BIR Ruling [DA-358-99]

June 17, 1999 BIR RULING [DA-358-99] Salcon Power Corporation 7th Floor, Citibank Center 8741 Paseo de Roxas Street Makati City Attention: Mr . Alfredo S . Ballesteros Corporate Secretary Gentlemen : This refers to your letter dated June 3, 1999 stating that ATC Engineering Sdn. Bhd., a corporation organized and existing under Malaysia laws with principal office at 73 Jalan 5/43, 46000 Petaling Jaya, Selangor, Malaysia, assigned its 12,750,000 shares of stock in Salcon Power Corporation (SPC), a domestic corporation, in favor of Salcon Limited (a corporation organized and existing under the laws of Singapore) thru a Deed of Assignment dated June 4, 1999; that you are of the opinion that the subject assignment of shares is exempted from the payment of capital gains tax in the Philippines, since the assignor is a Malaysian corporation not doing business in the Philippines, and less than 50% of the total assets of Salcon Power Corporation consist of immovable properties, as shown in its Audited Financial Statement for the year 1998, which is merely 42.68% of its total assets, in terms of value; and that the documentary stamp of tax on said sale transaction has been duly paid. Based on the foregoing representations and documents submitted, you are now requesting exemption from the payment of Philippine capital gains tax, the said assignment by ATC Engineering Sdn. Bhd. of its 12,750,000 shares of stock in SPC in favor of Salcon Limited, pursuant to the RP-Malaysia Tax Treaty. In reply, please be informed that Article 13 (3) and (4) of the RP-Malaysian Tax Treaty provides, viz: "ARTICLE 13 xxx xxx xxx "3. Gains from the alienation of shares of a company, the property of which consists principally of immovable property situated in a Contracting State, may be taxed in that State. . . (emphasis supplied) "4. Gains from the alienation of any property or assets other than those mentioned in paragraphs 1, 2 and 3 of this Article shall be taxable only in the Contracting State of which the alienator is a resident." (emphasis supplied.) From the foregoing provisions of Article 13(3) and (4) of the RP-Malaysian Tax Treaty and the Audited Financial Statement of Salcon Power Corporation for the year 1998, it is clear that the assignment by ATC Engineering Adn., Bhd., a Malaysian corporation, on June 4, 1999 of its 12,750,000 shares of stock in Salcon Power Corporation in favor of Salcon, Limited, is not subject to Philippine income tax and consequently to the capital gains tax imposed under Section 25(B) of the Tax Code of 1997, considering that the assets of Salcon Power Corporation does not consist "principally" or "wholly" of immovable properties. The term "principally" or "wholly" has been defined under Revenue Regulations No. 4-86, as more than 50% of the entire assets, in terms of value, which under its Audited Financial Statement for the year 1998, is merely 42.68% of its entire assets, in terms of value, for the said year. (BIR Ruling No. 037-96 dated March 7, 1996) This ruling is being issued on the basis of the foregoing fact 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)