BIR Ruling [DA-123-99]

March 3, 1999 BIR RULING [DA-123-99] Picazo Buyco Tan Fider & Santos 8th, 6th and 4th Floors Singapore Airlines Building 138 H. V. dela Costa Street Salcedo Village Makati City Attention: Atty . Gemma M . Santos Gentlemen : This refers to your letter dated January 15, 1999 requesting for a ruling that any gain derived from the proposed sale by Kim Eng Holdings Limited (Kim Eng Singapore) of its shares of stock in Kim Eng Securities Philippines, Inc. (Kim Eng Phils.) is exempt from the capital gains tax imposed under Section 28(B)(5)(c) of the Tax Code of 1997 pursuant to Article 13 of the RP-Singapore Tax Treaty. It is represented that Kim Eng Singapore is a corporation organized and existing under and by virtue of the laws of Singapore; that Kim Eng Singapore presently owns a total of 130,000 shares of stock in Kim Eng Phils., a domestic corporation duly organized and existing under the laws of the Republic of the Philippines, with a par value of P100.00 per share and which comprise 52% of the outstanding capital stock of Kim Eng Phils.; that the aforementioned shares were acquired by Kim Eng Singapore as follows: (i) 122,500 shares of stock, by way of original/incorporation subscription; and (ii) 7,500 shares, by way of purchase from Mr. Deogracias Vistan, one of the original shareholders of Kim Eng Phils.; that Kim Eng Singapore now proposes to sell the said shares to a group of Filipino buyers; that Kim Eng Singapore does not carry on any business through any permanent establishment in the Philippines; that the properties of Kim Eng Phils. do not consist principally of immovable property situated in the Philippines; and that in support of your request, you submitted the following documents, viz: a) BIR Application Form TC-001 in triplicate; b) Certificate by the Inland Revenue Authority of Singapore that Kim Eng Singapore is treated as a resident of Singapore for income tax purposes; c) Certification from the Philippine Securities Exchange Commission that Kim Eng Singapore is not registered to engage in business in the Philippines; d) Documents pertaining to the acquisition by Kim Eng Singapore of the subject shares, to wit 1) photocopy of the Articles of Incorporation of Kim Eng Phils. evidencing the subscription by Kim Eng Singapore to 122,500 shares of stock; 2) Deed of Absolute Sale of Shares dated June 15, 1994 evidencing the acquisition by Kim Eng Singapore of 7,500 shares from Mr. Deogracias Vistan; and 3) Photocopies of Kim Eng Phils. Stock Certificates Nos. 001 and 015 evidencing the Subject Shares; e) Latest Tax Declarations of real properties and/or real property interests of Kim Eng Phils.; f) Final draft of the Deed of Assignment covering the proposed sale of the Subject Shares; g) Detailed schedule of Fixed Assets of Kim Eng Phils; and h) Audited Financial Statement as of March 31, 1998 of Kim Eng Phils. In reply, please be informed that Article 13 of the RP-Singapore Tax Treaty provides, viz: "ARTICLE 13 "GAINS FROM THE ALIENATION OF PROPERTY "1. Gains from the alienation if immovable property may be taxed in the Contracting State in which such property is situated. "2. Gains from the alienation of movable 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 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 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 an enterprise 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 or aircraft, shall be taxable only in that State. "3. Gains from the alienation of shares of a company, the property of which consists principally of immovable property situated in a Contracting State, may be taxed in that State. Gains from the alienation of an interest in a partnership or a trust, the property of which consists principally of immovable property situated in a Contracting State, may be fixed in that State. "4. Gains from the alienation of any property, other than those mentioned in paragraphs 1, 2 and 3, shall be taxable only in the Contracting State of which the alienator is a resident." It is clear from the aforequoted provisions of the RP-Singapore Tax Treaty that capital gains tax from the alienation of any property other than those mentioned in paragraphs 1, 2 and 3 of Article 13 of the said treaty shall be taxable only in that State where the alienator is a resident. Considering that the sale of shares of stock is not among those mentioned in said paragraphs 1, 2 and 3 of Article 13 of the RP-Singapore Tax Treaty, the gains that may be derived by Kim Eng Singapore which is a resident of Singapore from the sale of its shares of stock in Kim Eng Phils., a domestic corporation, to a group of Filipino buyers shall not be subject to Philippine income tax imposed under Section 28(B)(5)(c) of the Tax Code of 1997. (BIR Ruling No. 100-94 dated April 28, 1994) However, the sale by Kim Eng Singapore of its shares of stock in Kim Eng Phils. is subject to the documentary stamp tax imposed under Section 176 of the Tax Code of 1997. 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, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal & Enforcement Group)