BIR Ruling [DA-044-97]

January 30, 1997 BIR RULING [DA-044-97] Romulo, Mabanta, Buenaventura Sayoc & De Los Angeles 30th Floor, Citibank Tower 8741 Paseo De Roxas Makati City Attention: Attys . E . P . Guevarra and P . B . Valer Gentlemen : This refers to your letter dated September 30, 1996 stating that Watson Wyatt & Company (WWC) is a non-resident foreign corporation organized and existing under the laws of the State of Delaware, USA with address at 601 13th Street, N.W. Suite 900, Washington D.C.; that it does not engage in trade or business in the Philippines; that it does not engage in trade or business in the Philippines; that it owns 1,998 shares of stock of Watson Wyatt Philippines, Inc. [formerly Wyatt Company (Philippines), Inc.] (WWPI) with a par value per share of P100.00 or a total par value of P199,800 including 2 shares in the name of nominees; that WWPI is a domestic corporation engaged in consultancy business; that as shown in its Audited Financial Statements as of June 30, 1995 and 1994, not more than 50% of its assets consist principally of real property interest located in the Philippines; that pursuant to a corporate reorganization of the Wyatt group of companies in the United States, the ownership of shares of stocks in all foreign affiliates, such as WWPI, was consolidated in Watson Wyatt International, Inc. (WWII), a corporation organized and existing under the laws of the State of Nevada, U.S.A.; and that on June 28, 1996, a Deed of Assignment was executed by WWC assigning its 1,998 WWPI shares to WWII. In connection therewith, you now request confirmation of your opinion that: "1. The assignment of the WWPI shares by WWC to WWII pursuant to a corporate reorganization is exempt from 10%/20% capital gains imposed under Section 25(b) (5) (C) of the NIRC pursuant to Article 14 in relation to the Reservation Clause of the RP-United States Tax Treaty; "2. The sale of the WWPI shares shall be subject to the documentary stamp tax (DST) equivalent to P1.50 for every P200.00 or a fraction thereof of the par value of the shares; "3. Upon presentment of a proof of payment of the DST, the corporate secretary of WWPI shall be authorized to register the transfer of the shares from WWC to WWII in the Stock and Transfer Book of the corporation and to cancel and issue new stock certificates in the name of WWII and/or its nominees." In reply thereto, please be informed of the following: 1. Article 14, paragraphs (1) and (2) of the RP-US Tax Treaty provides, viz: "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 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 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. On the other hand, the Reservation Clause of the RP-US Tax Treaty, provides in part as follows: "Article I Notwithstanding the provisions of Article 14 of the Convention relating to the capital gains, both the Philippines and the United States may tax gains from the disposition of an interest in a corporation if its assets consists principally of a real property interest located in the country. Likewise, both countries may tax gains from the disposition of an interest in a partnership, trust or estate to the extent the gain is attributable to a real property interest in one of the countries. The term "real property interest is to have the meaning it has under the law of the country in which the underlying real property is located." It is clear from the aforequoted provisions that any capital gains which may be derived by WWC from the alienation of any property other than those mentioned in paragraph (1) of Article 14 of the RP-US Tax Treaty shall be taxable only in the State where the alienator is a resident. Moreover, the Reservation Clause of the RP-US Tax Treaty does not apply in this case. It is to be noted that under the Reservation Clause, the Philippines may tax the gains derived from the disposition of interests in a corporation if its assets consists principally, which means more than 50% of real property interest located in the Philippines. "Principally" means more than 50% of the entire assets in terms of value (Sec. 2, Revenue Regulations No. 4-86). The value of the real property interest of WWPI located in the Philippines as appearing in its audited financial statements for the fiscal year ending June 30, 1995 is less than 50% of the value of its total assets. Accordingly, your opinion that the gain may be realized by WWC from the sale of its WWPI shares to WWII is not subject to the capital gains tax imposed under Section 25 (b) (5) (C) of the Tax Code, as amended is hereby confirmed since not more than 50% of the assets of WWPI consist principally or real property interest located in the Philippines. 2. The assignment of the WWPI shares shall be subject to documentary stamp tax (DST) at the rate of P1.50 for every P200.00 or a fractional part thereof of the par value of the shares imposed under Section 176 of the Tax Code, as amended. 3. Your opinion that upon presentment of proof that the documentary stamp tax on the transfer has been paid, the corporate secretary of WWPI may cause the registration of the transfer of the shares of stock from WWC to WWII in the Stock and Transfer Book of the corporation and cancel and issue new Stock Certificates in the name of WWII and/or its nominees is likewise confirmed. (BIR Ruling No. 082-91 dated May 14, 1991) 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, ALICIA L. TOMACRUZ Head Revenue Executive Assistant (Legal Service)