BIR Ruling [DA-041-97]

January 27, 1997 BIR RULING [DA-041-97] Sycip, Gorres, Velayo & Co. 6760 Ayala Avenue Makati City Attention: Atty . E . C . Alcantara Gentlemen : This refers to your letter dated October 24, 1996 requesting in effect that the gain which may be realized by your client, GLAXO GROUP LTD., (GGL) from the transfer of its shares of stock in Duncan Pharmaceutical Philippines, Inc. (DPPI) to Glaxo-Wellcome Philippines, Inc. (GWPI) is not subject to Philippine income tax. cdtech It is represented that GGL is organized and existing under and by virtue of the laws of the United Kingdom; that GGL is primarily involved in the pharmaceutical business and is not engaged in trade or business in the Philippines; that GGL is the registered owner of One Million Sixty Thousand One Hundred Thirteen (1,066,113) shares of stock in DPPI with an aggregate book value of One Hundred Sixty Seven Million Two Hundred Seventy Nine Thousand Eight Hundred Seventy Four Pesos (P167,279,874.00); that DPPI is a domestic corporation duly organized and existing under and virtue of the laws of the Philippines; that GGL will convey and assign in favor of GWPI, its shares of stock in DPPI; that in consideration thereof, GWPI will issue Six Million Nine Hundred Ninety Six Thousand Four Hundred Thirteen (6,996,413) of its own shares of stock with an aggregate book value of One Hundred Sixty Seven Million Two Hundred Seventy Nine Thousand Eight Hundred Sixty Nine pesos (P167,279,869.00). In reply, please be informed that Article 12(4) of the RP-UK Tax Treaty provides as follows: "Article 12 GAINS FROM THE ALIENATION OF PROPERTY "(1) Capital gains from the alienation of immovable property, as defined in paragraph (2) of Article 6 may be taxed in the Contracting State in which such property is situated. "(2) Capital gains from the alienation of movable property forming part of business property of a permanent establishment which an enterprise of a Contracting State has in the other Contracting State or of 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 professional 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. "(3) Notwithstanding the provisions of paragraph (2) of this article, capital gains derived by a resident of a Contracting State from the alienation of ships and aircraft operated in international traffic and movable property pertaining to the operation of such ships and aircraft shall be taxable only in that Contracting State. "(4) Capital gains from the alienation of any property other than hose mentioned in paragraphs (1), (2) and (3) of this article shall be taxable only in the Contracting State of which the alienator is a resident. "(5) The provisions of paragraph 4 shall not affect the right of each of the States to levy according to its own law a tax on capital gains from the alienation of movable property derived by an individual who is a resident of the other State and has been a resident of the first mentioned Contracting State at any time during the six years immediately preceding the alienation of the property." (Emphasis supplied) It is clear from the aforequoted provisions of the RP-UK Tax Treaty that capital gains from the alienation of any property other than those mentioned in paragraphs 1, 2 and 3 of Article 12 of the tax treaty shall be taxable only in the State where the alienator is a resident. Considering that sale of shares of stock is not among those mentioned in said paragraphs 1, 2 and 3 of Article 12 of the RP-UK Tax Treaty, the gains that may be derived by Glaxo Group Ltd., a resident of the United Kingdom, from the sale of its shares of stock in Duncan Pharmaceutical Philippines, Inc. a domestic corporation, shall not be subject to Philippine income tax under Section 25 (b)(5)(C)(i) of the Tax Code, as amended, but are subject to tax only in the United Kingdom. Furthermore, the certificates of stocks to be issued by Glaxo-Wellcome Philippines, Inc. are, in all probability, original issues, which are subject to the documentary stamp tax imposed by Section 175 of the Tax Code as amended. cdta 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. (BIR Rulings No. 355-88 dated July 26, 1988; BIR Rulings No. 009-96 dated January 23, 1996). Very truly yours, ALICIA P. CLEMENO Assistant Commissioner (Legal Service) By: ALICIA L. TOMACRUZ Head Revenue Executive Assistant (Legal Service)