,346; that at the end of the lease period you have the option to purchase the vessels at U.S. $781,450 for "M.V. Lorcon Mindanao" and U.S. $812,970 for "M.V. Lorcon Luzon" respectively; that the vessels had been registered with the Maritime Industry Authority (Marina); and both are serving Mindanao ports. In reply thereto, I have the honor to inform you that the Bareboat Charter entered into by you with Milky Way Shipping, Inc., Panama 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 things given in lease. (H.E. Heacock & Co., vs. Buntal Manufacturing 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" to be paid by you to the foreign shipowner are considered installment payments if the sale will be ultimately consummated. Accordingly, they are not subject to the 4.5% final tax prescribed by Section 25 (b) (3) of the Tax Code which imposes said tax on rental, lease end charter fees payable to non-resident owners of vessels chartered by Philippine Nationals. In this connection, however, should you fail to exercise the option to purchase and, therefore, the foregoing transaction shall remain a lease agreement, the rentals shall be subject to the 4.5% final tax. To guarantee the payment of the said tax, you are requested to file within ten (10) days from receipt hereof a surety bond the amount of which shall be determined by the Bureau; and for this purpose, you may get in touch with the Chief, Legislative, Ruling and Research Division. If you fail to do so, we shall require you to pay the aforesaid 4.5% tax prescribed by Section 25 (b) (3) of the Tax Code, as amended. aisadc Very truly yours, (SGD.) JOSE U. ONG Commissioner