Exemption from the 4.5% Final Tax on Rental Derived by Non-resident Owners of Vessels Chartered by Philippine Nationals

October 19, 1987 BIR RULING NO. 318-87 25-b-3 114-85 318-87 Gentlemen : This refers to your letters dated August 26, 1986 and June 1, 1987 together with documentary evidence submitted showing that you, as charterer, entered into a Bareboat Charter Agreement with Seascale Shipping Limited, a corporation organized and existing under the laws of Liberia, with principal office located at 80 Broad Street, Monrovia, Liberia, as owner; that the owner agrees among others, to let and charterer agrees to hire the "MV ISABELITA" an ocean going vessel from the time of delivery for a period of three (3) years with everything on board and ashore belonging to the vessel, that during the charter period, the vessel shall be in the full possession and at the absolute disposal of charterer for all purposes and under the complete control of the charterer in every respect, that per Marina approval, the charter period is four (4) years reckoned from the date of delivery of the vessel and can be extended subject to Marina approval; that charterer shall pay the hire due on the vessel to the account of Seascale Shipping, Ltd., commencing on the date of delivery of the vessel to charterer at the rate of US Dollars $390 per day or (US$142,350) per year payable monthly, that the charterer shall irrevocably purchase the vessel upon the expiration of the term of the charter party Agreement; and that the said Agreement was approved by the Maritime Industry Authority (MARINA) in its letter dated March 5, 1986. iatdc It appears also that a Deed of Assignment was executed on December 8, 1986 whereby you assigned, transferred and conveyed to PTC Charterers, Inc., a corporation organized and existing under the laws of the Philippines, the above-mentioned Bareboat Charter, together with all of its rights, interests, and obligations thereunder which the Assignee accepts subject to the terms and conditions hereof, such assignment, transfer and conveyance to take effect on March 4, 1986, and that MARINA approval was secured prior to said assignment. You now request a ruling as to whether PTC Charterers is exempt from the 4.5% final tax on rental derived by non-resident owners of vessels chartered by Philippine nationals, pursuant to Section 25(b)(3) of the Tax Code, as amended by Executive Order No. 37. In reply, I have the honor to inform you that under the foregoing facts, the agreement entered into by and between the charterer and the foreign shipowner which has been assigned to PTC Charterers, Inc., 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. Buntal Manufacturing 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 stipulation 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 Nose vs. Julio Veloso Barrueco, 67 Phil. 191) In view thereof, the so-called " rentals " or charterhire to be paid by P.T.C. Charterers, Inc., 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 25(b)(3) of the Tax Code, as amended 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 P.T.C. Charterers, Inc. fail to exercise the option to purchase and, therefore, the foregoing transaction shall remain lease agreement, the rentals or charterhire shall be subject to the 4 % final tax. To guarantee the payment of the said tax, said charterer is requested 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. In case of failure to file the surety bond, this Office shall require payment of the aforesaid 4 % tax under the Tax Code. Very truly yours, (SGD.) EUFRACIO D. SANTOS Deputy Commissioner