ITAD Ruling No. 198-00

December 7, 2000 ITAD RULING NO. 198-00 RP-Singapore Article 12 BIR Ruling No. 078-97 Sycip Gorres Velayo & Co. 3rd Floor Insular Life Bldg. Cor. Gorordo and Gen. Maxilon Avenue Cebu City Attention: Rita Asuncion S . Fernandez Tax Division Gentlemen : This refers to your letter dated August 9, 2000 on behalf of Van Seumeren (Philippines) Inc. (VSPI) requesting confirmation of your opinion that the remittances of VSPI to Van Seumeren (Singapore) Pte Ltd (VVS) of rental payments for the use of one (1) unit 250 Crawler Crane be exempt from withholding tax pursuant to Article 5 and Article 7 paragraph (1) of the RP-Singapore Tax Treaty. It is represented that VVS is a nonresident foreign corporation duly organized and existing under the laws of Singapore with principal address at 51 Newton Road #19-07/08, Goldhill Plaza, Singapore; that it is not registered as a corporation or partnership and is not licensed to do business in the Philippines as per certification dated September 13, 2000 issued by the Securities and Exchange Commission; that VSPI is a domestic corporation organized and existing under the laws of the Republic of the Philippines with principal office at PDI Condominium, Archbishop Reyes Avenue, Cebu City; that VSPI is engaged in the leasing of cranes, specialized equipment for heavy lifting and transportation for onshore and offshore industries on a turnkey basis and sea transportation thereof or any services related thereto or connected therewith; that to augment the machineries and equipment being leased by VSPI, it entered into a Lease Agreement with VSS for the lease of one (1) unit Crawler Crane; that in consideration thereof, VSPI shall pay rental payments of US$35,000.00 per month from May 1, 2000 to June 30, 2000. In reply thereto, please be informed that Article 12 of the RP-Singapore Tax Treaty provides, viz: "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: SDIaCT (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 Investment and engaged in preferred areas of activities and also royalties in respect of cinematograph films or tapes for television or broadcasting; SAEHaC (b) in the case of Singapore, where the royalties are approved under the Economic Expansion Incentives (Relief from Income Tax) Act of Singapore, the royalties shall be exempt; c) in all other cases, 25 per cent of the gross amount of the royalties. "(3) The term "royalties" 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 cinematograph films and films or tapes for television or broadcasting, any patent, trademark, 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." "xxx xxx xxx" Based on the aforequoted provisions, the abovementioned rental payments are covered by the term "royalties" and as such are subject to the preferential rate not exceeding twenty-five percent (25%) of the gross amount of royalties, 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 of Aircraft, Machineries and Other Equipment . Rentals, charter and other fees derived by non-resident lessors of aircrafts, machineries and other equipment shall be subject to a tax of not less than 5% but not more than 10% to be fixed and determined by the President upon recommendation of the Secretary of Finance; provided, that the rate of 7.5% shall be imposed on such rentals, charter and other fees until such time as the President shall have prescribed the rates appropriate for each category or property. 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) In view thereof, this Office hereby rules that the rental income derived by VSS from its lease transaction with VSPI 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 royalties under the RP-Singapore Tax Treaty, contrary to your opinion that the said rental income may be exempted from income tax pursuant to Article 7 & 5 of the RP-Singapore Tax Treaty. (UN 296-94, BIR Ruling No. 078-97) Finally, said rental payments made by VSPI to VSS for the lease of one (1) unit Crawler Crane shall be subject to the 10% value added tax (VAT) imposed under Sec. 108 of the Tax Code of 1997, based on the contract price agreed upon by the parties. VSPI, being the lessee, shall be responsible for the payment of VAT on such rentals on behalf of VSS by filing a separate VAT declaration/return. The said VAT declaration/return can be used by VSPI as evidence in claiming input tax credit.(Sec. 4.102-1(b) Revenue Regulations No. 7-95) This ruling is issued on the basis of the foregoing facts as represented. However, if upon investigation it will be disclosed that the facts are different, then this ruling shall be considered null and void. DIECTc Very truly yours, Commissioner of Internal Revenue By: (SGD.) LILIAN B. HEFTI Deputy Commissioner Legal and Inspection Group