4.5% Tax on the Rentals, Lease and Charter Fees Derived by a Non-Resident Owner of Vessels

July 26, 1989 BIR RULING NO. 156-89 25 (b) (3) 000-00 156-89 Gentlemen : This refers to your letter dated May 2, 1989 stating that your client, Fujikura Ltd., is a corporation duly organized and existing under the laws of Japan; that it is not licensed to do business in the Philippines; that it has no permanent establishment (P.E.) in the Philippines; that it has never, before the contract hereunder mentioned undertaken any business activity in the Philippines; that in 1987, the National Power Corporation (NPC), after a bidding process contracted the services of Fujikura Ltd. "for the furnishing and installing complete the 138 KV 3-phase oil filled submarine cables and its accessories for the Negros-Panay interconnection project"; that sometime in 1988, the said contract was amended principally to provide for the change in the actual site where the installation of the cables will be made, that is, from the original Pagayon-Barcelona Cross of Guimaras Strait to the Tomonton-San Juan Crossing; that your client has recently received from the NPC the notice to proceed with the works, for which it has commenced work on the project in April 1989; that based on a conservative estimate, your client will be able to finish and complete the project, and turn it over to the NPC well within a period of 6 months from the date it commenced work on the project; that for the purpose of carrying out the project, it would have to use 2 tugboats, 2 barges and 4 working boats, which it will charter from a non-resident foreign owner that is a resident of Japan; that for this purpose, your client, through the NPC applied with the Maritime Industry Authority (Marina) for authority to bring the above-mentioned foreign-owned vessels into the Philippines; and that the Marina on March 20, 1989 issued Special Permit No. 0088-89 granting permission to the abovementioned vessels to engage temporarily in the domestic trade subject to certain conditions among which is the presentation to the Marina for verification purposes of proof of payment of taxes due to the Philippine Government in connection with the voyage charter. In connection therewith, you now request confirmation of your opinion that the rentals or charter fees to be paid by Fujikura Ltd., to the non-resident owner of the vessels chartered by it are not subject to Philippine tax. In reply thereto, I have the honor to inform you that considering that the aforementioned case is not treated in the RP-Japan Tax Treaty, then the pertinent provisions of the National Internal Revenue Code shall govern. Under Section 25(b)(3) of the Tax Code, as amended, rentals, lease and charter fees derived by a non-resident owner of vessels chartered by Philippine nationals and which charter or lease has been duly approved by the Maritime Industry Authority shall be subject to 4.5% tax. Such being the case, although the charter or lease has been duly approved by the Maritime Industry Authority nevertheless since the charterer is not a Philippine national but a Japanese national which is not licensed to do business in the Philippines, the rentals and/or charter fees payable by Fujikura Ltd., to the non-resident owner of the vessels are not subject to Philippine income tax. This ruling is being issued on the basis of the facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) EUFRACIO D. SANTOS Deputy Commissioner