Lessors of motor vehicles and domestic airline companies

Lessors of motor vehicles and domestic airline companies: Transportation contractors? by Catherine Quilantang

Transportation is a vital component of businesses everywhere since it allows goods or persons to be transferred to various places.  Goods need to be transported from ports to factories, and then to the place of sale or to the buyers.  Transportation helps a lot in providing mobility to workers. A company’s employees or officers travel locally or abroad to attend meetings, conventions or other business matters.  Also, it is not always possible to have workers near the workplace or the factory.  Many companies either provide their own motor vehicles or lease cars or coaches to bring the workers to the place of work.

Transportation expense can only be allowed as a deduction from the payor’s gross income only if it is shown that the income tax required to be withheld has been paid to the Bureau of Internal Revenue (BIR). However, there are some ambiguities on the implementation of the withholding tax on payments for transportation. For companies paying car rental and/or plane fare to airline companies or through their travel agencies, the question that normally comes to mind are: Are the payments for employees’ car rental and plane fare subject to creditable withholding tax (CWT)? At what rates?

Existing  regulations provide that transportation contractors, which include common carriers for the carriage of goods and merchandise of whatever kind by land, air, or water, where the gross payments by the payor to the same payee amounts to at least P2,000 per month, regardless of the number of shipments during the month, is subject to 2 percent CWT.

Under the same regulations, there is also a withholding tax requirement for lease of personal property.  Gross rental or lease in excess of P10,000 per payment for personal property used in business which the payor is not taking title is subject to 5 percent CWT.  Since motor vehicles are considered personal property, a 5 percent tax may be deducted and withheld on the rental of motor vehicles.

The question is, when shall we apply the 2 percent and the 5 percent rates in case of transportation contractors?

There are only two instances when the BIR issued rulings on car rental companies.  In one instance, the BIR ruled that a lessor of motor vehicles or a transportation contractor is subject to 2 percent CWT. It has been disclosed in the first ruling that the lessor will provide a car with driver as service car of the company’s consultant.  The second ruling, however, did not disclose if a driver has been provided or not. For rental of car without chauffeur, is the 5 percent tax applicable as lessor of personal property or still 2 percent as transportation contractor? Or are payments for the lease of motor vehicles, whether provided with chauffeur or not, considered payments to transportation contractor for purposes of withholding tax?

In a recent Court of Tax Appeals (CTA) En Banc decision, the CTA decided that car rental payments are subject to 2 percent CWT as transportation contractors. The court ruled that the transportation contractor includes both carriage of goods/merchandise or passengers. The withholding on transportation contractors is not limited to payments for the transportation of goods and merchandise but also includes payments to those engaged in the transport of passengers. The transportation contractor, whether for carriage of goods/merchandise or passengers, is the item subject to expanded withholding tax and the subsequent phrase “which include common carriers for the carriage of goods and merchandise” is a point of clarification that the payments must “at lease be P2,000 per month regardless of shipments during the month.”

As regards the payments to airline companies for the airfare, it has been clarified in one of the circulars issued by the BIR that for buyers classified as belonging to the top 10,000 (now top 20,000) private corporations, they have to deduct and withhold 2 percent on their payments for domestic air tickets as payments to its local regular suppliers of service.

However, the definition of transportation contractors could easily cover airline companies. Various court decisions and BIR rulings and circulars defined common carriers as those engaged in the business of carrying or transporting passengers or goods or both, by land, water or air, for compensation, offering their services to the public and shall include transportation contractor. Does this mean that payments to airline companies, either for transport of cargoes or passengers, are subject to 2 percent CWT as transportation contractor? And for this reason, is the payor, whether or not classified as one of the top 20,000 private corporations, required to withhold the 2 percent tax on payments to airline companies as transportation contractor?

If payors withheld 2 percent CWT for the lease of cars, instead of 5 percent as rental of personal property, or if it did not withhold the 2 percent tax on its payments to airline companies for its employees’ airfare since it does not belong to the top 20,000 private corporations, is there any risk that they will be assessed for under-withholding or for non-withholding of tax?

For the guidance of the taxpayers, the BIR should issue a clarification as to the proper CWT that should be applied on payments to lessor of motor vehicles and to domestic airline companies for airfare tickets.