ITAD Ruling No. 177-02

October 10, 2002 ITAD RULING NO. 177-02 Art. 12, RP-Australia Tax Treaty Sec. 28, 108, 114, NIRC; RR 2-98, Sec. 2.57-1 (1), (4); RR 7-95, Sec. 4.102-1 BIR Ruling No. 205-86 & 402-61 The Saigon Company Philippines, Inc. 6th Floor S & L Building 1500 Roxas Boulevard Ermita, Manila Attention: Concepcion C. Santos Financial Controller Gentlemen : This refers to your letters dated July 19, 2000 and August 3, 2000 requesting clarification on the tax rates applicable to the rental of equipment to be used for the production of the play "Miss Saigon". It is represented that your company, THE SAIGON COMPANY PHILIPPINES, INC. (Saigon) is a duly registered domestic corporation engaged in the production of a musicale theatrical play (broadway);that in connection with the staging of "Miss Saigon" at the Cultural Center of the Philippines from October 1 to March 31, 2001; you rented lights and sound system, the statue of Ho-Chi-Min, costumes, musical instruments, and props from THE TECHNICAL OFFICE PTY LIMITED (TOPL),a non-resident foreign corporation with address at 2/134 Redfern Street, Redfern, NSW 2016, Australia. Based on the foregoing, you seek clarification on the following: 1. Whether the rental from TOPL of an entire lights and sound system shall fall under the classification of machineries and other equipment under Revenue Regulations No. 2-98 Sec. 2-57 item No. (4) to be taxed at 7.5%; 2. Whether the rental from TOPL of the following equipment falls under Revenue Regulations No. 2-98 Sec 2.57 item no. (4) taxed at 7.5% and subject to the 10% VAT: a. statue of Ho-Chi-Min b. costume c. musical instrument c. props rental 3. Whether the rental fees on the lights and sound system payable to TOPL are subject to VAT; If so, whether the Saigon Company should, before remitting the rental payment, deduct therefrom the 10% VAT, and file the VAT return on the lessor's behalf on the 25th of the following month the payment was made. In reply, please be informed that in determining whether the subject rented production equipment are subject to the 7.5% tax rate, the same must fall under the classification of aircraft, machineries and other equipment under Revenue Regulations No. 2-98 Sec. 2.57 item No. 4 thereof. In ascertaining whether the phrase "and other equipment" includes the subject rented production equipment, the principle of " ejusdem generis " should apply which states: The rule of ejusdem generis provides that "where, in a statute, general words follow a designation of particular subjects or classes of persons, the meaning of the general words will ordinarily be presumed to be restricted by the particular designation, and to include only things or persons of the same kind, class or nature as those specifically enumerated." [BIR Ruling 205-86 citing Genato Commercial Corporation vs. Court of Tax Appeals, et. al. ,G.R. No. L-1172] The rule is based on the obvious reason that if the legislature had intended the general words to be used in their unrestricted sense they would have made no mention of the particular classes. The words "other" or "any other" following an enumeration of particular classes, are therefore to be read as "other such like",and to include only others of like kind or character." ( Words & Phrases, Vol. 14, pp. 220221, citing: People v. Mckean, 243 P. 898, 900, 76 Cal. App. 114 ) [ BIR Ruling 402-61 ] In other words, in order that a matter may come under the general clause, it is necessary that it belongs to the same kind or class therein specifically enumerated or possesses a common characteristic. Otherwise, it should be deemed foreign or extraneous and is not included. Accordingly, the " other equipment " that may come under the general clause should be of the same nature as those that have preceded them, meaning, " aircraft and machineries "." Aircraft " shall be understood to mean that which refers to the establishment, operation and maintenance of transport services for the carriage of passengers, mail, goods and property by air domestic and international, various aircraft equipment, engines, spare parts, and accessories which are necessary for the day to day operations to ensure the safety and worthiness of an aircraft. [BIR Ruling No. DA-219-6-6-97 dated June 8, 1995] On the other hand, "machineries" are those "used for the construction, improvement, repair, and maintenance of roads, bridges and other infrastructure projects, as well as garbage trucks, fire trucks, and other similar equipment . . ." [Sec. 382 of Republic Act No. 7160, Local Government Code as quoted in BIR Ruling No. 068-94 dated March 2, 1994) such as bulldozers, cranes, lifters, movable mixers, etc. [ CONCRETE AGGREGATES, INC. vs. COMMISSIONER OF INTERNAL REVENUE , C.T.A. CASE NO. 2433. September 19, 1980), or those which are actually, directly and primarily used or necessary to meet the needs of the power plants, including but not limited to steam generators, conveyors, compressors, diesel engine generators, generator control panels, fuel storage tanks, etc. . . . [BIR Ruling No. 105A-94 dated May 20, 1994] or a mechanical contrivance used to carry the tenants and the general public to the various floors of the building, . . . for the efficient operation of the building . . . ( Lourdes R. de Ortega v. City Board of Assessments Appeals of Manila ,C.T.A. Case No. 2199, January 31, 1972). CETIDH Applying the ejusdem generis rule, the lights and sound system, the statue of Ho-Chi-Min, costumes, musical instruments, and props to be used for the production of "Miss Saigon" cannot be considered to be of the same kind, class or nature of aircraft and machineries for which rental, a non-resident lessor is taxed at the rate of only 7.5%. Please be informed also of the existing RP-Australia tax treaty, Article 12 of which provides as follows: "Article 12 "ROYALTIES (1) Royalties arising in one of the Contracting States, being royalties to which a resident of the other Contracting State is beneficially entitled, may be taxed in that other State. (2) Such royalties may also be taxed in the Contracting State in which they arise, and according to the law of that State. However, the tax so charged shall not exceed (a) 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 (b) in all other cases, 25 per cent of the gross amount of the royalties. (3) The term `royalties' in this Article means payments or credits, whether periodical or not, and however described or computed, to the extent to which they are made as consideration for (a) the use of, or the right to use, any copyright, patent, design or model, plan, secret formula or process, trademark, or other like property or right; (b) the use of, or the right to use, any industrial, commercial or scientific equipment; xxx xxx xxx" Based on the aforequoted provisions, payments made for the use of or the right to use, any industrial, commercial or scientific equipment are considered as royalties taxable at twenty-five per cent (25%). Since TOPL is engaged in the business of leasing out commercial equipment such as lights and sound system, costumes, musical instruments and props, payments received by TOPL therefore are classified as royalties under Art. 12(3)(b) of the RP-Australia tax treaty taxable at a rate not exceeding 25% of the gross amount of the royalties. While Sec. 28(B)(4) of the Tax Code of 1997, as implemented by Revenue Regulations No. 2-98 Sec. 2.57 item no. (4), provides for a lower rate of seven and one-half percent (7%) of gross rentals or fees, but since the subject commercial equipment do not come within the meaning of "equipment" as earlier discussed, then TOPL is not entitled to the lower tax rate of 7.5% provided therein. With respect to VAT on rentals, Section 108 of the Tax Code provides: SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties . (A) Rate and base of tax There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of the gross receipts derived from the sale or exchange of services including the use or lease of properties. "...The phrase "sale or exchange of services" shall likewise include: 1. ... 2. The lease or the use of or the right to use any industrial, commercial or scientific equipment; xxx xxx xxx Lease of properties shall be subject to the tax herein imposed irrespective of the place where the contract of lease or licensing agreement was executed if the property is leased or used in the Philippines. The term "gross receipts" means the total amount of money or its equivalent representing the contract price, compensation, service fee, rental or royalty, including the amount charged for materials supplied with the services and deposits and advance payments actually or constructively received during the taxable quarter for the services performed or to be performed for another person, excluding value-added tax." Moreover, Sec. 4.102-1 Revenue Regulations 7-95 provides, viz : Sec. 4.102-1. Value-Added Tax on the sale of services and use or lease of properties . (a) Sale or exchange of services, as well as the use or lease of properties, as defined in Section 102(a) of the Code shall be subject to VAT. "xxx xxx xxx" (b) The VAT on rental and/or royalties payable to non-resident foreign corporations or owners for the sale of services and use or lease of properties in the Philippines shall be based on the contract price agreed upon by the licensor and the licensee. The licensee shall be responsible for the payment of VAT on such rentals and/or properties in behalf of the non-resident foreign corporation or owner by filing a separate VAT declaration/return (BIR Form No. 1600 Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld) for this purpose. The duly validated VAT declaration/return is sufficient evidence in claiming input tax credit by the licensee. (emphasis supplied) Finally, the filing of return and payment of VAT is prescribed under Sec. 114 (A) of the Tax Code of 1997 which provides, viz : SEC. 114. Return and Payment of Value-added Tax . "xxx xxx xxx" (B) Withholding of Creditable Value-added Tax. ...the payment for lease or use of properties or property rights to nonresident owners shall be subject to ten percent (10%) withholding tax at the time of payment .For this purpose, the payor or person in control of the payment shall be considered as the withholding agent. (emphasis supplied) The value-added tax withheld under this Section shall be remitted within ten (10) days following the end of the month the withholding was made .(emphasis supplied) Based on the aforequoted provisions, as long as the property is leased or used in the Philippines, the same shall be subject to VAT at the rate of 10% of the gross receipts derived from the lease of properties. Accordingly, rental fees on the lights and sounds system, the statue of Ho-Chi-Min, costumes, musical instruments, props, and other equipment to be used for the production of "Miss Saigon" payable to a non-resident foreign corporation are subject to 10% VAT, based on the contract price agreed upon by Saigon and TOPL. In view of the above, since the lessee is constituted the withholding agent for VAT purposes, Saigon shall be responsible for the payment of VAT on the rentals on behalf of TOPL by filing a separate VAT declaration/return using BIR Form 1600. The duly validated declaration/return is sufficient evidence by Saigon in claiming input tax credit. The value-added tax withheld by Saigon should have been remitted within ten (10) days following the end of the month the withholding was made. This ruling is issued on the basis of the facts as represented. However, if upon investigation it shall be disclosed 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