BIR Ruling [DA-137-99]

March 8, 1999 BIR RULING [DA-137-99] Castillo Laman Tan Pantaleon & San Jose The Valero Tower, 122 Valero Street Salcedo Village 1227 Makati City Attention: Attys . Eva Policar-Bautista and Virginia B . Viray Gentlemen : This refers to your letter dated January 4, 1999 requesting on behalf of your client, ML IBK Positions, Inc . , (MLIBK) , for a ruling that proposed sale of shares of stock owned by MLIBK in PSI Technologies, Inc. to Merrill Lynch Global Emerging Markets Partners is not subject to capital gains tax pursuant to the RP-US Tax Treaty. It is represented that MLIBK owns 15,484,410 common shares and 35,931,967 preferred shares in PSI Technologies, Inc. (PSI), a corporation organized and existing under Philippines laws; that both the common and preferred shares have a par value of One Peso (P1.00) per share; that less than 50% of PSI's assets consists of real property in the Philippines; that MLIBK does not have a permanent establishment in the Philippines; that MLIBK intends to sell the aforestated shareholdings in PSI to Merrill Lynch Global Emerging Markets Partners, L.P. (MLGEMP), a limited partnership organized under the laws of the State of Delaware, U.S.A. In reply, please be informed that Article 14(2) of the RP-US Tax Treaty provides, as follows: "ARTICLE 14 CAPITAL GAINS "(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 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 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 " Moreover, the Reservation Clause of the RP-US Tax Treaty, pertinent portion of which is quoted hereunder: "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 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 property is located." It is to be noted that under the Reservation Clause, 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. "Principally" means more than 50% of the entire assets in terms of value. (Sec. 2, Revenue Regulations No. 14-86) Verification of the Audited Financial Statements show that PSI's real property interest situated in the Philippines for the years 1996 and 1997 are 42,208,582 and 42,681,014, respectively. Thus, the real property interest of PSI in the Philippines are less than 50% of its total assets for the years ending 1996 and 1997. In view thereof, the gains that may be realized by MLIBK from the proposed sale of its shares to MLGEMP shall be taxable only in the United States pursuant to Article 14(2) of the RP-US Tax Treaty. (BIR Ruling No. 77-94 dated March 17, 1994) 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 and Enforcement Group)