BIR Ruling No. 337-11

September 7, 2011 BIR RULING NO. 337-11 Sec. 28 (B) (4) of the Tax Code of 1997; BIR Ruling No. DA-438-99; BIR Ruling No. [DA-(C-001) 021-09] BK Systems Philippines, Inc. Warehouse # 11 Manjos Industrial Compound A. Sandoval Avenue Pinagbuhatan, Pasig City Attention: Mr. Regino Joel N. Tuao President and COO Gentlemen : This refers to your letter dated October 23, 2010 stating that BK Systems Philippines, Inc. [formerly Regal Systems, Inc.] (BK Systems), is a corporation organized and existing under the laws of the Philippines and duly registered with the Securities and Exchange Commission (SEC) under SEC Registration No. A199919873 with TIN 204-952-083-000; that it is primarily organized to engage in the business of trading of goods such as all kinds of musical and sound equipment, articles and paraphernalia on wholesale/retail basis; that on March 21, 2011, BK Systems, as the Lessee, entered into a Lease Agreement (the "Agreement") with Video King (VKGS LLC), as the Lessor, a non-resident American corporation; that VKGS LLC is in the business of leasing electronic bingo systems comprised of hand held bingo devices (Lil Champ Color Handsets, Power Bingo Flash Handsets, Classic Handsets and Power Touch Fixed Base, and Champion II Tablets) (the "Units") with associated computer hardware and software (the "Systems"); that BK Systems, as the Lessee and as the authorized agent of VKGS LLC, desires to sublease the Units with the corresponding Systems to local bingo operators, pursuant to the terms and conditions of the Lease Agreement; and that the salient features of the Lease Agreement are as follows: "xxx xxx xxx 1. The Lessor grants to the Lessee the non-exclusive rights to a Territory in the Country of the Philippines. The Lessee agrees during the term of the Agreement that it will exclusively represent only the products of the Lessor and will not offer for lease and/or sublease, sell, install, or represent any other electronic bingo products and other electronic bingo manufacturers; 2. The Agreement shall commence on the date it is executed and shall continue for an initial period of thirty six (36) months. The Agreement shall automatically renew for additional one (1) year terms, unless either party gives written notice at least sixty (60) days prior to the termination date of the Agreement, or unless terminated sooner pursuant to the terms described therein; 3. The Lessee acknowledges and agrees that the Units included in the Agreement are proprietary products of the Lessor, protected under Patent Law, Copyright Law, Trade Secret Laws of general applicability. The Lessee further acknowledges and agrees that all rights, titles and interest in and to the Units and the System are, and shall remain with the Lessor. The Agreement does not convey to the Lessee an interest in or to the Units but only a limited right to use, revocable in accordance with the terms of the Agreement; 4. The Lessor will invoice the Lessee of the monthly flat-rate-per-unit. New installations will be invoiced on a pro-rated basis, through the end of the first month, from the date of the installation of the units by the Lessor or Distributor Standard invoices based on full unit inventory will be issued on the 1st day of each month, with payment of all invoices being due within 30 days from original invoice date. xxx xxx xxx" Based on the foregoing representations, you now request for confirmation that the rental payments made by BK Systems to VKGS LLC, a non-resident foreign corporation, for the lease of electronic gaming machines, are subject to the 7.5% Philippine income tax pursuant to Section 28 (B) (4) of the Tax Code of 1997. In reply thereto, please be informed that Section 28 (B) (4) of the Tax Code of 1997 provides that AaHTIE "SEC. 28. Rates of Income Tax on Foreign Corporations. xxx xxx xxx (B) Tax on Nonresident Foreign Corporation. xxx xxx xxx (4) Nonresident Owner or Lessor of Aircraft, Machineries and Other Equipment. Rentals, charters and other fees derived by a non-resident lessor of aircraft, machineries and other equipment shall be subject to a tax of seven and one-half percent (7 1/2%) of gross rentals or fees." In stressing the rationale of the above-mentioned provisions, this Office elucidated the matter in BIR Ruling No. DA-438-99 dated July 29, 1999 , as follows: "In this respect, Section 28(B)(4) of the Tax Code clearly provides that the rentals, charters and other fees derived by a nonresident foreign corporation-lessor of machineries and other equipment are subject to a final withholding tax of 7.5% of the gross rentals or fees. On this basis and in relation to Section 57 of the Tax Code, AODS is required to withhold a final tax of 7.5% of gross rentals payable by it to the nonresident foreign corporation-lessor for the bareboat lease of oilrigs necessary for its business operations." This was later reiterated in BIR Ruling No. [DA-(C-001) 021-09] dated January 15, 2009 , as follows: "In view thereof, this Office is of the opinion and so holds that the rental payments of HTMPC to OMRON-AMP and to SBLPL are subject to the seven and one-half percent (7 1/2%) tax rate on gross rentals imposed under Section 28 (B) (4) of the Tax Code of 1997, as amended, the same not having exceeded the 25% rate imposed on the gross amount of royalties under the RP-Singapore tax treaty and RP-Japan Tax Treaty. (BIR Ruling No. DA-ITAD 039-04 dated April 28, 2004), ITAD Ruling 150-02 dated August 26, 2002; ITAD Ruling 33-01 dated March 31, 2001; ITAD Ruling 149-00 dated October 23, 2000)." SUCH BEING THE CASE, this Office holds that rental payments, for the lease of electronic gaming machineries, by BK Systems to VKGS LLC are SUBJECT to the 7.5% final withholding tax on gross rentals prescribed in Section 28 (B) (4) of the Tax Code of 1997, as implemented by Section 2.57-1 (I) (4) of Revenue Regulations No. 2-98. 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