BIR Ruling [DA-419-99]

July 20, 1999 BIR RULING [DA-419-99] Sycip Salazar Hernandez & Gatmaitan Sycip-Law All Asia Capital Center 105 Paseo de Roxas, Makati City Attention: Atty. Ernesto S. Taio, Jr . Gentlemen : This refers to your letter dated April 30, 1999 requesting on behalf of your client, United Technologies Automotive, Inc. (UTAI) for a ruling that the transfer by UTAI of all of its shares of stock in United Technologies Automotive Philippines (UTAP) to UT Automotive Dearbon, Inc. (UTAD) is exempt from the payment of capital gains tax pursuant to Article 14, paragraph (2) of the RP-US Tax Treaty. It is represented that UTAP is a corporation organized and existing under the laws of the Philippines and is a wholly-owned subsidiary of UTAI; that UTAI is a corporation organized and existing under the laws of the State of Delaware, USA; that it owns of record 99.99% of the outstanding shares of common and preferred capital stock of UTAP and owns beneficially the qualifying shares of common stock held by the current directors of UTAP; that the shares owned by UTAP are broken down as follows: "58,285 common shares represented by stock certificates; "140,730 preferred shares represented by stock certificates; "21,396 common shares represented by stock certificates; and "5 common shares held in trust by five directors for UTAI" EACIcH that a Transfer Agreement was executed by and between UTAI and UTAD, a corporation organized and existing under the laws of the State of Delaware, USA, for the transfer of all of its shares representing 99.99% of the share capital of UTAP and all of its rights, title and interest in the qualifying shares held by certain directors of UTAP; and that the Financial Statements of UTAP disclose that its real property interest for the years 1997 and 1998 are P585,715,607.00 and P735,572,130.00, respectively. In reply, please be informed that pursuant to Article 14 of the RP-US Tax Treaty, pertinent provision of which reads: "Article 14 CAPITAL GAINS "(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 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. DACcIH "(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." Such being the case, the gains that may be realized by UTAI from the transfer of its shares of stock in UTAP in favor of UTAD shall be taxable only in the United States, hence not subject to Philippine income tax. Moreover, the Reservation Clause of the RP-US Tax Treaty, pertinent portion of which reads: "Article 1 "Notwithstanding the provision of Article 14 of the Convention relating to capital gains, both the Philippines and the United States may tax gains from the disposition of an interest in a corporation if its assets consist principally of 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. (Underscoring supplied) HICEca 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. 4-86). In this particular case, the audited financial statements of UTAP for the years 1997 and 1998 show that its real property interest is less than 50% of the value of its total assets. (BIR Ruling No. 77-94 dated March 17, 1994) 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 and Enforcement Group)