BIR Ruling No. 125-82

April 20, 1982 BIR RULING NO. 125-82 24-b-v 87-81 125-82 Lapez and Gonzaga Law Office Suite 301-A Trade Center Bldg. P. Faura corner Mabini Street Ermita, Manila Attention: Atty . Ramon M . Lapez Counsel Gentlemen : This refers to your letter dated February 25, 1982 requesting a ruling on whether the alleged "rentals" to be paid by your client, Sweet Lines, Inc., a company engaged in interisland shipping to a foreign shipowner is subject to the 4 % final tax prescribed under Section 24 (b)(v) of the Tax Code. It is represented that your client will acquire a second hand vessel named MV "SWEET RORO" under a bareboat lease agreement with option to purchase with Dimerco Line S.A. a corporation duly organized and existing under the laws of Panama; that this agreement is for a period of seven (7) years at a monthly rental of US $57,740.00, with a down payment of US $173,220.00 which shall be applied to the purchase price of the vessel at the end of the lease term. 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. Luntal 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" to be paid by your client to the foreign shipowner are considered installment payments if the sale will be ultimately consummated. 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. In this connection, however, should your client 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 % final tax. To guarantee the payment of the said tax, you are requested to urge your client to file within ten (10) days from your 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, Law Division. If you fail to do so, we shall require you to pay the aforesaid 4 % tax under the Tax Code. cdtech Very truly yours, RUBEN B. ANCHETA Acting Commissioner