BIR Ruling [DA-543-98]

December 2, 1998 BIR RULING [DA-543-98] SyCip Gorres Velayo & Co. 6760 Ayala Avenue Makati City Attention: Atty . C . P . Noel Tax Division Gentlemen : This refers to your letter dated October 15, 1998 requesting on behalf of your client, MD Distripark Manila, Inc . (MDD ), for confirmation of your opinion that the sale by Mitsubishi Corporation, a stockholder, of its shares in MDD to MC Trans International, Inc. is not subject to Philippine capital gains tax pursuant to Article 13 paragraph 5 of the RP-Japan Tax Treaty. cd It is represented that MDD is a corporation duly organized and existing under and by virtue of the laws of the Philippines; that it has an authorized capital stock of P380,000,000 divided by 380,000 shares with a par value of P1,000 per share; that the subscribed and paid-up capital of MDD is P340,000,000; that Mitsubishi Corporation, a corporation organized and existing under the laws of Japan holds 127,500 shares in MDD with an aggregate par value of P127,500,000; that Mitsubishi intends to sell the MDD shares to MC Trans International, Inc., a Japanese corporation, for P127,500,000 or its equivalent in Japanese currency; and that based on its latest Audited Financial Statements dated December 1997, the real property assets of MDD do not exceed 50% of its total assets. In reply, please be informed that Article 13 of the RP-Japan Tax Treaty provides, as follows: "ARTICLE 13 "GAINS FROM THE ALIENATION OF PROPERTY "(1) Gains derived by a resident of 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. "(3) Gains derived by a resident of a Contracting State from the alienation of ships and aircraft operated in International traffic, and any 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 is 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 above transaction involving sale of shares of stock of MDD, a domestic corporation, does not fall under paragraphs 1, 2 and 3 above-quoted. Neither does it fall under paragraph 4 because it has been ascertained from the current financial statement of MDD that the total market value of its real properties does not exceed 50% of its total assets; hence, do not consist principally of real property located in the Philippines. Such being the case, the transaction falls within the purview of paragraph 5. Accordingly, the gains, if any, derived by Mitsubishi Corporation, a corporation organized and existing under the laws of Japan, from the sale of its 127,500 shares in MDD to MC Trans International, Inc. is subject to tax only in Japan, the country where the seller is a resident. Said gains, therefore, are not taxable in the Philippines. However, the sale by Mitsubishi Corporation of its shares in MDD to MC Trans International, Inc. is subject to the documentary stamp tax in accordance with Section 176 of the Tax Code of 1997. 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. (BIR Ruling No. DA-202-96 dated June 19, 1996) Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal and Enforcement Group)