ITAD Ruling No. 153-02

September 3, 2002 ITAD RULING NO. 153-02 Article 5 & 7-RP-Japan BIR Ruling No. ITAD-198-00 Tan & Venturanza Law Offices 2704 East Tower Philippines Stock Exchange Center, Exchange Road Ortigas Center, Pasig City Attention: Atty. Enrico G. Valdez Gentlemen : This refers to your application for relief from double taxation dated April 14, 2001, on behalf of your client Jan De Nul N.V. Philippine Branch (Jan De Nul), requesting confirmation of your opinion that the income payments by Jan De Nul to Flanders Dredging Company (Flanders) pursuant to their Charter Agreement are not subject to the Philippine income tax pursuant to Articles 5 and 7(1) of the RP-Belgium tax treaty. It is represented that Flanders is a corporation organized and existing under the laws of Belgium with business address at Katelijrestraat 2A, 9308 Hofstade Salsk, Belgium; that it is not registered either as a corporation or as a partnership and has not been licensed to do business in the Philippines per certification dated July 10, 2001 issued by the Securities and Exchange Commission (SEC); that Jan De Nul is a corporation organized and existing under the laws of Belgium licensed to do business in the Philippines, with SEC Registration No. 00063 as the Philippine branch of Jan De Nul N.V. (Belgium) with business address at Room Excelsior Bldg., Appt. 303, 161 Roxas Boulevard, Paraaque, to act as a service contractor for reclamation jobs and other related activities; that Jan de Nul and Flanders entered into a Charter Agreement executed on March 27, 2000; that Jan de Nul has chartered the vessel Pinta, a split trailing suction hopper dreger barge used for reclamation; and that Jan de Nul will pay a charter rental of Twenty Million Pesos (Php20,000,000) per month for six months or such longer period as the parties agree. In reply, please be informed that Article 12 of the RP-Belgium tax treaty provides: Article 12 Royalties "1. Royalties arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. "2. However, such royalties may also be taxed in the Contracting State in which they arise, and according to the law of that State, but, if the recipient is the beneficial owner of the royalties, the tax so charged shall not exceed: a) in the case of the Philippines, 15 per cent of the gross amount of the royalties, where the royalties are paid by an enterprise registered with the Philippine Board of Investments and engaged in preferred areas of activities and also royalties in respect of cinematographic films or tapes for television or broadcasting; b) in all other cases, 25 per cent of the gross amount of the royalties. "3. The term "royalties" as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work, including cinematographic films or tapes for television or broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment , or for information concerning industrial, commercial or scientific experience. (emphasis supplied) Based on the aforequoted provisions, the abovementioned charter rental payments are covered by the term "royalties" and as such are subject to a preferential rate not exceeding twenty-five percent (25%) of the gross amount of royalties, contrary to your opinion that the same are "business profits". However, Section 28(B)(4) of the Tax code of 1997 provides, viz : Sec. 28. Rates of Income Tax on Foreign Corporation . "xxx xxx xxx "(B) Tax on Nonresident Foreign Corporation . "xxx xxx xxx "(4) Nonresident Owner or Lessor or Aircraft, Machineries and Other Equipment. Rentals, charters and other fees derived by a nonresident lessor of aircraft, machineries and other equipment shall be subject to a tax of seven and one-half percent (7%) of gross rentals or fees . (Emphasis supplied) xxx xxx xxx" In view thereof, this Office is of the opinion and so holds that the rental income derived by Flanders from its lease transaction with Jan de Nul is subject to seven and one-half percent (7%) tax rate on gross rentals the same not having exceeded the 25% rate imposed on the gross amount of the royalties under the RP-Belgium tax treaty. ( BIR Ruling No. 198-00 ) Also the said rental payments by Jan de Nul to Flanders shall be subject to the 10% value-added tax pursuant to Sec. 108 of the Tax Code. Accordingly, Jan de Nul being the payor in control of the payment shall be responsible for the withholding of VAT on behalf of Flanders by filing a separate VAT return for and on behalf of Flanders using BIR Form No. 1600 (monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld). The duly filed BIR Form 1600 and proof of payment thereof shall serve as sufficient basis for the claim of input tax to be applied against the output tax that may be due from Jan de Nul if it is a VAT-registered taxpayer. In case Jan de Nul is a non-VAT registered taxpayer, the passed-on VAT withheld shall form part of the cost of the service purchased or treated as expense, whichever is applicable. In addition, Jan de Nul is required to issue the Certificate of Creditable Tax Withheld at Source (BIR Form 2307) in quadruplicate upon request of Flanders, the first three copies thereof to be given to Flanders and the fourth copy to be retained by Jan de Nul as its file copy. [Sections 4 & 6, Revenue Regulations No. 4-2002] (DA-ITAD-53-02) Finally, the Charter Agreement executed by and between Jan de Nul and Flanders shall be subject to the documentary stamp tax imposed under Section 197 of the Tax Code of 1997. ISAaTH This ruling is issued on the basis of the foregoing representations. However, if upon investigation it will be disclosed or discovered that the facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service