BIR Ruling [DA-202-96]

June 19, 1996 BIR RULING [DA-202-96] Nissho Iwai Corporation 24/F Pacific Star Building Makati Avenue cor. Gil J. Puyat Avenue Makati City Attention: Attys . Antonio A . Cablitas and Imelda H . Abadilla Counsels for Nissho Iwai Corporation Gentlemen : This refers to your letter dated May 13, 1996 requesting a ruling to the effect that the sale by Nissho Iwai Corporation Japan (NIC) of its shares of stock in Philippine Automotive Manufacturing Corporation (PAMCOR) to Mitsubishi Motors Corporation Japan (MMC) is exempt from capital gains tax pursuant to Article 13, paragraph 5 of the RP-Japan Tax Treaty. It is represented that PAMCOR is a domestic corporation engaged in the assembly and distribution of motor vehicles; that NIC is a corporation organized and existing under the laws of Japan and is licensed to do business in the Philippines on April 4, 1967; that MMC is a non-resident foreign corporation also organized and existing under the laws of Japan; that NIC and MMC are both stockholders of PAMCOR; that as of December 31, 1995, NIC owns 3,636,000 shares including that of its nominees with the aggregate par value of P363,600,000.00 representing 50% of the outstanding capital stock of PAMCOR; that MMC, on the other hand, also owns 3,636,000 shares including that of its nominees with the aggregate par value of P363,600.000.00 representing 50% of the outstanding capital stock of PAMCOR; that on April 25, 1996, NIC sold in favor of MMC 72,720 shares in PAMCOR at a price of Japanese Yen () 112.999.608 (or P27,560,880.00); and that as per Certification dated April 29, 1996 of the Treasurer/Chief Accountant of NIC-Philippines, the investment of NIC-Japan in PAMCOR is an independent investment attributable only to NIC-Japan and transactions in respect of said investment are done directly by the head office independent of the local branch. In reply, please be informed that Article 13 of the Convention between the Republic of the Philippines and Japan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to taxes on income provides, 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. "(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 a 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 above transaction involving sale of shares of stock of PAMCOR, a domestic corporation, does not fall under paragraphs 1, 2 and 3 above-quoted. Neither does it fall under paragraph 4 because it has been ascertained from the current financial statement of PAMCOR that the total market value of its real properties is only 13.61% of its total assets; hence, do not consist principally of real property located in the Philippines. Such being the case, the transaction falls within the purview of paragraph 5. cdta Accordingly, the gains if any derived by Nissho Iwai Corporation Japan from the sale of its 72,720 PAMCOR's shares to Mitsubishi Motors Corporation Japan is subject to tax only in Japan, the country where the seller is a resident. Said gains, therefore, are not taxable in the Philippines. (BIR Ruling No. 071-90 dated May 10, 1990) 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. cd Very truly yours, ALICIA P. CLEMENO Assistant Commissioner (Legal Service)