BIR Ruling [DA-334-97]

October 8, 1997 BIR RULING [DA-334-97] Romulo Mabanta Buenaventura Sayoc & De Los Angeles 30th Flr. Citibank Tower 8741 Paseo de Roxas, Makati City Attention: Atty. Edmundo P. Guevara and Atty. Jayson L. Fernandez Gentlemen : This refers to your letter dated May 14, 1997 requesting for confirmation of your opinion that the sale by Mitsubishi Corporation (Mitsubishi) of its shares of stock in Walden AB Ayala Management Co., Inc. (WAAMCI) and Walden AB Ayala Ventures Co., Inc. (WAAVCI) to MC Capital Asia Pte, Ltd. (MC Capital) is exempt from the capital gains tax imposed under Section 25 (b) (5) (C) of the National Internal Revenue Code, as amended, pursuant to Article 13 of the RP-Japan Tax Treaty. It is represented that Mitsubishi is a non-resident foreign corporation organized and existing under the laws of Japan; that Mitsubishi owns 103,048 shares of stock with a par value per share of P10.00 or a total par value of P1,030,480.00 in WAAMCI, a domestic corporation engaged in the business of providing management services; that Mitsubishi also owns 15,552 shares of common stock with a par value per share of P100.00 or a total par value of P1,555,200.00 and 41,472 redeemable preferred shares with a par value per share of P900.00 or a total par value of Thirty Seven Million Three Hundred Twenty Four Thousand Eight Hundred Pesos (P37,324,800.00) in WAAVCI, a domestic corporation engaged in the business of investing in shares of stock and other securities; that WAAMCI's and WAAVCI's real property interest located in the Philippines is less than 50% of their respective total assets as shown in their latest (1996) Audited Financial Statements; that in March 1997, Mitsubishi sold its (a) 103,048 common shares in WAAMCI; (b) 15,552 common shares in WAAVCI; and (c) 41,472 redeemable preferred shares in WAAVCI to MC Capital, a corporation duly organized and existing under the laws of Singapore. Based on the foregoing representations, you now request for confirmation that the sale of the shares of stock in WAAMCI and WAAVCI by Mitsubishi to MC Capital is exempt from 10%/20% capital gains imposed under Section 25 (b) (5) (C) of the NIRC, as amended, but is 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 imposed under Section 176 of the NIRC, as amended. In reply thereto, please be informed that pursuant to Article 13 of the RP-Japan Tax Treaty, stating: CAaDTH "Article 13 CAPITAL GAINS "(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. SADECI "(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 gains which will be realized by Mitsubishi from the sale of shares of stock in WAAMCI and WAAVCI, both domestic corporations, to MC Capital 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 WAAMCI and WAAVCI in the Philippines as appearing in their respective Audited Financial Statements for the year ending December 31, 1996 is less than 50% of the value of their respective total assets. Accordingly, this Office hereby confirms your opinion that the gains to be realized by Mitsubishi from the sale of the shares of stock in WAAMCI and WAAVCI to MC Capital will not be subject to the capital gains tax imposed under Section 25 (b) (5) (C) of the NIRC. However, the said transfers 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 imposed under Section 176 of the Tax Code, as amended by Republic Act No. 7660. Apart from the said documentary stamp tax, the sale of shares by Mitsubishi 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 secretaries of WAAMCI and WAAVCI can register the transfer of the shares from Mitsubishi to MC Capital in their respective Stock and Transfer Books and cancel and issue new stock certificates 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. EAcIST Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV OIC-Assistant Commissioner (Legal Service)