March 5, 2008 BIR RULING [DA-128-08] Sec. 2.57.2 Rev. Regs. 2-98; BIR Ruling No. 098-97 dtd 8/28/97 Planters Products, Inc. 109 Esteban St,, Legaspi Village, Makati City Attention: Ms. Carol P. Buagas Finance Analyst Gentlemen This refers to your letter dated February 26, 2008 requesting an opinion whether or not the payment of the consideration for the pre-termination of a lease contract between Planters Products, Inc., (PPI), and Limay Bulk Handling Terminal, Inc. (LBHT!) is subject to withholding tax. It is represented that PPI is a corporation duly organized and existing under Philippine laws with office address at 109 Esteban St., Legaspi Village, Makati City; that it is engaged in the purchasing, acquiring, manufacturing, trading and generally dealing in any and all kinds of artificial manures and agri-chemical products and by-products; ‘that LBHTI, on the other hand, is a corfi@tation duly organized and existing under Philippine laws with principal office at 2nd Floor, Eurovilla Condominium, Legaspi corner Herrera Sts., Legaspi Village, Makati City. It is further represented that PP! owns an industrial estate located at Limay, Bataan covering eighteen (18) contiguous parcels of land with a total aggregate land area of 580,424 square meters; that LBHTI is one of the lessees of PPI in said property; that their Lease Contract had an original lease term of twenty (20) years which period was subsequently extended for another ten (10) years; that the duration of the contract, is from March 1990 to July 20, 2020; that on February 7, 2007, prior to the expiration of ‘the contract, PPI and LBHT! mutually agreed to pre-terminate the lease contract under the terms and conditions set forth in a duly-notarized Memorandum of Agreement (MOA) executed by the parties; and that under the MOA, the consideration for the pre- termination of the lease contract to be paid by PPI to the LBHTI shall amount to Seventy Five Million Pesos (Php75,000,000.00). Itis finally represented that PPI undertakes to pay the consideration subject to the terms set forth in the MOA but would like to be certain as to whether the payment shall be subject to withholding taxes. Hence, this request for opinion. In reply, please be informed that this Office had previously ruled that payments of consideration for pre-termination of lease contracts are not subject to withholding tax. ‘Thus, in BIR Ruling 098-97 dated August 28, 1997, it was held that: "Pursuant to Revenue Regulations No. 6-85, as amended, otherwise known as the Revised and Expanded Withholding Tax Regulations implementing Section 50(b) of the Tax Code, only payments to persons ‘enumerated therein are subject to the expanded withholding tax. (BIR Ruling Nos. 101-94 dated May 3, 1994 and 12-83 dated February 3, 1983}) Accordingly,your opinion is hereby confirmed that since the payment to be received by the lessee, Read Rite, from the lessors, Philamlife and PERF, as consideration for the pre-termination of the lease contracts, cancellation of options to purchase and indemnity for the disturbance and damages arising from such pre- termination and cancellation is not among those specified in Revenue Regulations No. 6-85, as amended, such payment is not subject to the expanded withholding tax.” Following the same principle, this Office stated in BIR Ruling DA 532-2007 dated October 10, 2007 that only payments to persons enumerated under the withholding tax regulations are subject to withholding tax. In the said ruling, the BIR held that tuition, fees collected by schools in rendering educational services to students are not subject, to the creditable withholding tax since payments of such nature are not among those payments subject to withholding as specified in Rev. Regs. 2-98, as amended, Thus, inasmuch as the payment to be received by LBHTI from PPI under the MOA represents consideration for the pre-termination of their lease contract, itis, therefore, not subject to the creditable withholdingjtax imposed under Section 2.57.2. of Rev Regs. 2-98, as amended. However, such payment is taxable to the recipient as ordinary income in the year of receipt 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, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service