BIR Ruling [DA-029-02]

March 05, 2002 BIR RULING [DA-029-02] Sycip Gorres Velayo & Co. 6760 Ayala Avenue Makati, Metro Manila Attention: Atty. C. P. Noel Tax Division Gentlemen : This refers to your letter dated April 4, 2001 requesting for confirmation of your opinion (1) that the transfer of Lamitube shares of stock by Propack Switzerland to Propack Mauritius is subject to capital gains tax at the rate of 5%/10% pursuant to Section 28(B)(5)(c) of the Tax Code of 1997; (2) that the transfer of shares is also subject to documentary stamp tax at the rate of P1.50 on each P200.00, or fractional part thereof, of the par value of the shares of stock pursuant to Section 176 of the said Code; (3) that dividends declared prior to the transfer of the shares and received by Propack Switzerland is subject to the 15% tax on dividends pursuant to Section 28(B)(5)(b) of the same Tax Code. It is represented that your client, Lamitube Corporation ("Lamitube"), is a domestic corporation and is a wholly owned Philippine subsidiary of Propack Holding AG ("Propack Switzerland"); that Propack Holding AG is a corporation organized and existing under the laws of Switzerland; that on January 24, 2001, Propack Switzerland transferred 375,588 Lamitube shares to Propack Mauritius Limited ("Propack Mauritius"); that Propack Mauritius Limited is a company organized and existing under the laws of the Mauritius; that the Lamitube shares are not listed and traded in the Philippine Stock Exchange ("PSE"); that Lamitube declared dividends prior to the transfer of the shares; and that both Propack Switzerland and Propack Mauritius are not engaged in trade or business in the Philippines and have no permanent establishments in the Philippines. In reply, please be informed that your opinion is hereby confirmed as follows: 1. The net capital gains derived by a nonresident foreign corporation seller on the sale of shares of domestic corporation not traded in the local stock exchange realized during the taxable year shall be subject to capital gains tax under Section 28(B)(5)(c) of the Tax Code of 1997 at the rate of 5% of the net capital gains not exceeding P100,000 and 10% on the net capital gains in excess of P100,000. The net capital gains is the difference between the gross selling price or fair market value (FMV) of the shares, whichever is higher, and the acquisition cost of the shares. The selling price is either the actual consideration paid, the book value, or the fair market value of the shares, whichever is higher. The book value of the unlisted shares of stock shall be prima facie considered as their fair market value. However, if there have been previous bona fide sales exchanges of the unlisted shares of stock, the price at which these shares exchanged hands should be taken/considered as its fair market value. On the other hand, the cost of the shares shall be the actual purchase price plus all costs of acquisition such as commission, documentary tax, transfer fees, etc. ( Sec. 6, Revenue Regulations No. 2-82 ) Thus, the transfer of 375,588 Lamitube shares by Propack Switzerland to Propack Mauritius is subject to capital gains tax at the rate of 5% of the net capital gains not exceeding P100,000 and 10% on the net capital gains in excess of P100,000. 2. The transfer of Lamitube shares or certificates of stock representing the shares is subject to documentary stamp tax under Section 176 of the Tax Code of 1997 at the rate of P1.50 on each P200 or fractional part thereof, of the par value of the shares of stock. 3. Dividends declared by Lamitube prior to the transfer of the shares and received by Propack Switzerland is subject to tax at the rate of 15% pursuant to Section 28(B)(5)(b) of the Tax Code of 1997, which states: "(B) Tax on nonresident foreign corporations . xxx xxx xxx (5) Tax on certain incomes received by a nonresident foreign corporation . xxx xxx xxx (b) Intercorporate dividends a final withholding tax at the rate of fifteen percent (15%) is hereby imposed on the amount of cash and/or property dividends received from a domestic corporation, which shall be collected and paid as provided in Section 57(A) of the said Code, subject to the condition that the country in which the non-resident foreign corporation is domiciled, shall allow a credit against the tax due from the non-resident foreign corporation taxes deemed to have been paid in the Philippines equivalent to twenty percent (20%) for 1997, nineteen percent (19%) for 1998, eighteen percent (18%) for 1999, and seventeen percent (17%) thereafter, which represented the difference between the regular income tax of thirty-five percent (35%) in 1997, thirty-four percent (34%) in 1998, thirty-three percent (33%) in 1999, and thirty-two percent (32%) thereafter on corporations and the fifteen percent (15%) tax on dividends as provided in the subparagraph." Thus, in affirming the decision of the Court of Tax Appeals ("CTA") that dividends declared by a Philippine corporation and receives by its parent corporation organized under the laws of Switzerland is subject to tax at the rate of 15%, the Supreme Court held in Commissioner of Internal Revenue vs. Wonder Philippines, Inc. and the Court of Tax Appeals, G.R. No. L-68375, April 15, 1988: ". . . the fact that Switzerland did not impose any tax on the dividends received by Glaxo from the Philippines should be considered as a full satisfaction of the given condition. For as aptly stated by the respondent Court, to deny private respondent the privilege to withhold only 15% tax. . . would run counter to the very spirit and intent of said law and definitely will adversely affect foreign corporations' interest here and discourage them from investing capital in our country. xxx xxx xxx . . . since the Swiss Government does not impose any tax on the dividends to be received by the said parent corporation in the Philippines, the condition imposed under the abovementioned section is satisfied. Accordingly, the withholding tax rate of 15% is hereby affirmed." The above pronouncement by the Supreme Court served as an established precedent in a number of BIR Rulings namely BIR Ruling Nos. 008-00 dated January 5, 2000; DA-365-6-24-99; 208-89 dated September 28, 1989; 111-88 dated March 18, 1988; 178-85 dated October 4, 1985; 030-80 dated February 15, 1980 declaring that dividends declared by domestic corporation in favor of a Swiss company is subject to 15% withholding tax pursuant to Section 28(B)(5)(b) of the Tax Code. 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.) EDMUNDO P. GUEVARA Deputy Commissioner Legal & Inspection Group