Aranas Consunji & Barleta Law Office

January 27, 2009 BIR RULING [DA-(C-015) 048-09] 105; 175; BIR Ruling DA-209-08; Art. 13 RP-Japan Tax Treaty Aranas Consunji & Barleta Law Office Unit 106 G/F Le Metropole Condominium Tordesillas Corner Dela Costa Streets, Salcedo Village, Makati City Attention: Atty. Ma. Louella M. Aranas Gentlemen : This refers to your letter requesting confirmation of your opinion that the transfer by HC Precision of its shares in PHCP, Inc. ("PHCP") to Hitachi Cable, Ltd. ("HC Limited") is not subject to Value-Added Tax ("VAT") and income tax, but is subject to Documentary Stamp Tax ("DST") pursuant to Section 175 (formerly Section 176) of the Tax Code of 1997, as amended. CAaDSI It is represented that PHCP is a domestic corporation organized and existing under the laws of the Philippines; that it is part of the Hitachi global group of companies, which produces and markets a wide range of products and services for various industry sectors like electronics, power, heavy industrial equipment, as well as elevators and escalators; that thirty percent (30%) of the authorized capital stock of PHCP is owned by another member of the Hitachi global group, HC Precision; that in line with the corporate restructuring of the Hitachi global group, HC Precision entered in to a Share Purchase Agreement with another Hitachi company, HC Limited; that pursuant to the said Share Purchase Agreement, HC Precision transferred all its 30% equity in PHCP in favor of HC Limited; that both HC Precision and HC Limited are non-resident foreign corporations organized and existing under the laws of Japan, and neither of them has a permanent establishment in the Philippines and that as shown by its latest Audited Financial Statements, less than 50% of PHCP's assets consist of immovable properties. In reply, please be informed that Section 105 of the Tax Code of 1997, as amended, provides as follows: "Sec. 105. Persons Liable . Any person who, in the course of trade or business, sells, barters, exchanges leases goods or properties, renders services, and any person who imports goods shall be subject to the value-added tax (VAT) . . . xxx xxx xxx The phrase "in the course of trade or business" means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a non-stock, non-profit private organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members or their guests), or government entity." In BIR Ruling No. DA-209-08 dated March 28, 2008, 1 which involves similar facts, this Office held as follows: "Based on the foregoing definition [Section 105], the assignments of RPI shares by CMTC and SAPAC to Roche BV is not a disposition or exchange of properties "in the course of trade or business". The RPI shares assigned by CMTC and SAPAC to RPI were not held by CMTC and SAPAC for sale in the ordinary course of trade or business. Thus, the assignment of RPI shares by CMTC and SAPAC to Roche BV is not subject to VAT." cHAaCE With respect to income tax, BIR Ruling No. DA-209-08, supra , is also instructive, thus: "In numerous ruling issued by this Office, we ruled that in a transfer of shares of stock of a Philippine company by a non-resident foreign corporation to another non-resident foreign corporation belonging to the same group of companies, said transfer being made pursuant to a legitimate worldwide corporate reorganization, there is no effective transfer of beneficial ownership of the said shares in the Philippine company. There being no transfer of beneficial ownership, no gain will be realized by both the transferor and transferee from the transfer of shares. Consequently the transfer is not subject to capital gains tax." Moreover, Article 13 (4) in relation to Article 13 (5) of the Philippines-Japan Tax Treaty provides that, "Gains from the alienation of shares of company, a partnership or a trust the property of which consists principally of immovable property situated in a Contracting State, may be taxed in that Contracting State. However, gains from the alienation of any property, other than those mentioned in paragraphs 1, 2, 3 and 4 of the RP-Japan Tax Treaty shall be taxable only in the Contracting States of which the alienator is a resident." In the case at bar, the transfer of PHCP shares from HC Precision to HC Limited does not fall under paragraphs 1, 2, or 3 of the RP-Japan Tax Treaty. Neither does it fall under paragraph 4 since PHCP's assets do not consist principally of immovable properties. It is clear, therefore, that the controlling provision in this case is paragraph 5 of Article 13 of the Philippines-Japan Tax Treaty. Accordingly, any gain from the transfer of PHCP shares from HC Precision to HC Limited is not taxable in the Philippines considering that its assets do not consist principally of immovable [See BIR Ruling No. 071-90, dated May 10, 1990; BIR Ruling No. DA-105-98 dated March 26, 1998; BIR Ruling No. DA-121-97 dated March 21, 1997; and DA-202-96 dated June 19, 1996]. However, the Share Purchase Agreement shall be subject to DST in accordance with Section 175 [formerly Section 176] of the Tax Code of 1997, as amended. In BIR Ruling No. DA-209-08, supra , the BIR held: ADcEST The assignment of RPI shares from CMTC and SAPAC to Roche BV is subject to DST. This Office held in BIR Ruling No. DA-475-05 dated November 21, 2005 that under Section 4 of Revenue Regulations No. 13-2004, implementing Section 176 of the Tax Code of 1997, as amended, all transfer of shares of stocks of a domestic corporation are subject to DST upon execution of the deed transferring ownership or rights thereto, or upon delivery, assignment or indorsement of such shares in favor of another." 2 Accordingly, your opinion is hereby confirmed that the transfer by HC Precision of its shares in PHCP, Inc. ("PHCP") to Hitachi Cable, Ltd. ("HC Limited") is not subject to Value-Added Tax ("VAT") and income tax, but is subject to Documentary Stamp Tax ("DST") pursuant to Section 175 (formerly Section 176) of the Tax Code of 1997, as amended. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation it is shown that the facts are different from those represented, then this ruling shall be null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Footnotes 1. [See also BIR Ruling No. DA-162-08, 14 March 2008]. 2. [See also BIR Ruling No. DA-105-98, supra ]. cEHSTC