10% Value-Added Tax on the Operations of Vessel

May 9, 1990 BIR RULING NO. 069-90 20 (b) 115 000-00 069-90 Gentlemen : This refers to your letter dated January 10, 1990 stating that your client, ESCAO Lines, Inc. (Escao),is a domestic corporation engaged in coastwise shipping with principal office at Pier 16, North Harbor, Manila; that Escao is the grantee of a franchise over a certain route, i.e.,Manila-Surigao-Butuan-Manila; that its former vessel used to ply such route until the same was destroyed by fire about two years ago, and at present it has no existing vessel to service the said route; that in its desire to provide continuity of service in the said route, as mandated in its franchise, it has in principle agreed to enter into a joint venture agreement with another local shipping company, Loadstar Shipping Co.,Inc. (Loadstar);that said agreement stipulates the following, to wit: cdt 1. Loadstar shall provide the vessel while Escao shall provide the franchise over the route, the operational and marketing structure and resources at each port of call of the vessel; 2. Gross revenue from operation shall be divided on a 62% (Loadstar) 38% (Escao) ratio, out of which each party has to take care of its own expense; 3. Operations of the vessel during the existence of the venture shall be handled by another entity known as Escao Management and Consultancy, Inc.;and 4. The venture shall last for a period of one year (1) from execution or until such time that Escao shall acquire a vessel that will permanently service the said route. Based on the foregoing facts, you request a ruling as to the tax consequence of said joint venture agreement. In reply, please be informed that the said joint venture which is intended to be formed for the purpose of undertaking shipping services comes within the purview of a corporation subject to the 35% corporate income tax as contemplated in Section 20(b) in relation to Section 24(a) both of the Tax Code. Likewise, each of the parties to the joint venture, i.e., Escao and Loadstar, is liable for the payment of the corporate income tax on the profit distributed to them by the joint venture. (BIR Ruling Nos. 20-80 and 47-80) The joint venture is engaged in the business as common carrier by water; hence, it is subject to the 3% tax on its gross receipts under Section 115 of the Tax Code, as amended by Executive Order No. 273. However, the joint venture is exempt from the value-added tax, pursuant to Section 103(j) of the same Code. Finally, by handling the operations of the vessel during the existence of the joint venture, the Escao Management Consultancy, Inc. is engaged in the sale of service; hence, it is subject to the 10% value-added tax on its gross receipts. (Sec. 102, Tax Code) Very truly yours, (SGD.) VICTOR A. DEOFERIO, JR. Deputy Commissioner