Tax Consequence of Acquisition of Vessel from Foreign Shipowner on Bareboat Charter Contract

June 23, 1986 BIR RULING NO. 086-86 24-b 167-83 086-86 Gentlemen : This refers to your letter dated November 12, 1985 stating that your company is a joint venture corporation, registered in the Philippines, 60 percent of which capitalization is owned by Filipino nationals, who are engaged in the ownership, chartering and management of ocean-going vessels; that at present, you intend to acquire a more than 14,000 tons vessel from a foreign shipowner on a Bareboat charter contract with irrevocable purchase agreement; that the total purchase price is $900,000.00 payable in five (5) years with a down payment of 10% of the purchase price payable within one (1) year from execution of the contract and a monthly installment of $16,875.00 and that this vessel, subsequently, will be time-chartered out to another foreign shipping company and to be operated on international trading. cdt Based on the foregoing representations, you request information on the following queries, viz: "1. It is the acquisition of the vessel described above subject to the imposition of seven (7) percent compensating tax? "2. Is the amount that we pay monthly for the lease of the vessel subject to the 4.5 final tax? "3. Since the vessel will be utilized by the time charterer only for overseas trading, are we liable to the 4.5 percent international carriers tax (2.5% as Gross Philippine billings and 2% common carriers tax)? "4. As we are going to charter-out this vessel to another foreign company which will pay us a monthly Charter Hire, are we subject to any other form of percentage tax (Contractor's tax)? "5. Is our earning from the charter hire of the vessel which will be exclusively engaged in overseas trading subject to income tax? "6. After the lease period, when the vessel will be turned over to us, are we subject to the payment of the document payments in said contract, the same are not subject to the 4 1/2% final tax prescribed by Section 24(b)(1)(v) of the Tax Code which imposes a tax on rentals, lease and charter fees documentary stamp tax on the Deed of Sale and if so, what is the basis of the tax? "7. Should the lease irrevocable purchase agreement fails to materialize, what are our tax liabilities and other requirements your office will impose on us?" In reply, please be informed as follows: 1. Since the displacement weight of the vessel to be purchased by your company exceeds 10,000 tons, you are not subject to the 20% compensating tax pursuant to Section 169 (formerly Section 204) of the Tax Code, as amended by P.D. No. 1994. 2. The Irrevocable Purchase Agreement between you and the foreign shipowner is in reality a contract of purchase and sale. Accordingly, since your monthly payments are install-payable to non-resident owners of vessels chartered by Philippine nationals. Should the said irrevocable purchase agreement fail to materialize and, therefore, the foregoing transaction shall remain a lease agreement the rentals shall be subject to the 4 1/2% 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 this Bureau; and for this purpose, you may get in touch with the Chief, Law Division. If you fail to do so, we shall require you to pay the aforesaid 4% final tax under the Tax Code. 3. Since your company is a domestic corporation, it is not subject to the 2.5% tax on gross Philippine billings under Section 24(b)(2) of the Tax Code. Likewise, your company will not be subject to the 3% common carrier's tax prescribed by Section 173 (formerly Section 207) of the same Code on the time charter fees paid by foreign company to you since they will be realized from the operation of the vessel in cross-trading abroad, i.e., from a foreign port to another foreign port, hence, beyond the taxing jurisdiction of the Philippines. (BIR Ruling No. 246-82 dated September 14, 1982) 4. Your company shall not be subject to any other percentage tax on the monthly charter hire which will be paid to you by another foreign company. 5. Your company shall be subject to the corporate income tax imposed by Section 24(a) of the Tax Code, as amended, on its earnings from the charter hire of the vessel which will be exclusively engaged in overseas trading. 6. Ships or vessels are considered personal properties. Accordingly, the Deed of Sale to be executed by you and the foreign shipowner after the lease period concerning the vessel in question is not subject to the documentary stamp tax imposed under Section 209 (formerly Section 245) of the Tax Code, as amended. However, the acknowledgment executed before a Notary Public shall be subject to the documentary stamp tax on certificates under Section 201 of the same Code. cdta Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner