BIR Ruling [DA-478-99]

August 20, 1999 BIR RULING [DA-478-99] Sycip, Salazar, Hernandez & Gatmaitan Sycip Law All Asia Capital Center 105 Paseo de Roxas, Makati City Attention: Attys . Imelda A . Manguiat and Jhoanna Jasmine M . Javier Gentlemen : This refers to your letter dated June 24, 1999 requesting in behalf of your clients, Messrs. Sukanto Tanoto and Phoa Kia Heng, for a ruling exempting from income tax/capital gains tax the gains derived from the following transfers of shares in Filipinas Palmoil Industries, Inc. (FPII) from Asian Plantations Holding Pte. Ltd. (APHL) to Messrs. Sukanto and Phoa by way of liquidating dividends, and the transfer of the same shares from Messrs. Sukanto and Phoa to RGM International Philippines, Inc. (RGM) and HYS Holdings, Inc. (HYS). prcd It is represented that APHL was a corporation duly organized under the laws of Singapore and registered with the Singaporean Registrar of Companies and Businesses with Company No. 04141/1989M; that on February 4, 1998, a special resolution was passed by the members of APHL for the voluntary dissolution and winding up of APHL and the appointment Cheng Tung Woh (who later had changed name to Cheng Toon Wah) of Lee King & Cheng as liquidator; that APHL had investments in FPII, a domestic corporation covering Thirteen Million Three Hundred Forty Five Thousand Thirty Three (13,345,033) shares; that upon the dissolution of APHL, its stockholders, Messrs. Sukanto Tanoto, a Singaporean resident, and Phoa Kia Heng, a Malaysian resident, received by way of liquidating dividends Seven Million Eight Hundred Fifty Thousand Twenty Nine (7,850,029) FPII shares and Five Million Four Hundred Ninety Five Thousand Four (5,495,004) FPII shares, respectively; that Messrs. Sukanto and Phoa, in turn, transferred the shares they received as APHL liquidating dividends to RGM and HYS, respectively, both domestic corporations duly incorporated and existing under the Philippine laws; and that the total assets of FPII does not consist principally of real properties since the total value of its property, plant and equipment, as shown in its 1998 audited Financial Statements, represents only 0.32% of its total assets. In reply, please be informed that paragraph 3 of Article 13 of the RP-Singapore Tax Treaty provides, viz: "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. Gains from the alienation of an interest in a partnership or a trust, the property of which consists principally of immovable property situated in a Contracting State, may be taxed in that State. "4. Gains from the alienation of any property, other than those mentioned in paragraphs 1, 2 and 3 shall be taxable only in the Contracting State of which the alienator is a resident." On the other hand, paragraph 3 and 4 of Article 13 of the RP-Malaysia Tax Treaty also provides, viz: "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. Gains from the alienation of an interest in a partnership or a trust, the property of which consists principally of immovable property situated in a Contracting State, may be taxed in that State. "4. Gains from the alienation of any property or assets, other than those mentioned in paragraph 1, 2 and 3 of this Article shall be taxed only in the Contracting state of which the alienator is a resident." From the foregoing provisions of paragraph 4, Article 13, both of the RP-Singapore Tax Treaty and RP-Malaysia Tax Treaty, it is clear that gains derived from the transfer by APHL of its shares in FPII as liquidating dividends in favor of your clients, Messrs. Sukanto Tanoto, a Singaporean resident and Phoa Kia Heng, a Malaysian resident is not taxable in the Philippines. Hence, not subject to income tax and consequently to the capital gains tax imposed under Section 28(B)(5)(c) of the tax Code of 1997, considering that gains from the alienation of any property or assets, other than those mentioned in paragraph 1, 2 and 3 of Article 13 of the RP-Malaysia Tax Treaty and RP-Singapore Tax Treaty shall be taxed only in the Contracting State of which the alienator is a resident. Furthermore, paragraph 3, Article 13, both of the RP-Singapore Tax Treaty and RP-Malaysia Tax Treaty as aforecited, 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 the State. As represented, the total assets of FPII in 1998 does not consist principally of real properties since the total value of its property, plant and equipment as shown in its 1998 audited Financial Statements, represents only 0.32% of the total assets of FPII. For this purpose, the term "principally" as used in said treaties has been defined under Revenue Regulations No. 4-86 to mean more than 50% of the entire assets of the subject corporation in terms of value. However, the said transfer are subject to the documentary stamp tax prescribed under Section 176 of the Tax Code of 1997. (BIR Ruling No. DA-218-98 dated June 8, 1998) On the other hand, gains derived from the transfer by your clients, Messrs. Sukanto and Phoa, of the FPII shares they received as liquidating dividends in favor of RGM and HYS, respectively, are for the same reason as stated above, likewise not subject to Philippine tax. Hence, not subject to income tax and consequently, to the capital gains tax prescribed under Section 24(C) in relation to Section 25(B), both of the Tax Code of 1997. (BIR Ruling No. DA-360-99 dated June 17, 1999) 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)