BIR Ruling [UN-027-94]

January 27, 1994 BIR RULING [UN-027-94] Manila International Shipping Co., Ltd. 1957-59 M. Adriatico Street Malate, Manila Attention: Mr . Nestor A . Panahon Operation Manager Gentlemen : This refers to your letter dated January 4, 1994 requesting in effect, for a ruling that you are not required to withhold the final income tax of 4.5% on your rental of a vessel chartered from El Suerte Naviera S.A., a Panamanian registered company, on December 15, 1987 and subsequently purchased from the owner on November 16, 1989. It is represented that you are a domestic corporation engaged in the shipping industry; that you have entered into a Bareboat Charter on December 15, 1987 with El Suerte Naviera S.A., a Panamanian Corporation, organized and existing under the laws of Panama, as registered owner, together with Shimizu and Company, Ltd. a Japanese Corporation, as beneficial owner of the Vessel, MV Ruby I (Ferry Ishizuchi) for use in coastwise shipping business in the Philippines, for a period of five years at a monthly rental of U.S. $1,300.00; that under the Bareboat Charter you are granted the 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 Resolution No. 87-03 and that you have subsequently purchased the said vessel for U.S. $105,000, pursuant to a Deed of Sale executed by and between you and the owners of the vessel, on November 16, 1989. In reply thereto, please be informed that 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 that the so-called rent has been duly paid or with the 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) Such being the case, the Bareboat Charter entered into by and between you and El Suerte Naviera S.A., 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 if the contract makes the latter not a lease but a purchase and sale because in contracts of lease, as distinguished from those of purchases 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. Buntal Manufacturing Co., 66 Phil. 245) Be that as it may, this Office ruled in BIR Ruling No. 384-92 dated December 28, 1992 that rentals to be paid to the foreign shipowner under a bareboat charter with option to purchase are considered installment payments if the sale will be ultimately consummated and, therefore, 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. However, should the said purchase agreement fail to materialize 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, the charterer is required to file within ten (10) days from receipt of the adjudication letter, a surety bond the amount of which shall be determined by this Bureau. If the charterer fails to do so, it shall be required to withhold and remit the 4.5% final tax on the rental to be paid to the non-resident foreign owner. Our records fail to show that while your Bareboat Charter of the two vessels, Ishizuchi (MV Ruby I) and Yatsushiro have been approved by MARINA, you have applied for a ruling with this Office to qualify your bareboat charter agreement as a lease-purchase, such that the rentals you pay to the foreign national may be exempt from the 4.5% final tax. Since you have nevertheless exercised the option to purchase the vessel in 1989, this Office hereby holds that the rentals paid during the period prior to the purchase in 1989 are exempt from the 4.5% final tax. Moreover, since the displacement weight of the vessel purchased by you does not exceed ten thousand (10,000) tons, your company as importer, is subject to the value-added tax under Section 101 of the Tax Code, as it does not qualify as an exempt transaction under Section 103 of the Tax Code. You are therefore requested to pay within ten (10) days from receipt hereof the 10% VAT based on the purchase price of U.S. $105,000.00 or its Philippine peso equivalent, together with the increments incident to late payment, through the Law Division, this Bureau. After payment, the corresponding clearance shall be issued for purposes of securing a permit to operate the vessel, MV Ruby I (Ishizuchi) from MARINA. Finally, as charterer of the other vessel, Yatsushiro, you are liable to pay 4.5% final tax on the rentals paid to the foreign shipowner, beginning December, 1987 or when you started operating such vessel for coastwise shipping in the Philippines. Very truly yours, JAIME M. MAZA Assistant Commissioner (Legal Service)