BIR Ruling [UN-245-95]

July 5, 1995 BIR RULING [UN-245-95] Joaquin Cunanan and Co. 8th Floor, BA-Lepanto Building 8747 Paseo de Roxas Street Makati, Metro Manila Attention: Mr . George T . J . Lavadia Tax Principal Gentlemen : This refers to your letter dated November 14, 1994 requesting in behalf of your client, Kawasaki Kisen Kaisha Ltd. ("K" Line) for a ruling that the monthly payments made by Ventis Maritime Corporation (Ventis) and K-Line Maritime Training Corporation (KMTC) to "K" Line, are not income for being a mere reimbursement of costs/expenses and hence, not subject to any creditable expanded withholding taxes. cd It is represented that "K" Line is a corporation organized and existing under the laws of Japan; that it has been granted authority by the Philippine Board of Investments under its amended Certificate of Authority No. 2242, to establish a representative office in the Philippines which will act as a liaison/communications center for its head office; and to construct a building on leased land which will serve as temporary quarters for sojourning vessel captains and seafarers while they are in the Philippines, for the manning and crewing office of "K" Line as well as for the training and practice centers for those captains and seafarers who shall be sent to or employed in "K" Line vessels by and through the local manning/crewing/training agent; that Ventis is a corporation duly organized and existing under Philippine laws and acts as the manning and crewing office of "K" Line, while KMTC is a corporation duly organized and existing under Philippine laws and acts as the training and practices center for ship captains and seafarers who shall be sent to or employed in "K" Line vessels; that "K" Line constructed a building on a rented land located at San Marcelino St., Malate, Manila to house its Manila Representative Office (MRO) and as temporary quarters for its sojourning vessel captains and seafarers; that under the terms of its amended certificate of authority, the authority of "K" Line was in effect extended to accommodate Ventis and KMTC, subject to the right to be reimbursed the reasonable cost of such accommodation; that the parties on January 1, 1994 entered into an agreement as to the use and maintenance of the building; that "K" Line allowed Ventis and KMTC to occupy and use portions of the said building as manning and crewing office in the case of Ventis and as training and practices center in the case of KMTC for ship captains and seafarers who shall be employed or sent to "K" Line vessels; that of the 2,153.49 sq.m. total floor area of the building, "K" Line allows Ventis and KMTC to occupy and use the total area of 260.00 sq.m. and 455.75 sq.m. respectively, while "K" Line MRO itself occupy a total area of 809.42 sq.m., all other areas of the building (except for those areas occupied by "K" Line MRO, Ventis and KMTC) as well as other areas of the land where the said building is located are deemed common area for the common use of the three parties involved; that under the said agreement, the parties are to share proportionately the expenses of the maintenance of the building including the maintenance/utility expenses of the common areas. However, the share in the said expenses by Ventis and KMTC should not exceed the amounts of P52,160.00 and P63,525.00, respectively, on a monthly basis; that based on the schedule with supporting documents submitted, the total monthly expenses for the maintenance/utility expenses of the building amount to P794,177.91; thus, the monthly proportionate share thereon of Ventis and KMTC should have been P135,385.73 and P237,315.57, respectively, but that, due to the ceiling provided, the monthly payments of Ventis and KMTC were actually less than the actual cost of accommodation that should have been allocated to them if based on the proportionate area or office space occupied by them. In reply, this Office is of the opinion that the aforesaid monthly payments made by Ventis and KMTC of not exceeding P52,160.00 and P63,525.00 respectively to "K" Line for their shares in the maintenance/utility expenses should not be construed as income to "K" Line the same being mere reimbursement of costs without any mark-up or profit element. Accordingly, the said payments are not subject to any creditable expanded withholding tax. (BIR Rulings No. 001-90 dated January 4, 1990) 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, and/or any of the requirements imposed in this letter are not complied with, then this ruling shall be considered null and void. cdll Very truly yours, ALICIA P. CLEMENO Assistant Commissioner (Legal Service)