BIR Ruling [DA-294-05]

June 27, 2005 BIR RULING [DA-294-05] UN-241-94 dtd 8/16/94; DA-567-2004 dtd 11/09/04 Reyes Francisco & Associates Law Office Unit 1710 Citiland Tower 1 H.V. dela Costa Street, Salcedo Village Makati City Attention: Atty. Pastor M. Reyes, Jr. Counsel for OPT, Japan & Koh Ohtsuka Gentlemen : This refers to your letter dated November 16, 2004, in behalf of your clients Ohtsuka Poly-Tech Co. Ltd. Japan (OPT Japan) and Koh Ohtsuka, a Japanese National, requesting exemption from the payment of Capital Gains Tax under Section 21 (d) of the Tax Code of 1997 and from the Documentary Stamp Tax under Section 173 and 176 of the same Code on a Deed of Assignment over a 159,000 shares executed by Mr. Koh Ohtsuka in favor of Ohtsuka Poly-Tech Co. Ltd (OPT Japan) since the transfer was from a trustee to the real owner. Per representation, the facts are quoted hereunder: "1. Mr. Koh Ohtsuka is a stockholder of Ohtsuka Poly-Tech Co. LTD., Japan (OPT Japan), a corporation duly organized and existing under and by virtue of the laws of Japan, with business address at 4962 Haneo Namegawa Machi Hiki-Gun, Saitama, Japan. A photocopy of an Affidavit of Mr. Koh Ohtsuka attesting to this fact and other allegations stated therein in support of this Request for a Ruling is attached herewith as Annex "B" , 1 Likewise, attached are photocopies of a Certificate of Registration and Articles of Incorporation of OPT, Japan, as Annexes "A" & "B" of Ohtsuka Affidavit (Annex "B" hereof) 2 "2. In 1992, Koh Ohtsuka owned 100,210 shares in OPT, Japan, or 34.4% of the equity in said company; and was a Director and also holding the positions of Chairman and President; a Certification from the Corporate Secretary of OPT Japan is attached as Annex "C" of Ohtsuka's Affidavit (Annex, B hereof). "3. Sometime early part of 1992, OPT, Japan decided to expand overseas and agreed to invest in the Philippines by putting up a manufacturing plant for the purpose of producing automotive rubber parts. "4. Upon the advise and suggestion of some Filipino friends and businessmen, OPT, Japan, through Mr. Koh Ohtsuka, organized together with some Filipino counterparts, a holding company which was registered with the Philippine Securities Exchange Commission (SEC) on February 17, 1992. This holding company is Ohtsuka Poly-Tech Landholding, Inc . (OPT Landholding) which purchased a lot inside the Light Industry & Science Park of the Philippines, Special Export Processing Zone, Bo. Diezmo, Cabuyao, Laguna, where the manufacturing plant was established. Ohtsuka Poly-Tech Phils., Inc. (OPT, Phils.) a PEZA-registered export company (100% foreign owned) was established and registered with the SEC, which owns and operates the manufacturing plant. CaASIc "5. Upon registration with the Securities and Exchange Commission, the authorized capital stock of OPT Landholding is Forty Million Pesos (P40M) in 400,000 common shares (P100 par value per share) and Ten Million (P10M) of which was subscribed. The Articles of Incorporation of OPT Landholdings shows the following: Name of Citizenship No. of Shares Amount Paid Stockholder Subscribed 1. Koh Ohtsuka Japanese 40,000 P4,000,000 2. Alexander L. Quidayen Filipino 12,000 1,200,000 3. Jose C. Guijaro III Filipino 12,000 1,200,000 4. Jocobo C. Guijaro Filipino 12,000 1,200,000 5. Dolores G. Quidayen Filipino 12,000 1,200,000 6. Reydante S. Alcantara Filipino 12,000 1,200,000 Total 100,000 P10,000,000 ====== ========= Photocopies of the Certificate of Registration, Articles of Incorporation and By-Laws of OPT Landholding are attached as Annexes "D", "D-1" and "D-2" of Ohtsuka's Affidavit (Annex B hereof). "6. However, immediately after the filing of OPT Landholding's papers with the SEC, the shareholders decided to have an additional subscription of P14M which was fully paid. Hence, the total fully paid subscription became P24M, as follows: Name of No. of Shares Additional Total Amount Paid Stockholder Subscribed Shares Shares (original) Subscribed 1. Koh Ohtsuka 40,000 56,000 96,000 P9,600,000 2. Alexander L. Quidayen 12,000 16,800 28,000 2,880,000 3. Jose C. Guijaro III 12,000 16,800 28,000 2,880,000 4. Jocobo C. Guijaro 12,000 16,800 28,000 2,880,000 5. Dolores G. Quidayen 12,000 16,800 28,000 2,880,000 6. Reydante S. Alcantara 12,000 16,800 28,000 2,880,000 A photocopy of the SEC's Resolution dated June 2, 1992 granting the issuance of 140,000 additional shares in OPT Landholding is attached as Annex "E" of Ohtsuka's Affidavit (Annex B, hereof). "7. As a foreign investor, Mr. Ohtsuka was informed by his Filipino advisers then that the 40% of P9.6M equity in OPT Landholding had to be registered with the Central Bank of the Philippines (now Bangko Sentral ng Pilipinas). He did not know then that the said 40% equity in OPT Landholding was registered in his name, instead of OPT, Japan, which sent the US dollar remittances; a photocopy of the registration document from the Philippine Central Bank is attached as Annex "F" of Ohtsuka's Affidavit (Annex B, hereof). "8. Subsequently, an additional P16M in OPT Landholding's equity was subscribed such that the P40M (400,00 shares) authorized capital stock was fully subscribed and paid; a photocopy of the SEC's Order granting the request for the issuance of 160,000 shares is attached as Annex "G" of Ohtsuka's Affidavit (Annex B, hereof). "9. The payment for the 40% in the 160,000 additional subscription was again remitted and paid for by OPT, Japan. A photocopy of a Certification from Pilipinas Bank, now Prudential Bank evidencing the payment of funds from OPT Landholding's account to which the remittance from Japan was made, is attached as Annex "H" of Ohtsuka's Affidavit (Annex B, hereof). EDACSa "10. In the meantime, 1000 shares of the 40% foreign equity in OPT Landholding was transferred to Yoichi Murayama, Japanese National, and the remaining 159,000 shares in OPT Landholding through a Deed of Assignment, was transferred by Koh Ohtsuka Poly-Tech Co. Ltd., Japan (OPT, Japan) which is now the subject of this Request for a Ruling. GROUNDS FOR EXEMPTION "In the transfer of 159,000 shares to Ohtsuka Poly-Tech Co., Ltd, Japan, there was actually no sale and exchange of value, as Koh Ohtsuka did not actually receive any consideration, or any gain, and the Deed of Assignment was used simply as a transfer document to correct the corporate records of OPT Landholding, and put the shares in the name of the real owner, which is OPT, Japan. "Mr. Koh Ohtsuka and Mr. Yoichi Murayama were simply trustees and held the title to said shares as trustees for the benefit of OPT, Japan, the real and beneficial owner. "The transfer of 159,000 shares from Mr. Koh Ohtsuka to OPT, Japan was done to correct the error in the original issues which were registered in the name of Koh Ohtsuka, personally, instead of being a representative of OPT, Japan, which paid and actually made the investment. An original copy of the Board Resolution from OPT, Japan, with English and Japanese translations confirming its ownership over the 40% equity in OPT Landholding are attached herewith as Annex "C" . "Hence, it is respectfully prayed that considering that there was no transfer of values, and there being actually no sale, the Deed of Assignment being simply used to correct an error in good faith, the Deed of Assignment dated April 24, 2003 be exempt from the payment of capital gains tax and DST." In reply, please be informed that since the transfer of the shares of stocks did not involve any consideration, the same is not a taxable transaction; hence, the transferor, Mr. Koh Ohtsuka is not subject to capital gains tax. Moreover, the above transaction is not subject to the donor's tax, since there was no donative intent on the part of the transferor, Mr. Koh Ohtsuka, to donate the aforementioned shares under the above circumstances. It has been held that in a direct gift, the element of donative intent must be present in the transfer of property to be donated. ( Perez vs. Commissioner , CTA Case No. 1707 Feb. 10, 1969) Moreover, the transfer of the said certificate is not subject to the documentary stamp tax imposed under 176 of the Tax Code of 1997. This ruling is being issued on the basis of the foregoing facts as narrated. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. CSDTac Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group Footnotes 1. Annex B has a Japanese translation. Both Affidavits (English and Japanese versions) were duly notarized in Japan. An authentication from the Consul General from the Philippine Embassy in Japan is likewise attached. 2. All annexes may be compared with the original copies upon filing of this Request for BIR Ruling.