Application for Relief from Double Taxation on Gains Derived by a Non-Resident Australian Corporation from Sale of All of Its Shares of Stock in a Domestic Corporation to Another Non-Resident Australian Corporation under the RP-Australia Tax Treaty

December 10, 1997 BIR RULING NO. 129-97 25 (b) (5) (C) (i) 000-00 129-97 Sycip, Salazar, Hernandez & Gatmaitan 105 Paseo de Roxas 1200 Makati City Attention: Attys . Marilyn A . V . Aquino and Ernesto A . Taino, Jr . Gentlemen : This refers to your application for relief from double taxation on the gains derived by a non-resident Australian corporation from the sale of all of its shares of stock in a domestic corporation to another non-resident Australian corporation under Section 13(2)(a)(iii) of the RP-Australia Tax Treaty. The report of investigation of Revenue Officer II Elizabeth R. Bisquera dated October 13, 1993 disclosed that your client, ARIMCO N.L. (ANL), a non-resident Australian corporation with office address at Level 14, 20 Berry Street, Sydney, Australia, sold its shares of stocks in ARIMCO Mining Corporation (AMC), a domestic corporation duly organized and existing under Philippine laws with office address at 1754 Palomaria St., Dasmarias Village, Makati, Metro Manila, to Climax Mining Ltd., (CML), another non-resident foreign corporation, which does not have a permanent establishment or fixed base in the Philippines and with principal address at Level 2, B-12 Bridge Street, Sydney, Australia; that the primary purpose of the incorporation of AMC is to render exploration and other related services, as well as all aspects of technical and management services to individuals, partnerships, associations and corporations engaged in mining, or in any manner, in the acquisition, conveyance, storage, marketing, processing, refining and distribution of minerals; that the said shares were sold on December 18, 1992 in the amount of A$400,000.00; that prior to the subject transfer of shares of AMC by ANL to CML, the entire 76,923 issued and outstanding shares of stock of AMC, with a par value of P100.00 per share, are registered in the names of various foreign stockholders, as follows: ANL 19,996 shares Ethelwoldo E. Fernandez for ANL 1 share Richard Windsor for ANL 1 share CML 38,944 shares Terrence Normal Fern for CML 1 share Simeon Ken R. Ferrer for CML 1 share Bryce Roxbrough for Petroleum Securities Australian Limited 17,979 shares TOTAL 76,923 shares ========== that at present, AMC is a party to Agreements with certain mining claimowners whereby under the said agreements, AMC is granted the right to enter, explore, evaluate, investigate, survey and otherwise examine the mining properties owned by the other party, the claimowners; that a Bankable Feasibility Study to be conducted by AMC was also included in the agreements; that this Study was intended to determine the economic feasibility of commercial development and operation of any particular mineral deposit found within the claim area; that an Operating Agreement is undertaken whereby for monetary consideration, the claimowners shall assign all its rights, title and interests to the mining properties to the operator of the mines and the same shall take the form of a Financial and Technical Assistance Agreement (FTAA) or a Mineral Production Sharing Agreement (MPSA), both with the Philippine Government; that this FTAA or MPSA is a requirement to enable AMC to extract the mineral ores in view of the fact that AMC, being 100% foreign-owned, is prohibited by law to exploit Philippine natural resources pursuant to Sec. 9, Article XIV of the 1973 Philippine Constitution and P.D. No. 463, as amended by P.D. 1385; that the Agreements recognize this prohibition and have accordingly set the condition that AMC will take all appropriate actions to make it a qualified person under Philippine laws; that sometime in June, 1992, AMC filed with the Government of the Philippines an application for an FTAA but that the same, however, as of the date of the investigation, on October 13, 1993, still remains pending; that on December 18, 1992, ANL sold its AMC's total shareholdings of 19,998 shares to CML for A$400,000.00; that on January 15, 1993, contending that ANL is exempt from the payment of capital gains tax and documentary stamp tax on the said sale, you filed the Capital Gains Tax Return on Stock Transactions not Traded thru the Stock Exchange; that on October 14, 1994, you paid under protest the total deficiency capital gains tax due on the said sale amounting to One Million Four Hundred Twenty Two Thousand Five Hundred Seventy-Four Pesos and Sixty-Four Centavos (P1,422,574.64), inclusive of surcharge, interest and compromise penalty, and the sum of Seven Thousand Two Hundred Forty-Eight Pesos and Seventy-Five Centavos (P7,248.75), representing the total deficiency documentary stamp tax on the said transaction, as evidenced by a xerox copy each of machine validated Capital Gains Tax Return on Stock Transactions and Authority to Accept Payment (ATAP), both dated October 14, 1994. In reply, please be informed that the real issue in this case is whether or not shares of stock in a domestic mining corporation owned by a non-resident Australian corporation is a "real property" within the purview of the RP-Australia Tax Treaty, specifically under the provisions of Article 13 thereof, viz.: " Article 13 " Alienation of Property "(1) Income from the alienation of real property may be taxed in the Contracting State in which that property is situated . "(2) For the purpose of this Article "(a) the term " real property " shall have the meaning which it has under the laws in force in the Contracting State in which the property in question is situated and shall include "(i) a lease of land or any other direct interest in or over land ; "(ii) rights to exploit , or to explore , for natural resources ; and "(iii) shares or comparable interests in a company, the assets of which consist wholly or principally of direct interests in or over land in one of the Contracting states or of rights to exploit, or to explore for, natural resources in one of the Contracting States ; "(b) real property shall be deemed to be situated (i) where it consists of direct interests in or over land in the Contracting State in which the land is situated ; (ii) where it consists of right to exploit, or to explore for, natural resources in the Contracting State in which the natural resources are situated or the exploration may take place ; and (iii) where it consists of shares or comparable interests in a company, the assets of which consist wholly or principally of direct interests in or over land in one of the Contracting States or of rights to exploit, or to explore for, natural resources in one of the Contracting States in the Contracting State in which the assets or the principal assets of the company are situated . "(3) Subject to the provisions of paragraph (1) income from the alienation of capital assets of an enterprise of one of the Contracting States or available to a resident of one of the Contracting States for the purpose of performing professional services or other independent activities shall be taxable only in that Contracting State, but, where those assets form part of the business property of a permanent establishment or fixed base situated in the other Contracting State, such income may be taxed in that other State ." "Real property" as defined under RP-Australia Tax Treaty includes " shares or comparable interests in a company, the assets of which consist wholly or principally of direct interests in or over land in one of the Contracting States " . . . The investigation conducted by Revenue Officer II Elizabeth R. Bisquera revealed that the primary purpose for the incorporation/organization of AMC was to render exploration and other related services, as well as all aspects of technical and management services to individuals, partnerships, associations and corporations engaged in mining, or in any manner, in the acquisition, conveyance, storage, marketing, processing, refining and distribution of minerals." In short, AMC is a mining company engaged in mining services, and its name ARIMCO Mining Corporation speaks well for itself. Thus, the fact that it is a mining company and that it has no other purpose except to render the aforesaid business purpose, its shares of stock will definitely comprise the shares as contemplated under Article 13(2)(a)(iii) of the said RP-Australia Tax Treaty, viz.: "(iii) shares or comparable interests in a company, the assets of which consist wholly or principally of direct interests in or over land in one of the Contracting States or of rights to exploit, or to explore for, natural resources in one of the Contracting States ." Besides, your contention that AMC is 100% foreign owned corporation and therefore not a qualified entity to conduct exploration activities of natural resources in the Philippines, hence, exempt from Philippine income tax under Article 13 of the RP-Australia Tax Treaty, is of no moment because it may be foreign-owned but it is still a domestic corporation organized under the laws of the Philippines. Accordingly, the gains derived by AMC from the sale of shares of stock from a domestic corporation to another foreign corporation shall be taxed in the Philippines because that is where the "real property" alienated is situated regardless of where and to whom the said shares are sold. Thus, Sec. 25(b)(5)(C)(i) of the Tax Code, stating: "(5) Tax on certain incomes received by non-resident foreign corporation : "(C) Capital gains realized from sale, exchange or disposition of shares of stock in any domestic corporation shall be subject to tax as follows : "(i) Net capital gains as defined in Sec . 33(a)(2) realized during each taxable year from sale or exchange or other disposition of shares of stock not traded through a local stock exchange . Not over P100,000 10% Over P100,000 20% In view of all the foregoing, this Officer is of the opinion that your request for relief from double taxation on gains derived by your client, ARIMCO, N.L., a non-resident foreign corporation, from the sale of all of its shares of stock in ARIMCO Mining Corporation, a domestic corporation, to Climax Mining Ltd., another non-resident foreign corporation, in the amount of A$400,000.00 is hereby denied for lack of legal basis. Consequently, your request for refund of the capital gains tax due on documentary stamps tax paid in the amount of P1,422,574.64 and P7,248.75, respectively, or a total amount of P1,429,823.39 is likewise denied for the same reason. Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue