BIR Ruling No. 213-12

March 23, 2012 BIR RULING NO. 213-12 RA 7471; RA 9301; RR 13-93 Ong Meneses Gonzalez & Gupit Law Offices 18th/F, 88 Corporate Center 141 Valero cor. Sedeo Sts. Salcedo Village, Makati City Attention: Francisco B. Gonzalez Tax Counsel Gentlemen : This refers to your request, on behalf of Trytrans Shipping Corporation, Transportes Navieros, Inc., Transocean Transport Corporation, Trilines Shipping, Inc. and Transbulk Shipping Corporation (collectively referred to hereinafter as, the "Shipping Companies"), for exemption from the payment of income tax pursuant to RA 7471, otherwise known as, the Philippine Overseas Shipping Development Act, as amended by RA 9301. It is represented that the above shipping companies, duly organized under the laws of the Philippines and registered with the Securities and Exchange Commission (SEC), are engaged in the business of overseas shipping in the high seas, for conveyance and carriage of passengers, mail, merchandise and freight. Likewise, the above shipping companies are registered with the Maritime Industry Authority ("MARINA") as entities operating overseas shipping vessels. The corresponding Certificates of Registration/Accreditation Nos. of the shipping companies, issued by the concerned government agencies, are as follows: SacTCA Name of Business Tax SEC Registration MARINA Company Address Identification No. Accreditation No. (TIN) No. Trytrans 520 T. M. 330-000-828- 58015 181-08-04- Shipping Kalaw 048-NV 30-041-A Corporation St., City of` Manila Transportes 520 T. M. 000-827-719 103042 181-08-02- Navieros, Inc. Kalaw 21-032-A St., City of Manila Transocean 520 T. M. 007-366-392 CS200914307 181-08-07 Transport Kalaw 04-044-A Corporation St., City of Manila Trilines 520 T. M. 000-828-182 127919 181-07-12- Shipping, Kalaw 14-021-A Inc. St., City of Manila Transbulk 520 T. M. 000-889-552 85806 181-08-02- Shipping Kalaw 21-033-A Corporation St., City of Manila It is further represented, that the shipping companies applied with the MARINA for the application of the provisions of RA 7471, as amended by RA 9301, to avail the income tax exemptions for the years 2004 to 2010; and that MARINA issued a favorable recommendation for the shipping companies to be granted income tax exemptions for the years 2004 to 2010. In reply, please be informed that Republic Act (RA) No. 7471, was approved into law on May 5, 1992 and made effective for a period of ten years or until 2002. RA No. 7471 was enacted in order to promote the development of Philippine overseas shipping by granting certain incentives, such as exemption from income tax, to Philippine Shipping Enterprises. Section 7 of the said law provides, viz. : "Section 7. Exemption from Income Tax. A Philippine shipping enterprise shall be exempt from payment of income tax on income derived from Philippine overseas shipping for a period of ten (10) years from the date of approval of this Act provided that: (a) The entire net income, after deducting not more than ten percent (10%) thereof for distribution of profits or declaration of dividends, which would otherwise be taxable under the provisions of Title II of the National Internal Revenue Code, is reinvested for the construction, purchase, or acquisition of vessels and related equipment and/or in the improvement of modernization of its vessels and related equipment in accordance with the regulations; and (b) The cumulative amount so reinvested shall not be withdrawn for a period of ten (10) years after the expiration of the period of income tax exemption or until the vessel or related equipment so acquired have been fully paid, whichever date comes earlier. Any amount not so invested or withdrawn prior to the expiration of the period stipulated herein shall subject to the corresponding income tax, including penalties, surcharges and interests." The above-quoted provision was implemented by Revenue Regulations No. 15-93, dated September 1, 1993 (Prescribing the guidelines for availment of the tax incentives granted by Republic Act No. 7471, otherwise known as the Philippine Overseas Shipping Development Act) , the relevant portions of which provide as follows: cCHITA "Section 3. Coverage of national internal revenue tax incentives. (a) A qualified Philippine shipping enterprise shall be entitled to the following national internal revenue tax incentives: (1) Exemption from the payment of value added tax on importations of vessels for registration under the Philippine flag, and spare parts for the repair and/or overhaul of vessels, provided that these spare parts are destined to a Philippine dry-docking or repair facility accredited by MARINA and registered as a customs-bonded warehouse, or to the vessel in which these parts are to be installed. (2) Exemption from the payment of income tax on income derived directly from Philippine overseas shipping up to May 5, 2002. (b) Furthermore, local manufacturers or dealers who sell machinery, equipment, materials and spare parts to a Philippine shipping enterprise shall be entitled to a tax credit, hereinafter called suppliers' tax credit, for the full amount of the value added tax that had been actually paid thereon. Section 4. Requirements for exemption from payment of value added tax on importations of vessels and spare parts. MARINA shall refer to the Bureau of Customs and copy furnished the Bureau of Internal Revenue applications of taxpayer-importers for exemption from payment of value added tax according to existing rules and procedures. Section 5. Requirements for the grant of the suppliers' tax credit. MARINA shall refer to the One-Stop-Shop Inter-Agency Tax Credit and Duty Drawback Center created under Administrative Order No. 266 the applications for the issuance of the suppliers tax credit in the form of a tax credit certificate to the manufacturers or dealers of the Philippine shipping enterprise according to existing rules and procedures. This tax credit shall be the amount of value added tax or input tax on the purchase or importation of goods for sale or for conversion into the finished products enumerated in paragraph (b) of Section 3 of these regulations and sold to the Philippine shipping enterprise. The available input tax for the manufacturer or dealer shall be reduced by the amount of application for the issuance of tax credit certificate in accordance with Section 11 of Revenue Regulations No. 5-87. Section 6. Requirements for exemption from income tax. (a) Conditions for exemption. A Philippine shipping enterprise shall be exempt from the payment of income tax on income derived directly from Philippine overseas shipping up to May 5, 2002, provided that: (1) The entire net income, after deducting not more than ten percent (10%) thereof for distribution of profits or declaration of dividends, which would otherwise be taxable under the provisions of Title II of the National Internal Revenue Code, is actually reinvested in accordance with these regulations not later than May 5, 2005 for: (i) the construction, purchase or acquisition of vessels and related equipment; and/or (ii) the improvement or modernization of its vessels and related equipment. (2) The cumulative amount so reinvested shall not be distributed as profits or dividends until after May 5, 2012, or until the vessel or related equipment so acquired have been fully paid, whichever date comes earlier. (b) Coverage of income which is exempt from income tax. The income derived from Philippine overseas shipping entitled to exemption from the payment of income tax hereunder, is limited to income from the transport of goods and/or passengers overseas. It does not include income not directly related to transport of goods and passengers overseas, such as, but not limited to, interest income, gain from sale of vessels, or charter fee/lease income. (c) Effect of failure to reinvest or withdrawal before the prescribed date. Any amount not so reinvested, or withdrawn prior to the expiration of the period stipulated in paragraphs (a)(1) and (a)(2) of this section, respectively, shall be subject to the payment of the corresponding income tax due thereon, including penalties, surcharges and interests as provided for in the National Internal Revenue Code. If by May 5, 2012, or, in the event of dissolution of the Philippine shipping enterprise before the aforementioned date, there is still a remaining balance in the appropriated (for reinvestment in overseas shipping) retained earnings account as determined in paragraph (d) of this section, such shall be considered as the amount not so reinvested, which shall be subject to the payment of the corresponding income tax, including penalties, surcharge and interest pursuant to the National Internal Revenue Code. This amount not so reinvested shall be considered as originating from the most recent net income(s) and shall be the basis for determining the amount of deficiency income tax, penalties, surcharge and interest to pay. For this purpose, the running of the statute of limitations is hereby waived, and the particular taxpayer shall execute a waiver to this effect before being allowed to avail of this income tax exemption. HTCISE (d) Accounting procedures. Separate sets of accounting books and records shall be maintained in order that the tax exempt income and its related deductions or expenses can be segregated from the any taxable income and related expenses of the Philippine shipping enterprise. For purpose of this section, the accounting of the reinvestment and retention of the net income, after deducting not more than 10% thereof for the distribution of profits or declaration of dividends, shall be done through the recording and adjustments of the appropriated (for reinvestment in overseas shipping) retained earnings account, which shall be considered as the restricted portion of the retained earnings in the balance sheet. This account shall be increased by the amount of net income earned and exempted from income tax each year. On the other hand this account shall be reduced by any construction, purchase, acquisition of vessels and/or improvement or modernization of its vessels and related equipment, which are deemed as reinvestments, once these are fully paid or on May 5, 2012, whichever comes earlier. The amount of these reinvestments not fully paid as of the end of each tax year and the amount and nature of reinvestments made in a particular year shall be reported in the notes accompanying the financial statements and recorded in the books to be maintained for this purpose. (e) Tax compliance requirements. The Philippine shipping enterprise shall continue to file the prescribed income tax return(s) showing the tax exempt income and taxable income, if any, and corresponding deductions. The Philippine shipping enterprise shall also annually file with MARINA an application for income tax exemption, which shall then be forwarded to the Bureau of Internal Revenue not later than the April 15 of each year, for the issuance of the "Certificate of Income Tax Exemption", if warranted Any income item which has been exempted from income tax pursuant to this Act cannot be subsequently deducted as bad debt or any similar deduction, against any taxable income earned after Mary 5, 2002." It is noted that the effectivity of RA 7471 expired in 2002. In 2004, however, the Congress subsequently enacted RA 9301, entitled "An Act Amending Certain Provisions of Republic Act No. 7471 and for Other Purposes", which effectively extended the period of the effectivity of RA 7471 for another ten (10) years, beginning from 2004. Among the salient provisions of RA 9301 read as follows: IcCEDA "SEC. 7. Exemption from Income Tax. a Philippine shipping enterprise shall be exempt from payment, of income tax on income derived from Philippine overseas shipping for a period of ten (10) years, from the date of approval of this Act Provided, that: "(a) The entire net income, after deducting not more than fifteen percent (15%) thereof for distribution of profits or declaration of dividends, which would otherwise be taxable under the provisions of Title II of the National Internal Revenue Code, is reinvested for the construction, purchase, or acquisition of vessels and related equipment and/or in the improvement or modernization of its vessels and related equipment in accordance with the regulation; and "(b) The cumulative amount so reinvested shall not be withdrawn for a period of seven (7) years after the expiration of the period of income tax exemption or until the vessel or related equipment so acquired have been fully paid, which ever date comes earlier. Any amount not so invested or withdrawn prior to the expiration of the period stipulated herein shall be subject to the corresponding income tax, including penalties, surcharges and interests." Corollary thereto, the MARINA promulgated Memorandum Circular No. 201, Series of 2004, dated November 12, 2004, prescribing the guidelines in the availment of the incentives provided under RA 7471, as amended by RA 9301. The relevant portions of which provide as follows: "IV. EXEMPTION FROM INCOME TAX 1. A Philippine shipping enterprise accredited under Memorandum Circular No. 181 and its amendments shall be exempt from payment of income tax on income derived from Philippine overseas shipping for a period of ten (10) years from the date of approval of R.A. No. 9301 or up to 27 July 2014. Provided, That: a.) The entire net income, after deducting not more than fifteen (15%) percent thereof for distribution of profits or declaration of dividends, which would otherwise be taxable under the provisions of Title II of the National Internal Revenue Code, is reinvested for the construction, purchase, or acquisition of ships and related equipment and/or in the improvement or modernization of its ships and related equipment in accordance with the regulations; b.) The cumulative amount so reinvested shall not be withdrawn for a period of seven (7) years after the expiration of the period of income tax exemption or until the ship or related equipment so acquired have been fully paid, which ever date comes earlier; and c.) Any amount not so invested or withdrawn prior to the expiration of the period stipulated herein shall be subject to the corresponding income tax, including penalties, surcharges and interests. 2. The Philippine shipping enterprise shall secure an endorsement from the MARINA for the issuance of a Certificate of Income Tax Exemption from the Bureau of Internal Revenue. 3. The Philippine shipping enterprise must submit to the MARINA a copy of the Income Tax Return and the Annual Audited Financial Statements not later than thirty (30) days from receipt thereof by the Bureau of Internal Revenue starting year 2005." SECIcT Based on the foregoing provisions, this Office is of the opinion, as it hereby holds, that the shipping companies namely, Trytrans Shipping Corporation, Transportes Navieros, Inc., Transocean Transport Corporation, Trilines Shipping, Inc. and Transbulk Shipping Corporation, being registered with the MARINA as engaged in international shipping, are exempt from the payment of income tax on their income derived directly from Philippine overseas shipping from the taxable year 2004 until 2010. It is understood, however, that such exemption is not automatic as the above shipping companies have to comply with the applicable conditions set forth under RA 7471, as amended by RA 9301, and the guidelines provided under RR No. 15-93 and MC 201, issued by this Office and the MARINA, respectively. This ruling is being issued on the basis of the foregoing 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.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue