BIR Ruling [DA-057-98]

February 17, 1998 BIR RULING [DA-057-98] Angara Abello Concepcion Regala & Cruz ACCRA Bldg., 122 Gamboa Street Legaspi Village Makati City Attention: Attys . Victor P . Lazatin and Senen Y . Glinoga Gentlemen : This refers to your letter dated January 21, 1998 requesting for a ruling as to whether or not the gains which may be realized by your client, Mitsubishi Estate Co., Ltd. (MEC), from the sale of its shares of stock in Ayala Corporation (Ayala) are exempt from Philippine income tax pursuant to the RP-Japan Tax Treaty. In BIR Ruling No. 7-96 dated January 18, 1996 addressed to you on the same subject matter, this Office held "xxx xxx xxx "Accordingly, the gain if any to be realized by Mitsubishi Estate Co., Ltd. from the sale of its Class "B" shares of stock in Ayala Corporation to prospective buyers, who are also Japanese companies 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." "xxx xxx xxx" It is represented that MEC intends to transfer and assign its remaining shareholdings in Ayala in favor of MEC's subsidiary, a company organized under the laws of the United States of America, in exchange for the shares of the subsidiary. In reply, please be informed that pursuant to Article 13 of the RP-Japan Tax Treaty, viz: "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 base, may be taxed in that other Contracting State. prcd "(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 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 may be realized by MEC from the sale of its shares of stock in Ayala to its subsidiary, a company organized under the laws of the United States of America, 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, the term "Principally" means more than 50% of the entire assets in terms of value (Sec. 2(a) and (b), Revenue Regulations No. 4-86). Accordingly, the gains to be realized by MEC from the sale of its shares of stock in Ayala to its subsidiary, a company organized under the laws of the United States of America, are not subject to Philippine income tax imposed under Section 28(B)(5)(c) of the Tax Code of 1997 but subject to the documentary stamp tax imposed under Section 176 of the same Code. cdpr 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.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal & Enforcement Group)