Whether Ever Lines, Inc. is Subject to a Withholding Tax of 4.5% on the Rental of Vessel to be Paid to a Foreign Shipowner

December 28, 1992 BIR RULING NO. 384-92 25 (b) (3) 46-91 384-92 Ever Lines, Inc. P. O. Box No. 3 32 Campaner Street Zamboanga City Attention: Mr . Isabelo W . Saavedra Vice-President Gentlemen : This refers to your letter dated April 10, 1992 requesting a ruling as to whether you are subject to a withholding tax of 4.5% on the rental of vessel to be paid by you to a foreign shipowner. LLphil It is represented that you are a domestic corporation engaged in the shipping industry; that you have entered into a Bareboat Charter Agreement with Great Neptune Shipping Co., Inc., a foreign corporation, of M. V. Ever Transport (ex Neptune Asia) for a period of five (5) years at a monthly rental of U. S. $2,505.00; that the Bareboat Charter Agreement granted you an absolute option to purchase the vessel at a negotiated price within the period of the contract; that the bareboat charter with option to purchase has been approved by the Maritime Industry Authority (MARINA) in its letter dated November 2, 1987; that you are now going to exercise your option to purchase pursuant to stipulation #7 of the bareboat charter agreement, hence this request. In reply, please be informed that the Bareboat Charter Agreement entered into between you and Great Neptune Shipping Co., Inc. of Panama 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 contract 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 things given in lease (H.E. Heacock & Co., vs. Suntal 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 stipulations 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 Jose vs. Julio Veloso Barrucco, 67 Phil. 191). In view thereof, the so called "rentals" to be paid by you to the foreign shipowner are considered installment payments if the sale will be ultimately consummated. Accordingly, they are not subject to the 4.5% final tax prescribed by Section 25 (b) (3) of the Tax Code 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 you fail to exercise the option to purchase and, therefore, the foregoing transaction shall remain a lease agreement, the rentals shall be subject to the 4.5% final tax. To guarantee the payment of the said tax, you are requested to file within ten (10) days from 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, Legislative, Ruling and Research Division. If you fail to do so, we shall require you to pay the aforesaid 4.5% tax prescribed by Section 25 (b) (3) of the Tax Code, as amended. Very truly yours, JOSE U. ONG Commissioner of Internal Revenue