BIR Ruling

April 5, 1976 C. J. Valdes and Associates Attorneys & Counsellors At Law 1130 Perez Street, U. N. Avenue Paco, Manila Attention: Atty . Jose C . Leynes Gentlemen : This refers to your letter dated March 9, 1976 requesting a ruling on the tax consequence of the proposed exchange of shares between Meralco Securities Corporation (MSC) and Shell Petroleum Co., Ltd. (SPCO). cdta It is represented that MSC, a domestic corporation intends to transfer its 188,156 Philippine Petroleum Corporation (PPC) common shares and 400,000 Meralco Securities Industrial Corporation (MSIC) common shares in exchange for 13,703,465 Pilipinas Shell Petroleum Corporation (PSPC) common shares owned by SPCO which is a foreign corporation not licensed and not doing business in the Philippines; that some of the shares to be transferred by MSC were acquired before November 5, 1970 and some were acquired after said date; that the parties have agreed to execute the exchange of the shares at equal values; and that the exchange will be consummated abroad. In reply thereto, I have the honor to inform you that the stock transfer tax of of 1% shall be due and payable only as regards shares of stock acquired and sold, transferred or exchanged on or after November 5, 1970. If the stocks were acquired before November 5, 1970 and sold thereafter or any time between said date to the present, the transaction is subject to the capital gains tax. (Sec. 2, Rev. Regs. 2-70 dated November 11, 1970 as amended by Rev. Regs. No. 6-72 dated October 10, 1972 implementing R. A. 6141 as amended by P. D. No. 10) For Philippine income tax purposes, a non-resident foreign corporation like SPCO is subject to income tax only on income derived from all sources within the Philippines (see Sec. 24(b)(1) NIRC as amended) while MSC which is a domestic corporation is subject to income tax on income derived from all sources during the taxable year. (See Sec. 24(a), N.I.R.C. as amended) Accordingly, if the exchange is to be effected and consummated abroad, the place or source of the gains, if any, is outside the Philippines. (see Collector vs. Anglo-California National Bank, G. R. No. L-12476. January 29, 1960) Being a non-resident foreign corporation, SPCO shall not be subject to Philippine income tax, since the gains derived by it, if any, from the said exchange constitute income from sources without the Philippines. However, being a domestic corporation, MSC shall be subject to income tax on any gain or income derived from the exchange of shares acquired before November 5, 1970 and the gain or loss to MSC from the aforesaid exchange shall be the difference between the original acquisition cost or adjusted cost basis of its PPC common shares and MSIC common shares and the fair market value (at the time of exchange) of SPCO's PSPC shares received by MSC in the exchange. Finally, the exchange of the shares acquired after November 5, 1970 shall not be subject to the stock transfer tax, the transaction having been effected outside the taxing jurisdiction of the Philippines. Very truly yours, CONRADO P. DIAZ Acting Commissioner of Internal Revenue TAN-1182-568-4 "TAXPAYERS SHOULD INDICATE THEIR TAN IN ALL COMMUNICATIONS TO THE BIR."