BIR Ruling [DA-044-96]

January 29, 1996 BIR RULING [DA-044-96] Delsa Chemicals and Multi-Products, Inc. Km. 24 East Service Road, Co. Bo. Cupang Muntinlupa, Metro Manila Attention: Mr . Angel R . Morgia Vice-President Gentlemen : This refers to your letter dated May 6, 1994 stating that Delsa Chemicals and Multi-Products, Inc. (Delsa) is a Filipino-Japanese joint venture engaged in the importation and sale of refrigerant gas; that it also sells compressors, thermal papers and computer forms; that its major stockholders consists of the following: Filipino: Wodel, Inc./Jesus V. Del Rosario - 70%, Japanese: Sakata Inx Corporation 15%, Daikin Kogyo Co., Ltd. 15%, or a total of 100%; that on July 1, 1992, Sakata Inx Corporation (INX) decided to establish Sakata Inx International Corporation (International) a Japanese company as its wholly-owned subsidiary to oversee the business related to the import and export of electronic components and computer products, chemical products, wiring harness and motorcycles; that the main objective of the decision was to segregate the foregoing field from their printing and photoengraving business field because these two fields are completely different in their markets, products and business forms; that as a result of said decision and because Delsa is engaged in the importation and sale of chemicals and computer products, the management of INX decided to sell its shares in Delsa to International; and that a Business Transfer Agreement was executed between INX and International on July 2, 1992; and that as of November 1, 1993, the date of the transfer is the shares of stock of INX in Delsa to International per Deed of Sale executed between INX and International, the assets of Delsa do not consist principally of immovable property as shown by its Audited Financial Statements as of December 31, 1993. In connection therewith, you are requesting a ruling that the sale by INX of its shares of stock in Delsa to International is not subject to capital gains tax. In reply thereto, please be informed that pursuant to Article 13 of the RP and Japan Tax Treaty, stating: cdtech "Article 13 (1) Gains derived by a resident of a Contracting State from the alienation of immovable property as defined in paragraph (2) of Article 6 and situated in the other Contracting State may be taxed in that other Contracting State. (2) Gains from the alienation of any property, other than immovable property, forming part of the business property of a permanent establishment which an enterprise of a Contracting State has in the other Contracting State or of any property, other than immovable 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 based, may be taxed in that other Contracting State. (3) Gains derived by a resident of a Contracting State from the alienation of ships or aircraft operated in International traffic, and any property, other than immovable property, pertaining to the operation of such ships or aircraft shall be taxable only in that Contracting State. (4) Gains from the alienation of shares of a company, a partnership or a trust the property of which consists principally of immovable property situated in a Contracting State, may be taxed in that Contracting State. (5) Gains from the alienation of any property other than those referred to in paragraphs (1), (2), (3) and (4) shall be taxable only in the Contracting State of which the alienator is a resident." the gains which will be realized by INX from the sale its shares of stock in Delsa Chemicals and Multiproducts, Inc., a domestic corporation, to International, a Japanese company shall be taxable only in Japan. However, under the aforequoted provision of paragraph 4 supra , which is similar to the Reservation Clause of the RP-US Tax Treaty the Philippines may tax the gains derived from the disposition of interest in a corporation if its assets consist principally of real property interest located in the Philippines. "Real Property Interest" means interest on properties enumerated in Section 3 of Revenue Regulations No. 4-86 which are not, however, exclusive of others that are similarly situated. As used in the treaties and in the Regulations, it shall be understood to include real properties as understood under Philippine Laws. Moreover, "Principally" means more than 50% of the entire assets in terms of value. (Sec. 2(a) and (b), Revenue Regulations No. 4-86) As represented, Delsa's real property is less than 50% of its entire assets. Accordingly, the gains if any to be realized by INX from the sale of its shares of stock in Delsa Chemicals and Multiproducts, Inc. to International who is also a Japanese company are not subject to Philippine income tax but subject to the documentary stamp tax imposed under Section 176 of the Tax Code, as amended by Republic Act No. 7660 (BIR Ruling No. 7-96 dated January 18, 1996). 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. cd Very truly yours, ALICIA P. CLEMENO Assistant Commissioner (Legal Service) By: ALICIA L. TOMACRUZ Head Revenue Executive Assistant (Legal Service)