BIR Ruling [DA-017-98]

January 27, 1998 BIR RULING [DA-017-98] Joaquin Cunanan & Co. 14/F Multinational Bancorporation 6805 Ayala Avenue, Makati City Attention: Mrs . Tomasa H . Lipana Managing Partner Tax and Corporate Services Gentlemen : This refers to your letter dated May 1, 1997 applying for and on behalf of your client, Warner Lambert Philippines (WL-Phils.), for tax treaty relief in compliance with Revenue Memorandum Order No. 10-92. aisadc It is represented that WL-Phils. is a corporation organized and existing under the laws of the Philippines and is wholly-owned by Warner Lambert Company U.S.A. (WL-US), incorporated in the State of Delaware, U.S.A.; that Parke Davies B.V. (PD-BV), on the other hand, is a corporation duly organized under the laws of the Netherlands. In line with the on-going corporate reorganization WL-US and PD-BV entered into a Contribution Agreement wherein PD-BV agreed to grant WL-US the Right to Subscribe to its capital stock equivalent to one (1) share with a par value of NLG 500. Upon exercise by WL-US of the Right to Subscribe, WL-US shall make full payment for the issue of the said share through the contribution and transfer to PD-BV of its shares in the other WL-US subsidiaries which include 126,404 common shares in the WL-Phils.; the assets of WL-Phils. as of the date of transfer do not consist principally of real property interest located in the Philippines. Based on the foregoing facts, it is your contention that the gain derived by WL-US from the transfer or alienation of shares of stock in WL-Phils. to PD-BV is not subject to the Philippine income/withholding tax. In reply, please be informed that the gain derived by WL-US (a non-resident US corporation) from the assignment/transfer of its 126,404 common shares in WL-Phils. to PD-BV is not subject to Philippine income tax pursuant to Article 14(2) of the RP-US Tax Treaty in relation to Article 1 of the Reservation Clause of said Treaty, which reads as follows: ARTICLE 14 "(1) Gains from the alienation of tangible personal (movable) property forming part of the business property of a permanent establishment which a resident of a Contracting State has in the other Contracting State or of tangible personal (movable) property pertaining to a fixed base available to a resident of a Contracting State in the other Contracting State for the purpose of performing independent personal services, including such gains from the alienation of such a permanent establishment (alone or together with the whole enterprise) or of such a fixed base, may be taxed in the other State. However, gains derived by a resident of a Contracting State from the alienation of ships, aircraft or containers operated by such resident in international traffic shall be taxable only in that State, and gains described in Article 13 (Royalties) shall be taxable only in accordance with the provisions of Article 13. "(2) Gains from the alienation of any property other than those mentioned in paragraph (1) or in Article 7 (Income From Real Property) shall be taxable only in the Contracting State of which the alienator is a resident . . . ." (emphasis supplied) ARTICLE 1 "Notwithstanding the provisions of Article 14 of the Convention relating to capital gains, both the Philippines and the United States may tax gains from the disposition of an interest in a corporation if its assets consist principally of a real property interest located in that country. . ." As shown in WL-Phils.' Balance Sheets as of December 31, 1996 (audited) and May 1, 1997 (certified by its treasurer), the company's assets do not consist principally (or not more than 50% in terms of value) of real property interest located in the Philippines. In view thereof, this Office is of the opinion that the gain derived by WL-US from the assignment/transfer of shares of stock of WL-Phils. to PD-BV is not income subject to Philippine income withholding tax. Accordingly, your client's Application for Tax Treaty Relief is hereby granted. However, the transfer shall be subject to the payment of the documentary stamp tax of P1.50 on every P200.00, or fractional part thereof, of the par value of the shares transferred. 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, (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal & Enforcement Service)