BIR Ruling [DA-046-96]

January 30, 1996 BIR RULING [DA-046-96] Sycip Gorres Velayo & Co. 6760 Ayala Avenue Makati, Metro Manila Attention: Atty . J . A . Osana Gentlemen : This refers to your letter dated September 18, 1995, requesting in effect for a ruling that the sale by FCB INTERNATIONAL, INC. (FCB-US) of its shares of stock in BASIC/FCB, INC. (FCB-Phils.) is not subject to capital gains tax in the Philippines pursuant to Article 14(2) of the RP-US Tax Treaty. It is represented that FCB-US is a non-resident foreign corporation duly organized and existing under and by virtue of the laws of the State of Illinois, United States of America; that FCB-US is not engaged in trade or business in the Philippines; that FCB-Phils. is a corporation duly organized and existing under and by virtue of the laws of the Philippines with TIN No. 000-108-533; that FCB-US owns Three Thousand 3,000 shares of stock in FCB-Phils. with a par value of Fifty Pesos (P50.00) per share equivalent to thirty percent (30%) of the latter's issued and outstanding capital stock; that pursuant to the Sale and Purchase Agreement dated March 31, 1994, FCB-US sold all its FCB-Phils. shares to FCB-Phils. and the latter will keep them as treasury shares; that the audited financial statements of FCB-Phils. for the period ending December 31, 1993, FCB-Phils. has the following real properties in the Philippines: cdta Asset Amount Condominium Unit P1,910,000.00 Recording Studio 89,905.00 Leasehold Improvements 10,248,357.00 Total P12,248,262.00 =========== and that the above mentioned properties, as against the total asset of FCB-Phils. of Ninety Seven Million Two Hundred Sixty Six Thousand Two Hundred Twenty Nine Pesos (P97,266,229.00) is only thirteen percent (13%), which is less than fifty percent (50%), of the carrying value of FCB-Phils. total assets. In reply thereto, please be informed that gains which may be realized by FCB-US from the sale of its shares of stock in FCB-Phils. shall be taxable only in the United States pursuant to Article 14(2) of the RP-US Tax Treaty, hence, said gain is not subject to Philippine tax. The Reservation Clause of the RP-US Tax Treaty, pertinent portion of which is quoted hereunder as follows: "Article I 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 real property interest located in that 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 ." 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 consist principally 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). In this particular case, the value of the FCB-Phils. real property interest in the Philippines as appearing in its financial statements for the year ending December 31, 1993 is only 12.59% of its total assets, which is less than 50% of the value of its total assets. 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 Ruling No. 136-92 dated April 28, 1992; BIR Ruling No. UN-218-94 dated July 20, 1994.) Very truly yours, ALICE P. CLEMENO Assistant Commissioner (Legal Service)