BIR Ruling [DA-156-98]

April 21, 1998 BIR RULING [DA-156-98] Law Office of A.M. Sison, Jr. and Associates Suite 2002-A Security Bank Centre 6776 Ayala Ave., 1226 Makati City Attention: Atty . Nelson D . Empalmado Gentlemen : This refers to your letter dated March 11, 1998 requesting, on behalf of Coca-Cola Amatil Limited (CCA-Australia), for ruling that in accordance with Article 13 of the Agreement Between the Government of the Republic of the Philippines and the Government of Australia For The Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (RP-Australia Tax Treaty), the income that CCA-Australia will earn from the sale, assignment and/or transfer of its common shares and subscription to the capital stock of Coca-Cola Bottlers Philippines, Inc. (CCB-Philippines) to CC Amatil Netherlands BV. (CCA-Netherlands) may be taxed only in Australia. LLphil It is represented that CCA-Australia is a corporation duly organized and existing under and by virtue of the laws of Australia, with principal office at No. 71 Macquaric St., Sydney NSW 2000, Australia; that it has no permanent establishment or fixed base in the Philippines; that it currently owns 1,350,000 common shares, with par value of P1,000 each, of the capital stock of CCB-Philippines which it acquired in a shares-for-shares exchange wherein no gain or loss was recognized pursuant to Section 34(c)(2) and (6)(c) of the Tax Code, as amended [now Section 40(C)(2) of the Tax Code of 1997]; that it is also a subscriber to 21,300 common shares with par value of P1,000 each to the increase in authorized capital stock of CCB-Philippines; that CCB-Philippines is a corporation duly organized and existing under the laws of the Republic of the Philippines, with principal office at Feliza Bldg., 108 Herrera St., Legaspi Village, Makati City, that it is engaged in the bottling and wholesale of non-alcoholic beverages, that its assets do not consist wholly or principally of direct interest in or over land situated in the Philippines or of rights to exploit, or to explore for natural resources in the Philippines; that CCA-Netherlands is a corporation duly organized and existing under the laws of Netherlands, with principal office at Herengracht 548, Amsterdam, Netherlands; that it is a wholly owned subsidiary of CCA-Australia; that it has no permanent establishment or fixed base in the Philippines; that CCA-Australia will sell, assign and/or transfer to CCA-Netherlands all its shares in the capital stock of CCB-Philippines (the 1,350,000 common shares currently owned and the 21,300 common shares subscribed); that if the increase in the authorized capital stock of CCB-Philippines is not yet approved by the time the sale, assignment and/or transfer is to occur, thus no new shares can yet be issued, the subscription will instead be sold, assigned and/or transferred; and that the deed of sale, assignment and/or transfer will be executed in Makati City, Metro Manila, Philippines. In reply, please be informed that Article 13(3) of the RP-Australia Tax Treaty provides, viz: "(3) Subject to the provisions of paragraph 1, income from the alienation of capital assets of an enterprise of one of the Contracting States or available to a resident of one of the Contracting States for the purpose of performing professional services or other independent activities shall be taxable only in that Contracting State, but, where those assets form part of the business property of a permanent establishment or fixed base situated in the other Contracting State, such income pay may be, taxed in that other State." The property that will be sold, assigned or transferred are shares in the capital stock of CCB-Philippines, which are not, however included in the term " real property " as defined in Article 13(2)(a)(iii) of the RP-Australia Tax Treaty, which reads as follows: "ARTICLE 13 Alienation of Property "(1) . . . "(2) For the purpose of this Article (a) the term " real property " shall have the meaning which it has under the laws in force in the Contracting State in which the Property in question is situated and shall include (i) . . . (ii) . . . (iii) shares or comparable interests in a company, the assets of which consist wholly or principally of direct interest in or over land in one of the Contracting States or of rights to exploit, or to explore for, natural resources in one of the Contracting States;" On the other hand, the said property falls within the definition of capital assets as defined in Section 39(A)(1) of the Tax Code of 1997, which reads: "(1) Capital Assets . The term "capital assets" means property held by the taxpayer (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer if on other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, or properly used in the trade or business, of a character which is subject to the allowance for depreciation provided in Subsection (F) of Section 34; or real property used in trade or business of the taxpayer." Moreover, the seller, transferor CCA-Australia, is a resident of Australia without a fixed base or permanent establishment in the Philippines. From the foregoing circumstances and considering that the assets of CCB-Philippines do not consist wholly or principally (more than 50%) of direct interest in or over land in the Philippines, or of rights to exploit, or to explore for, natural resources in the Philippines, income derived from the alienation of capital assets of an Australian enterprise, i.e., the shares of stock of CCA-Australia in CCB-Philippines is taxable only in Australia. Such being the case, the aforementioned sale, assignment, and/or transfer by CCA-Australia of its shares of stock in CCB-Philippine in favor of CCA-Netherlands is exempt from Philippine income tax pursuant to Article 13(3) of the RP-Australia Tax Treaty. (BIR Ruling No. UN-027-96 dated January 13, 1996; BIR Ruling No. 118-89 dated June 5, 1989) However, the deed to be executed by and between CCA-Australia and CCA-Netherlands selling, assigning and/or transferring the CCA-Australia's shares of stock in CCB-Philippines in favor of CCA-Netherlands is subject to the documentary stamp tax imposed under Section 176 of the Tax Code of 1997. In this connection, in the event that an increase in the authorized capital stock of CCB-Philippines is approved by the time the sale, assignment and/or transfer occur, the additional 21,300 common shares subscription of CCA-Australia in the increase in capital stock of CCB-Philippines shall be subject to the documentary stamp tax on original issue imposed under Section 175 of the Tax Code of 1997, which shall attach upon acceptance of CCB-Philippines of the said additional subscription of CCA-Australia regardless of the actual delivery of the Certificates of Stock. LLjur 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, this ruling shall be considered null and void. Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal & Enforcement Group)