Exemption from 4 ½% Final Tax — Foreign Shipowner

1981 BIR RULING NO. 087-81 24-b-v 023-80 087-81 Lapez and Gonzaga Law Office Suite 301-A Trade Center Bldg. Padre Faura Cor. Mabini St. Ermita, Metro Manila Attention: Atty . Ramon M . Lapez Gentlemen : This refers to your letter dated May 14, 1981 requesting a ruling whether the alleged "rentals" being paid by your client, Central Shipping Company, Inc., a company engaged in overseas shipping to a foreign shipowner is subject to the 4 % final tax. cd You have represented that your client will acquire a second hand vessel named M/S "BIRKA" under a bareboat lease agreement with Henkel Navigation Co., S.A., a corporation organized under the laws of and domiciled in Panama; that the agreement is for a period of six (6) years at a monthly rental of US $31,170.00; and that upon the expiration of the agreement, your client has the option to purchase the vessel at a nominal cost of US $1,000.00, the monthly rentals being actually the installment payments for the purchase of the vessel. 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. cdtech Very truly yours, RUBEN B. ANCHETA Acting Commissioner