Whether a One-Time Addition to Lease Rental Known as Priority Premiums Paid by the Lessee and Collected at the Time of the Signing of the Contract of Lease Form Part of the Tax Base for the Documentary Stamp Tax Purposes

July 24, 1995 BIR RULING NO. 112-95 Tutuban Properties, Inc. Tutuban Center, C.M. Recto Manila Attention: Mr . Luis Santos Accounting Manager Gentlemen : This refers to your letter dated February 25, 1995 requesting for a ruling on whether or not a one-time addition to lease rental known as priority premiums paid by the lessee and collected at the time of the signing of the Contract of Lease form part of the tax base for the documentary stamp tax purposes. prcd It is represented that you are the developer/owner of the commercial complex known as the Tutuban Center located at Claro M. Recto, Metro Manila; that your operations includes leasing of commercial stalls to retailers/wholesalers of textiles, RTW and other dry goods; that the Contract of Lease for stalls provides, in part, as follows: "1. The lease shall be for a period of Twenty (20) years; "2. The lessee (the "Lessee") shall pay to TPI a monthly lease rental, to wit: '3. LEASE RENTAL 'The LESSEE shall, without need of prior notice of demand, pay to the LESSOR on or before the first day of each month starting May, 1993 until August, 2013 monthly lease rentals in the amount of Two Hundred Forty Four and 48/100 PESOS (P244.48) per square meter of the Leased Premises, or a total monthly lease rental of _________ PESOS (P_______) Philippine Currency; Provided that five (5%) percent of the above monthly rentals in the amount of ________________ PESOS (P_______) shall be deducted and withheld by the LESSEE and corresponding remitted to the Bureau of Internal Revenue and credited to the account of the LESSOR. The LESSEE shall furnish the LESSOR a copy of the Remittance Return (BIR Form No. 1743-W), duly validated by the receiving bank and Certificate of Creditable Income Tax Withheld at Source (BIR Form No. 1743). 'Should the LESSEE pay the monthly lease rentals within the first five days of each month, the LESSEE shall be entitled to a prompt payment discount of ten (10%) percent of the lease rental equivalent to Two Hundred Twenty PESOS (P220.00) per square meter. 'A ten (10%) percent cumulative increase on the lease rentals computed on an annual basis, shall be imposed starting from the second year and every year thereafter, subject to further adjustment in case of extraordinary inflation. Any adjustment in the lease rental shall be pro-rated over twelve (12) months and paid coincidentally with the monthly lease rental payments.' "The aggregate amount of the lease rental would depend on the area leased by the Lessee; and" that for purposes of obtaining the lease, the lessee shall pay to you a one-time priority premium in the amount of P55,000 per square meter which is in the nature of goodwill and is paid by the lessee only once upon the signing of the Contract of Lease; and that the aggregate amount of the priority premiums would depend on the area leased by the lessee. LexLib In reply, please be informed that under Section 194 of the Tax Code, as amended by R.A. No. 7660 which states, thus "SEC. 194. Stamp Tax on Leases and Other Hiring Agreements . On each lease, agreements, memorandum, or contract for hire, use of rent of any lands or tenements, or portions thereof, there shall be collected a documentary stamp tax of Three pesos (P3.00) for the first Two Thousand pesos (P2,000.000) or fractional part thereof, and an additional One pesos (P1.00) for every One Thousand pesos (1,000.00) of fractional part thereof in excess of the first two thousand pesos (P2,000.00) for each year of the term of said contracts or agreement." the tax base in computing the documentary stamp tax due on your Contract of lease shall be arrived at by multiplying the annual lease rental (lease rental of P244.48 per square meter x total area in square meters of the leased premises occupied by the tenant) by 20 years, or the term of the contract. The resulting sum thereof shall be subject to the documentary stamp tax of P3.00 for the first P2,000.00 or fractional part thereof, plus an additional sum of P1.00 for every P1,000.00 or fractional part thereof in excess of the first P2,000.00 pesos. However denominated, the priority premium should be included as part of the tax base for documentary stamp tax purposes, because, as represented, it is every much a part of the entire lease rental as, in fact, it is paid by the lessee to obtain the lease and at the time of the signing of the Contract of Lease. LLpr Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue