BIR Ruling [DA-352-97]

October 29, 1997 BIR RULING [DA-352-97] Romulo, Mabanta, Buenaventura Sayoc & De Los Angeles 30th Floor, Citibank Tower Citibank Plaza 8741 Paseo de Roxas Makati City Attention: Attys . Jose Salvador Y . Mirasol Priscilla B . Valer and Ronaldo Modesto J . Ventura Gentlemen : This refers to your letter dated May 7, 1997 requesting for a ruling exempting your client, Westar Capital (Westar) , from the payment of capital gains tax on its sale of its shares of stock in Pepsi Cola Products Philippines, Inc. (PCPPI) to Premier Beverages Philippines, Inc. (Premier) imposed under Section 25(b)(5)(C) of the Tax Code, as amended, and pursuant to Article 14, in relation to the Reservation Clause of the RP-US Tax Treaty. It is represented that Westar is a non-resident foreign partnership organized and existing under the laws of the State of California, U.S.A., with address at 950 South Coast Drive, Suite 165, Costa Mesa, California 92626, USA; that it is not engaged in trade or business in the Philippines; that it owns 260,000 shares in PCPPI, with a par value of P100.00 per share or a total par value of P26,000,000.00; that PCPPI is a domestic corporation engaged in the bottling business; that per audited financial statements of PCPPI, not more than 51% of its assets consist principally of real property interest located in the Philippines; that Premier is a corporation also organized and existing under Philippine laws and that it intends to purchase Westar's 260,000 shares in PCPPI at P150.00 per share or a total purchase price of P39,000,000.00. Based on the foregoing, you now request, on behalf of Westar, for a confirmation that: "(1) The sale by Westar of the PCPPI shares to Premier is exempt from the 10%/20% capital gains tax imposed under Section 25(b)(5)(C) of the NIRC pursuant to Article 14, in relation to the Reservation Clause of the RP-United States Tax Treaty; "(2) However, the sale of the PCPPI 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; "(3) Upon presentment of proof of payment of the DST, the corporate secretary of PCPPI shall be authorized to register the transfer of the shares from Westar to Premier in the Stock and Transfer Book of the corporation and to cancel and issue new stock certificates in the name of Premier and/or its nominees." In reply, please be informed that Article 14, paragraphs (1)(2) of the RP-US Tax Treaty states, viz: "Article 14 "(1) Gains from the alienation of tangible personal (movable) property forming part of the business property of a permanent establishment which a resident of a Contracting State has in the other Contracting State or of tangible personal (movable) 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 the other State. However, gains derived by a resident of a Contracting State from the alienation of ships, aircraft or containers operated by such resident in international traffic shall be taxable only in that State, and gains described in Article 13 (Royalties) shall be taxable only in accordance with the provisions of Article 13. "(2) Gains from the alienation of any property other than those mentioned in paragraph (1) or in Article 7 (Income From Real Property) shall be taxable only in the Contracting State of which the alienator is a resident. On the other hand, the Reservation Clause of the RP-US Tax Treaty, provides in part as follows: "Article 1 "Notwithstanding the provisions of Article 14 of the Convention relating to capital gains, both the Philippines and United States may tax gains from the disposition of an interest in a corporation if its assets consist principally of a real property interest located in that country. Likewise, both countries may tax gains from the disposition of an interest in a partnership, trust or estate to the extent the gain is attributable to a real property interest in one of the countries. The term " real property interest " is to have the meaning it has under the law of the country in which the underlying real property is located ." cdll It is clear from the aforequoted provisions that the capital gains which will be derived by Westar from the alienation of any property other than those mentioned in paragraph (1) of Article 14 of the RP-US Tax Treaty shall be taxable only in the State where the alienator is a resident. Moreover, the Reservation Clause of the RP-US Tax Treaty does not apply in this case. It is to be noted that under the Reservation Clause, the Philippines may tax the gains derived from the disposition of interests in a corporation if its assets consist principally of real property interest located in the Philippines. "Principally" means more than 50% of the entire assets in terms of value (Sec. 2, Revenue Regulations No. 6-86). The value of the real property interest of PCPPI located in the Philippines as appearing in their audited financial statements for the year ending December 31, 1996 is less than 50% of the value of its total assets. Accordingly, we confirm your opinion on the following: (1) That since not more than 50% of the assets of PCPPI consist principally of real property interest located in the Philippines, the gain that may be realized by Westar from the sale of its PCPPI shares to Premier is not subject to the 10%/20% capital gains tax imposed under Section 25(b)(5)(C) of the Tax Code, as amended. cdll (2) That the sale of PCPPI shares shall be subject to documentary stamp tax (DST) at the rate of P1.50 for every P200.00 or a fractional part thereof of the par value of the shares. (Section 176, Tax Code, as amended by R.A. No. 7660); and (3) That upon presentment of proof that the documentary stamp tax on the transfer has been paid, the corporate secretary of PCPPI may cause the registration of the transfer of the shares of stock from WESTAR to Premier in the Stock and Transfer Book of the corporation and cancel and issue new Stock Certificates in the name of Premier . (BIR Ruling No. 082-91 dated May 14, 1991) 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, and/or any of the requirements imposed in this letter are not complied with, then this ruling shall be considered null and void. Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV OIC, Asst . Commissioner (Legal Service)