BIR Ruling [DA-570-99]

October 5, 1999 BIR RULING [DA-570-99] Platon Martinez Flores San Pedro & Leao 6th Floor Tuscan Building 114 Herrera Street Legaspi Village Makati City Attention: Atty . Hector A . Martinez Gentlemen : This refers to your letters dated November 11, 1998 and January 4, 1999 requesting confirmation of your opinion on behalf of your client, Purina Philippines, Inc., whose corporate name has been amended to Agribrands Philippines, Inc. effective June 23, 1998, (hereinafter "Purina"), that no gain or loss shall be recognized on the transfer of Purina shares by Ralston Purina International Holding Company, Inc. (hereinafter "RPIHCI") to Ralston Purina Company (hereinafter "Ralston") and the subsequent transfer of the same shares from Ralston to Agribrands International, Inc. (hereinafter "Agribrands") pursuant to Article 14, paragraph 2 of the RP-US Tax Treaty in connection with paragraph 1 of the Protocol of the Treaty. prcd It is represented that Purina is a domestic corporation duly registered with the Securities and Exchange Commission (SEC) "to engage in the business of manufacturing, processing, marketing, selling, dealing and trading in and with poultry, livestock and specialized animal feeds, animal health products and pet foods, including machinery, appliances and apparatus for their manufacturing or handling"; that it has an authorized capital stock of One Hundred Fifty One Million Pesos (P151,000,000) divided into One Million Five Hundred Ten Thousand (1,510,000) shares with a par value of One Hundred Pesos (P100.00) per share; that One Million Four Hundred Thirteen Thousand Two Hundred (1,413,200) shares are issued and outstanding and the following are the registered owners of said shares: Name No. of Shares RPIHCI 1,413,160 Paul Van Walleghem 10 Antonio Maria Guerrero 9 Carlos G. Platon 1 Bill Armstrong 10 Michael J. Costello 10 1,413,200 shares; that RPIHCI was a corporation organized and existing under the laws of the State of Delaware, United States of America prior to its merger with and into Ralston, its parent company; that RPIHCI was not doing business in the Philippines; that Ralston, a corporation organized and existing under the laws of the State of Missouri, United States of America, is not doing business in the Philippines; that as an integral part of a corporate reorganization among the subsidiaries and affiliates of Ralston, which includes the separation of Ralston's international animal feeds business from its core pet products and battery business and the consolidation of such international animal feeds business into Agribrands, Ralston and Agribrands, a non-resident U.S. corporation, entered into an Agreement and Plan of Reorganization dated April 1, 1998, pursuant to which RPIHCI merged with and into Ralston effective as of March 30, 1998, with the latter as the surviving corporation; that as a result of such merger, Ralston became owner of the shares of RPIHCI in Purina consisting of 1,413,160 shares with par value at P100 each; that on April 1, 1998, Ralston made a capital contribution of all of the aforesaid shares in Purina in favor of Agribrands in exchange for 1,413,150 new common shares in the capital stock of Agribrands plus a promissory note of Agribrands in the amount of US$100.00; and that as of March 30 and April 1, 1998, the real property interest of Purina in the Philippines makes up less than 50% of the total assets of Purina. In reply, please be informed that the Reservation Clause of the RP-US Tax Treaty, pertinent portion of which is quoted hereunder, states at follows: "Notwithstanding the provisions of Article 14 relating to capital gains, both the United States and the Philippines may tax gain 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." "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 is 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." "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." It is to be noted that under the Reservation Clause, the Philippines may tax the gains derived from the disposition of interest 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). Verification of the audited Financial Statement of Purina as of March 30 and April 1, 1998 shows that Purina's real property interest situated in the Philippines when its shares were transferred were 41% and 47% of its total assets respectively. llcd In view thereof, your opinion is hereby confirmed. Gains which may be realized on the transfer of Purina shares by RPIHCI to Ralston and likewise the subsequent transfer of the same shares from Ralston to Agribrands shall be taxable only in the United States pursuant to Article 14 (2) of the RP-US Tax Treaty. The Corporate Secretary is hereby authorized to record in the stock and transfer book of Purina the transfer of its shares from RPIHCI to Ralston and the subsequent transfer of the same shares from Ralston to Agribrands. (BIR Ruling No. 135-94 dated September 1, 1994) We likewise confirm your opinion that in determining the gain or loss from the subsequent transfer of the stocks involved, the acquisition cost of Agribrands from Ralston of the shares shall be considered. Thus, if Agribrands later sells or exchanges the shares of stock acquired by them from Ralston, Agribrands shall be subject to tax derived from sale or exchange taking into consideration that the cost basis of the shares shall be the acquisition cost of Agribrands from Ralston. Finally, the certificate of stocks to be transferred by RPIHCI to Ralston and from Ralston to Agribrands shall be subject to the documentary stamp tax imposed by 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. LibLex Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal & Enforcement Group)