BIR Ruling [DA-317-99]

May 21, 1999 BIR RULING [DA-317-99] Romulo Mabanta Buenaventura Sayoc & de los Angeles 30th Flr. Citibank Tower 8741 Paseo de Roxas, Makati City Attention: Attys . Edmundo P . Guevara and Jayson L . Fernandez Gentlemen : This refers to your letter dated December 5, 1998 requesting for a ruling that the sale by Honda, Foundry Co., Ltd. ("Honda") of its shares of stock in Hadsys Philippines Corporation ("Hadsys") to Keihin Corporation ("Keihin") is exempt from the capital gains tax imposed under Section 28(B)(5)(c) of the National Internal Revenue Code of 1997 ("NIRC") pursuant to Article 13 of the RP-Japan Tax Treaty. prcd It is represented that your client, Honda is a non-resident foreign corporation organized and existing under the laws of Japan; that Honda owns 30,380 shares of stock with a par value of P1,000.00 per share or a total par value of P30,380,000.00 in Hadsys; that Hadsys is a domestic corporation engaged in the business of aircon assembly; that per Audited Financial Statements of Hadsys for March 31, 1998 and 1997, the assets of Hadsys do not consist principally of real property interest located in the Philippines; that in August 1998, Honda sold its 30,380 shares in Hadsys to Keihin, a corporation duly organized and existing under the laws of Japan and that Keihin is not engaged in trade or business in the Philippines. In connection therewith, you are requesting confirmation of your opinion to the effect that: 1. Pursuant to Article 13 of the RP-Japan Tax Treaty the sale of the shares of stock in Hadsys by Honda to Keihin is exempt from 5%/10% capital gains imposed under Section 28(b)(5)(C) of the NIRC; 2. However, the sale of the Shares shall be subject to documentary stamp tax (DST) equivalent to P1.50 for every P200.00 or a fraction thereof of the par value of the shares. Apart from the said DST, the sale of shares by Honda shall not be subject to any other tax; 3. Upon presentment of proof of payment of the DST, the corporate secretary of Hadsys shall be authorized to register the transfer of the shares from Honda to Keihin in the Stock and Transfer Book of the corporation concerned and to cancel and issue new stock certificates in the name of Keihin. In reply thereto, please be informed that Article 13 of the RP-Japan Tax Treaty, 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 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 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 where the alienator is a resident." llcd the gains which will be realized by Honda from the sale of its shares of stock in Hadsys to Keihin shall be taxable only in Japan. Under the aforequoted provision of paragraph 4 supra , the Philippines may tax the gains derived from the disposition of interest in a corporation only if such corporation's assets consist principally of real property located in the Philippines. "Principally" means more than fifty percent of the entire assets of the corporation in terms of value (Revenue Regulations No. 4-86). As represented, the value of the real property interest of Hadsys in the Philippines as appearing in its Audited Financial Statements for the fiscal year ending March 31, 1998 is less than 50% of the value of its total assets. Accordingly, this office is of the opinion as it hereby holds that the gains to be realized by Honda from the sale of its shares of stock in Hadsys to Keihin will not be subject to the capital gains tax imposed under Section 28(B)(5)(c) of the NIRC. However, the said transfer will be subject to the documentary stamp tax equivalent to P1.50 for every P200.00 or a fraction thereof of the par value of the shares pursuant to Section 176 of the NIRC. Apart from the said documentary stamp tax, the sale of shares by Honda shall not be subject to any other tax. (BIR Ruling Nos. 007-96 dated January 18, 1996; 280-87 dated September 10, 1987; 017-86 dated February 19, 1986) Upon presentment of the proof of payment of the documentary stamp tax, the Corporate Secretary of Hadsys can register the transfer of the shares from Honda to Keihin in the corporation's Stock and Transfer Book and cancel and issue a new stock certificate in the name of the buyer. 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 & Enforcement Group)