Domestic Corporations Subject to 32% Tax on Income Derived from Sources Within and Without the Phil.

July 19, 2004 BIR RULING NO. 008-04 22 (Z), 27 (A) & (D) (2), 39 (A) (1), 127 (A), Article 23, RP-US Tax Treaty 00-000 Dr. Constancio Amen, Ph.D. 291 P. Tuazon Cubao, Quezon City S i r : This refers to your query on whether Gospel Support Corporation (GSC) is subject to capital gains tax under Section 27(D)(2) or other percentage tax under Section 127(A) of the Tax Code of 1997. It is represented that GSC is a close corporation duly registered with the Securities and Exchange Commission (SEC) per SEC Registration No. A200105746 dated March 10, 2001 and whose only business is buying and selling of shares of stock at the New York Stock Exchange and the Nasdaq. According to its Articles of Incorporation, GSC's primary purpose is to invest in stocks without acting as a stockbroker or a dealer in securities. It is further represented that GSC buys through an American stockbroker who charges GSC at a commission per trade; that GSC trades only for itself; that GSC is not a stockbroker, but buys through a stockbroker in the United States; that GSC is not a "dealer in securities" as the term is defined in the current Philippine Tax Code; that GSC trades through the internet and sometimes by telephone e.g. GSC tells its broker to buy Stock XYZ at such and such a price or sell stock YMB at such and such a price; that for each transaction, the stockbroker charges GSC a "commission" which becomes part of the net buy or net sale. In reply, please be informed that under Section 27(A) of the Tax Code of 1997, domestic corporations are subject to tax on their income derived from sources within and without the Philippines at the rate of 32%. Thus, GSC, as a domestic corporation, is subject to tax on its income from sources within and without the Philippines at the rate of 32%. Accordingly, income by GSC, which is solely derived from buying and selling of shares of stock at the New York Stock exchange and the Nasdaq, is considered as income by GSC from sources without the Philippines, taxable at the rate of 32%. Contrary to your opinion, neither the percentage tax of 1/2 of 1% under Section 127(A) of the Tax Code of 1997 nor the capital gains tax of 5% or 10% under Section 27 (D) (2) of the same Code apply to GSC. Section 127 (A) of the Tax Code of 1997 imposes a tax at the rate of of 1% of the gross selling price or gross value in money on the sale, barter or exchange of shares of stock listed and traded through the local stock exchange. This tax does not apply to GSC, since its shares of stock are not listed or traded through the local stock exchange. The following definitions found in the Tax Code of 1997 are relevant in determining whether the capital gains tax at the rate of either 5% (for shares amounting not over P100,000.00) or 10% (for shares in an amount in excess of P100,000.00) shall apply to sales of shares of stock by GSC in the New York stock exchange or the Nasdaq. Section 22(Z) "The term ordinary income includes any gain from the sale or exchange of property which is not a capital asset or property described in Section 39(A)(1). Any gain from the sale or exchange of property which is treated or considered, under other provisions of this Title, as ordinary income shall be treated as gain from the sale or exchange of property which is not a capital asset as defined in Section 39(A)(1). The term ordinary loss includes any loss from the sale or exchange of property which is not a capital asset. Any loss from the sale or exchange of property which is treated or considered, under other provisions of this Title, as ordinary loss shall be treated as loss from the sale or exchange of property which is not a capital asset." Section 39(A)(1) "The term capital assets means property held by the taxpayer (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, or property used in the trade or business, of a character which is subject to the allowance for depreciation provided in Subsection (F) of Section 34; or real property used in trade or business of the taxpayer". As represented, GSC's primary purpose is to invest in stocks without acting as a stockbroker or a dealer in securities. Such being the case, shares of stock held by GSC in pursuance of its primary purpose are more appropriately classified as property held primarily for sale to customers in the ordinary course of its trade or business and which would properly be included in its inventory if on hand at the close of the taxable year, or property which is more commonly referred to as "ordinary asset" , as opposed to "capital assets" as defined above (Section 39(A)(1), Tax Code of 1997). Accordingly, any gain realized from the sale of said shares of stock shall be considered as ordinary income by GSC, subject to the tax rate of 32% imposed on domestic corporations under Section 27(A) of the Tax Code of 1997. Finally, Article 23 of the RP-US Tax Treaty provides, viz. : "xxx xxx xxx "2. In accordance with the provisions and subject to the limitations of the law of the Philippines (as it may be amended from time to time without changing the general principle hereof), the Philippines shall allow to a citizen or resident of the Philippines as a credit against the Philippine tax the appropriate amount of taxes paid or accrued to the United States and, in the case of a Philippine corporation owning more than 50 percent of the voting stock of a United States corporation from which it receives dividends in any taxable year, shall allow credit for the appropriate amount of taxes paid or accrued to the United States by the United States corporation paying such dividends with respect to the profits out of which such dividends are paid. Such appropriate amount shall be based upon the amount of tax paid or accrued to the United States, but the credit shall not exceed the limitations (for the purpose of limiting the credit to the Philippine tax on income from sources within the United States, and on income from sources outside the Philippines) provided by Philippine law for the taxable year. For the purpose of applying the Philippine credit in relation to taxes paid or accrued to the United States, the rules set forth in Article 4 (Source of Income) shall be applied to determine the source of income. For purposes of applying the Philippine credit in relation to taxes paid or accrued to the United States, the taxes referred to in paragraphs 1(a) and 2 of (Taxes Covered) shall be considered to be income taxes." (Emphasis supplied) Subject to the conditions laid down in the foregoing provisions, GSC, a Philippine corporation earning income from the United States, may apply the taxes paid or accrued to the United States as a credit against its Philippine income tax liability of 32%. Therefore, in view of all the foregoing, GSC is subject to income tax at the rate of 32% on its income earned from its sale of shares of stock in the New York stock exchange and the Nasdaq. Further, GSC shall, under the provisions of the RP-US Tax Treaty, be allowed a credit against its 32% Philippine income tax liability the appropriate amount of taxes paid or accrued to the United States. Very truly yours, (SGD.) GUILLERMO L. PARAYNO, JR. Commissioner of Internal Revenue