BIR Ruling [DA-153-98]

April 20, 1998 BIR RULING [DA-153-98] Quisumbing Torres & Evangelista 11th Floor, Pacific Star Bldg. Makati Avenue cor. Sen. Gil J. Puyat Avenue Makati City Attention: Atty . Edgardo M . De Vera Gentlemen : This refers to your letter dated February 2, 1998 requesting on behalf of your client, FAPI HOLDINGS, INC . (FAPI), for a confirmation of your opinion that no gain shall be recognized on the sale of shares of stocks by FAPI in favor of ASIA LIGHT LTD. (ASIA). It is represented that FAPI is a non-resident corporation organized and existing under the laws of the United States of America; that FAPI is the owner of record of 151,495 shares in the capital stock of FASHION ACCESSORIES PHILIPPINES, INC. (FASHION), a domestic corporation; that the said 151,495 shares were purchased by FAPI from BG Marketing Corporation, a non-resident foreign corporation organized and existing under the laws of the United States of America for US$121,000.00 as evidenced by a Deed of Assignment dated July 28, 1997; that on December 29, 1997, a Deed of Assignment was executed whereby FAPI transferred the 151,495 shares in Fashion in favor of Asia for US$121,000.00; and that the corresponding documentary stamp taxes have been paid. In reply, please be informed that pursuant to Article 14 of the RP-US Tax Treaty, pertinent provision of which reads: "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." Such being the case, the gains that may be realized by FAPI from the sale of its shares of stock in Fashion shall be taxable only in the United States, hence, not subject to Philippine income tax. The Reservation Clause of the RP-US Tax Treaty, pertinent portion of which reads: "ARTICLE 1 "Notwithstanding the provision 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 audited financial statements of Fashion Accessories Philippines, Inc., for the years ended June 30, 1996 and 1997 show that its real property interest is less than 50% of the value of its total assets. (BIR Ruling No. 77-94 dated March 17, 1994) LLpr 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 and Enforcement Group)