Whether Certain Described Sale Transactions are Not Covered by or Exempt from the Requirements of Section 36 of the Tax Code, as amended

June 23, 1995 BIR RULING NO. 097-95 36 000-00 097-95 Angara, Abello, Concepcion Regala & Cruz (ACCRA) ACCRA Building, 122 Gamboa St. Legaspi Village, Makati Metro Manila Attention: Atty . Rodrigo H . Nepomuceno Gentlemen : This refers to your letter dated June 6, 1994 stating that your client, Rothmans Asia Pacific Limited (RAPL), an Australian company, owns forty percent (40%) of the outstanding shares of Sterling Tobacco Corporation (STC) and Consumer Brands Holdings, Inc. (CBHI), both domestic corporations; that RAPL invested in 1,226,200 preferred shares and 675,195 common shares of STC at the aggregate acquisition price of P735,000,000 and P196,274,847, respectively; that RAPL also invested in 70,232,270 shares of CBHI at the aggregate acquisition cost of P70,232,230, whose (CBHI's) assets consist mainly of STC's shares of stock; that since 1980, STC has been incurring losses, and based on STC's interim unaudited Financial statements as of March 01, 1994, the book value of STC's common and preferred shares is negative; that due to the adverse result of RTC's business operations and its consequent impact in CBHI's investment (as a holding company) consisting principally of shareholdings in STC, RAPL has decided to divest and, accordingly, sold its abovedescribed entire shareholdings in both STC and CBHI to Macondray Holdings Corporation ("MHC"), a domestic corporation, for the nominal price of One Peso (P1.00), thereby resulting in actual losses to RAPL in respect to its equity investments in both STC and CBHI; that the reason and justification for the sale of both the STC and CBHI shares at a nominal price is the fact that the respective book values of the STC and CBHI shares are negative; that in the case of CBHI, its book value is virtually valueless since its underlying asset, the STC shares has a negative book value, that accordingly, the sale of the CBHI shares necessarily resulted likewise to a loss, as in the case of the STC shares. Based on the foregoing representations, you would like to request for a ruling confirming your opinion that the abovedescribed sale transactions are not covered by or exempt from the requirements of Section 36 of the Tax Code, as amended. In reply, please be informed that Section 36 of the Tax Code, as amended, in pertinent part, provides that "SEC. 36. Income from Sources Within the Philippines . (a) Gross income from sources within the Philippines. . . . "e. . . . Provided, however, That gain from the sale of shares of stock in a domestic corporation shall be treated as derived entirely from sources within the Philippines regardless of where the said shares are sold. The transfer by a nonresident alien or a foreign corporation to anyone of any share of stock issued by a domestic corporation shall not be effected or made in its book unless: (1) the transferor has filed with the Commissioner a bond conditioned upon the future payment by him of any income tax that may be due on the gains derived from such transfer or, (2) the Commissioner has certified that the taxes, if any, imposed in this Title and due on the gain realized from such sale or transfer have been paid. It shall be the duty of the transferor and the corporation the shares, of which are sold or transferred to advise the transferee of this requirement. . . ." From the abovequoted provision of Section 36 of the Tax Code, it is clear that transfer by a foreign corporation to anyone of any of its shares of stock issued by a domestic corporation shall not be effected or made in its book unless the requirements enumerated therein have been punctiliously complied with. However, since as presented in the instant case the sale by your client, RAPL, of its entire shareholdings in both STC and CBHI to MHC resulted in actual losses, this Office is of the opinion as it hereby holds that your client, RAPL, is required, subject to verification, to secure a Certification from the Revenue District Office concerned to the effect that no tax is due from said sale transaction since no gain was derived therefrom. Accordingly, your request for confirmation of your aforesaid opinion is hereby denied for lack of legal basis. cdta Very truly yours, RENE G. BAEZ Acting Commissioner