Shipbuilding and Repair Contracts in the Philippines: Key Protections

A shipbuilding or ship repair contract in the Philippines is governed primarily by Republic Act No. 9295, the Domestic Shipping Development Act of 2004, which defines shipbuilding as the design, construction, launching and outfitting of all types of ships and watercraft, and ship repair as the overhaul, refurbishment, renovation, improvement, or alteration of the hull, machineries, equipment, outfits and components of ships. The law also grants tax incentives to registered shipyards and directs MARINA to develop local building capability. Parties contracting for newbuilds or repairs should therefore confirm the yard's MARINA accreditation, allocate tax incentives clearly, and plan for the law's preference for locally built vessels.

Who may lawfully operate a shipyard

Under Section 3 of Republic Act No. 9295, a shipbuilder or ship repairer is a citizen of the Philippines, a commercial partnership owned by a majority of Filipinos, or a corporation incorporated under Philippine laws whose capital is owned or controlled, in any proportion, by Filipinos, foreign nationals, or both, or by corporations whether Filipino or foreign-owned. The entity must be duly authorized by MARINA to engage in shipbuilding or ship repair or to operate a shipyard, graving dock or marine repair yard.

For a contract to be enforceable and the project insurable, the counterparty should hold that MARINA authorization. A shipyard is defined as shipbuilding or repair facilities with the capability to lift vessels above the waterline to work on vessels, appendages, structure, machinery and equipment.

Tax incentives that shape contract pricing

Section 19 of Republic Act No. 9295 grants shipbuilders and ship repairers an exemption from value-added tax on the importation of capital equipment, machinery, spare parts, life-saving and navigational equipment, steel plates and other metal plates, including marine-grade aluminum plates, to be used in the construction, repair, renovation or alteration of any merchant marine vessel operated or to be operated in the domestic trade.

The exemption is conditional: the articles must not be manufactured domestically in sufficient quantity, of comparable quality and at reasonable prices; they must be directly imported by a MARINA-registered shipbuilder or ship repairer; they must be reasonably needed and used exclusively by that registered entity; MARINA approval must be obtained prior to importation; and the exemption may be availed of within ten (10) years from the approval of the Act.

Contracts should state which party secures MARINA approval, who bears the risk if the exemption is denied, and whether any savings are passed through to the vessel owner. Section 19 also imposes a liability of twice the value-added tax exemption or waived amount where covered articles are sold, transferred or disposed of without prior MARINA approval.

Net operating loss carry-over and accelerated depreciation

Section 19 likewise allows a registered shipbuilder or ship repairer a net operating loss carry-over: a net operating loss not previously offset as a deduction from gross income may be carried over as a deduction for the next three (3) consecutive taxable years, subject to the National Internal Revenue Code of 1997, as amended.

Accelerated depreciation is also available for fixed assets: not more than twice as fast as the normal rate, or at the normal rate if the expected life is ten (10) years or less; or over any number of years between five (5) years and the expected life if the latter is more than ten (10) years. The registered entity must notify the Bureau of Internal Revenue at the beginning of the depreciation period which rate it will use. These incentives affect the true cost of a yard's bid and are worth reflecting in pricing schedules.

The built-locally preference and vessel import restrictions

Section 20 of Republic Act No. 9295 requires MARINA, ten (10) years from the effective date of the Act and every year thereafter, to evaluate and determine the progressive capability of MARINA-registered shipyards to build and construct new vessels for the domestic trade.

In its first year of evaluation, MARINA determines the capability of registered shipyards to build new vessels below 500 GRT. If that capability is proven sufficient to meet domestic demand, domestic ship operators are to be discouraged from importing new or previously owned vessels of less than 500 GRT for the domestic trade, and vessels built in MARINA-registered shipyards are given priority for entry in the Philippine Registry and allowed to operate in the domestic trade. MARINA adjusts the size of vessels that may be sourced locally through yearly evaluations.

For owners weighing a newbuild abroad versus a local yard, this provision is a material planning consideration and should be addressed in the contract's delivery and registration clauses.

Classification and safety obligations

Section 22 requires all vessels, whether newly built or previously owned, acquired on or after the effectivity of the Act, to be classed by a government-recognized classification society on the date of acquisition prior to operation in the domestic trade. Section 23 directs MARINA to implement a mandatory vessel retirement program for unclassed vessels that fail to meet classification standards. A newbuild contract should therefore specify the classification society, the class notations required, and which party bears the cost of securing the class certificate before delivery.

Frequently asked questions

Does a shipyard need a MARINA license in the Philippines? Yes. Under Section 3 of Republic Act No. 9295, a shipbuilder or ship repairer must be duly authorized by MARINA to engage in shipbuilding or ship repair or to operate a shipyard, graving dock or marine repair yard.

What incentives do shipbuilders and ship repairers get? Section 19 grants a VAT exemption on importation of capital equipment, machinery, spare parts, and steel and metal plates used in construction, repair, renovation or alteration of domestic-trade vessels, plus net operating loss carry-over and accelerated depreciation, subject to stated conditions.

Are imported vessels preferred over locally built ones? No. Under Section 20, once MARINA determines that registered shipyards can build vessels below 500 GRT in sufficient quantities, domestic operators are discouraged from importing such vessels, and locally built vessels are given priority for entry in the Philippine Registry.

Practical takeaways

• Verify the yard's MARINA authorization before signing; the definition of shipbuilder and ship repairer under Section 3 of Republic Act No. 9295 requires it.
• Allocate the Section 19 VAT exemption clearly in the contract, including who obtains prior MARINA approval and who bears denial risk.
• Note the ten-year window for availing the exemption and the double-tax liability for unauthorized transfers of covered articles.
• Address classification under Section 22 and the built-locally preference under Section 20 in delivery and registration clauses.
• Build in documentary milestones for MARINA and BIR compliance so incentives are not lost through procedural lapses.

Primary sources

The rules discussed above are drawn from the following primary sources, as published in the Official Gazette and the national statute book.

• IRR of REPUBLIC ACT NO. 10635 - 2022 IMPLEMENTING RULES AND REGULATIONS OF REPUBLIC ACT 10635, "ACT ESTABLISHING THE MARINA AS THE SINGLE MARITIME ADMINISTRATION RESPONSIBLE FOR THE IMPLEMENTATION AND ENFORCEMENT OF THE INTERNATIONAL CONVENTION ON STANDARDS OF TRAINING, CERTIFICATION AND WATCHKEEPING FOR SEAFARERS, 1978, AS AMENDED, AND INTERNATIONAL AGREEMENTS OR COVENANTS RELATED THERETO:

• REPUBLIC ACT NO. 9295 - AN ACT PROMOTING THE DEVELOPMENT OF PHILIPPINE DOMESTIC SHIPPING, SHIPBUILDING, SHIP REPAIR AND SHIP BREAKING, ORDAINING REFORMS IN GOVERNMENT POLICIES TOWARDS SHIPPING IN THE PHILIPPINES, AND FOR OTHER PURPOSES

• MARINA MEMORANDUM CIRCULAR NO. 87, September 15, 1994

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.