Taxability of a Mining Claim Owner/Contractee and Contractor

May 11, 1988 BIR RULING NO. 205-88 24 (e) (1) 000-00 205-88 Gentlemen : This refers to your request for a ruling on whether the monthly income which you received under an Operating Agreement with Benguet Corporation (Benguet) is subject to the 20% final withholding tax imposed on royalties, pursuant to Section 24(e), in relation of Section 51(a) of the Tax Code. Documentary evidence submitted shows that under your Operating Agreement with Benguet, the latter binds itself to perform for you the following services, viz: to explore and develop fifty-seven (57) mineral claims described in the agreement which are owned and controlled by you; that if the result of Benguet's exploration and development work warrants it, Benguet shall solely decide to equip and operate the properties in the most expeditious time and manner for the production and marketing of the products derived therefrom including, among others, copper sulfide concentrates, copper oxide, precipitates, gold, silver and other minerals; that Benguet shall provide the lands, buildings, plants, machinery, equipment and other fixed assets and other facilities but shall receive a monthly reimbursement for the use of the said items; that pre-production operation expenditures from the date of execution of the Operating Agreement up to and including the day prior to the commencement of production operation which shall be made by Benguet shall be reimbursed to it with simple interest at the rate of 1% per month; that in consideration of such services, Benguet shall be entitled to a premium service fee equal to 5% of the monthly excess of receipts over disbursements beginning from the start of production operations until Benguet shall have recovered its original investment to place the property into commercial operation, after which time this fee shall eliminated, and in addition to such premium service fee, in the event that the properties are placed in productive operation by Benguet, it shall receive a fee as independent contractor equal to 50% of the monthly excess of receipts over disbursements ;the balance of 50% shall be remitted to you on or before the 20th day of the succeeding month. cdta In reply, please be informed that your request is answered in the negative. Under Section 24(e) of the Tax Code, royalties derived from sources in the Philippines are subject to a 20% tax. Under Section 36(a)(4) of the same Code, rentals or royalties constituting Philippine source income includes the following: "(4) Rentals and royalties . Rentals and royalties from property located in the Philippines or from any interest in such property, including rentals or royalties for "(A) The use of or the right or privilege to use in the Philippines any copyright, patent, design or model, plan, secret formula or process, goodwill, trademark, trade brand or other like property or right; "(B) The use of, or the right to use in the Philippines of any industrial, commercial or scientific equipment; "(C) The supply of scientific, technical, industrial or commercial knowledge or information; "(D) The supply of any assistance that is ancillary and subsidiary to, and is furnished as a means of enabling the application or enjoyment of, any such property, or right as is mentioned in paragraph (b) or any such knowledge or information as is mentioned in paragraph (c);or "(E) The supply of services by a non-resident person or his employee in connection with the use of property or rights belonging to, or the installation or operation of any brand, machinery or other apparatus purchased from such nonresident person; "(F) Technical advice, assistance or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking, venture, project or scheme; "(G) The use of or the right to use (i) motion picture films; (ii) films or video tapes for the use in connection with television; (iii) tapes for use in connection with radio broadcasting." From the foregoing provisions of the Operating Agreement, it seems clear that the monthly income you receive from Benguet is not considered a royalty within the contemplation of Section 36(a)(4) of the Tax Code. On the other hand, we hereby confirm your opinion that your Operating Agreement with Benguet is, in fact, a contractor for a piece of work under Article 1713 of the Civil Code stating: "Art. 1713. By the contract for a piece of work the contractor binds himself to execute a piece of work for the employer in consideration of a certain price or compensation. The contractor may either employ only his labor or skill or also furnish the material." In other words, the business relation between you and Benguet is that of a mining claim owner/contractee and contractor. Such being the case, the income you receive from Benguet on account of the aforesaid operating agreement represents gross income from business which is taxable under Section 24(a), in relation to Section 28(a), of the Tax Code, as amended. On the other hand, the income constituting the gross receipts received by Benguet which used to be subject to contractor's tax under then Section 170 of the Tax Code shall now be subject to a value-added tax of 10% pursuant to Section 102 of the Tax Code, as amended by Executive Order No. 273. cd Very truly yours, (SGD.) EUFRACIO D. SANTOS Deputy Commissioner