Dy Go Fernando & Company

July 31, 2009 BIR RULING [DA-(C-161) 424-09] Sec. 28 (B) (5) (c); DA-317-99 Dy Go Fernando & Company 3rd Floor Saville Building 8728 Paseo de Roxas Avenue cor. Buendia Avenue, Makati City Philippines Attention: Mr. Richard D. Go Managing Partner Gentlemen : This refers to your letter dated March 20, 2009 on behalf of your client, Nissin Foods Holdings Co., Ltd. (Nissin Foods), requesting for confirmation of your opinion that the sale of shares of stock in Nissin-Universal Robina Corp. ("URC") by Nissin Foods in favor of Nissin Foods (Asia) Pte. Ltd. ("Nissin Asia") is not subject to value-added tax, documentary stamp tax, and withholding tax. It is represented that Nissin Foods is a non-resident foreign corporation organized and existing under the laws of Japan with principal office address at 28-1, 6 Chome, Shinjuku, Shinjuku-ku 160-8524, Japan; that it is not registered either as a corporation or as a partnership and has not been licensed to do business in the Philippines per certification issued by the Securities and Exchange Commission; that Nissin Foods is the registered and beneficial owner of Forty Seven Million Two Hundred Fifty Thousand (47,250,000) common shares of URC; that on the other hand, Nissin Asia is also a non-resident foreign corporation organized and existing under the laws of Singapore with principal office address at 16, Chin Bee Road, Jurong Town, Singapore 619826; that on January 26, 2009, Nissin Foods and Nissin Asia entered into a Deed of Absolute Sale whereby Nissin Foods agreed to sell its shares of stock in URC to Nissin Asia for the total purchase price of Sixty Seven Million Five Hundred Sixty Seven Thousand and Five Hundred Pesos (Php67,567,500.00) or One Peso & 43/100 (Php1.43) per share; that URC is a corporation duly organized and existing under the laws of the Republic of the Philippines with principal place of business located at the 2/F CFC Administration Bldg. E. Rodriguez Jr. Avenue Bagong Ilog, Pasig City Philippines; that it is engaged in the business of manufacturing, selling, dealing, importing and exporting food and food products; that the underlying assets of URC as shown by its latest audited financial statements as of September 30, 2008 do not consist principally of immovable assets considering that out of the total assets of URC amounting to Php691,749,737, the book value of its property, plant and equipment amounts only to Php140,024,603 or approximately twenty percent (20%) of its total assets. In reply, please be informed of the following: Section 105 of the Tax Code of 1997, as amended, provides: "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) imposed in Sections 106 to 108 of this Code. xxx xxx xxx" On the other hand, Section 106 of the Tax Code of 1997, as amended, also provides: "Sec. 106. Value-added Tax on Sale of Goods or Properties. (A) Rate and Base of Tax. There shall be levied, assessed and collected on every sale, barter or exchange of goods or properties, a value-added tax equivalent to ten percent of the gross selling price or gross value in money of the goods or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor: Provided, That the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%) . . ." Based on the foregoing provisions, the 12% VAT is imposed only if the sale, barter or exchange of goods or properties is made in the ordinary course of trade or business. Since the URC shares of stock are not held by Nissin Foods primarily for sale, barter or exchange in the ordinary course of its trade or business, the foregoing transfer is not subject to 12% VAT. The sale is not a sale in the regular course of business. In Section 4.105-3, the phrase "in the course of trade or business" was defined as "the regular conduct or pursuit of a commercial or 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". The sale of the shares of stocks is a one-off transaction that is not meant to be undertaken on a regular basis. In the same way, the sale of shares of stocks by Nissin Foods to Nissin Asia cannot be construed as a "transaction incidental" to the regular conduct of business, because this sale not a sale of good or service. Nissin Foods is likewise not a dealer in securities/stock broker, and the transaction is more of a capital formation. Moreover, both Nissin Foods and Nissin Asia are non-resident foreign corporations and therefore, not covered by VAT. In BIR Ruling 024-05 dated December 23, 2005, this Office held that: ". . . the word 'incidental' contemplates an activity that necessarily follows the carrying out of the primary function. Since the sale of vessels is not necessary in the carrying out NDC's primary function of leasing personal properties, it should not be subject to VAT. In the instant case, the transfer by PSPC of the Fixed Assets of its LPG business to SGLPI in exchange for the latter's shares of stock pursuant to a tax-free exchange under Section 40 (C) (2) of the Tax Code of 1997 is by reason of a reorganization, a transaction which is not done with regularity and would no longer be repeated. The assignment of the Fixed Assets is not undertaken in the course of PSPC's regular conduct of trade or business or in pursuit of a commercial or an economic activity, nor is it incidental thereto." Concerning income tax, the capital gains to be derived by a non-resident corporation, not engaged in trade or business, from the sale of shares of stock in a domestic corporation are generally subject to the final withholding tax at the rate of 5% on the first PhP100,000 and 10% on any amount in excess of PhP100,000 as provided under Sec. 28 (B) (5) (c) of the Tax Code of 1997, as amended, and Sec. 7 of Revenue Regulations No. 6-2008. In the instant case, however, the gains which will be realized by Nissin Foods from the transfer of its shares of stock in URC to Nissin Asia shall not be subject to capital gains tax and withholding tax in the Philippines pursuant to Article 13 of the RP-Japan Tax Treaty inasmuch as the assets of URC do not consist principally of real property interest located in the Philippines. EcaDCI As for the documentary stamp tax liability, the said transfer will be subject to the documentary stamp tax equivalent to P0.75 for every P200.00 or a fraction thereof of the par value of the shares pursuant to Section 176 of the Tax Code of 1997 as amended. Upon presentment of the proof of payment of the documentary stamp tax, the Corporate Secretary of URC can register the transfer of the shares from Nissin Foods to Nissin Asia in the corporation's Stock and Transfer Book and cancel and issue a new stock certificate in the name of the buyer. 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. TEcADS Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service