Taxability of the Any Gain Realized from Sale of Shares of Stock to Bank of America International Financial Corporation

April 28, 1992 BIR RULING NO. 136-92 24 042-87 136-92 Sycip, Gorres, Velayo & Co. P.O. Box 256 Makati Central Post Office 1299 Metro Manila Attention: Atty . E . C . Alcantara Tax Division Gentlemen : This refers to your letter dated September 27, 1991 requesting on behalf of your client, Bank of America International (BA-International) for confirmation of your opinion to the effect that it is exempt from Philippine income tax on any gain realized from its sale of BA Finance Corporation (BAFC) shares of stock, to Bank of America International Financial Corporation (BIFC). It is represented that BA-International, BIFC, and BAFC are all corporate members of the Bank of America Group; that Bank of America NT & SA, a U.S. corporation with a permanent establishment (branch office) in the Philippines, wholly owns BIFC and BA-International, which are both U.S. corporations; that neither BA-International nor BIFC, have any permanent establishment in the Philippines; that BA-International currently owns 40% of BAFC, a Philippine corporation; and that BA-International is contemplating selling its BAFC shares of stock to BIFC. In reply thereto, please be informed that gains which may be realized by BA-International from the sale of its shares of stock in BAFC to BIFC shall be taxable only in the United States pursuant to Article 14 (2) of the RP-US Tax Treaty. Hence, said gain is not subject to Philippine tax. The Reservation Clause of the RP-US Tax Treaty, pertinent portion of which is quoted hereunder as follows: "Article I " Notwithstanding the provisions of Article 14 of the Convention relating to capital gains, both the Philippines and the United States may tax gains from the disposition of an interest in a corporation if its assets consist principally of real property interest located in that country . Likewise, both countries may tax gains from the disposition of an interest in a partnership, trust or estate to the extent the gain is attributable to a real property interest in one of the countries. The term "real property interest" is to have the meaning it has under the law of the country in which the underlying real property is located." (Emphasis supplied) does not apply in this case. It is to be noted that under the Reservation Clause, the Philippines may tax the gains derived from the disposition of interests in a corporation if its assets consists principally of real property interest located in the Philippines. "Principally" means more than 50% of the entire assets in terms of value. (Sec. 2, Revenue Regulations No. 4-86) Investigation disclosed that BAFC's real property or fixed assets for the year ending December 31, 1990 is only 1.018% of its total assets which is less than 50% of the value of its total assets. Very truly yours, JOSE U. ONG Commissioner of Internal Revenue By: EUFRACIO D. SANTOS Deputy Commissioner Officer-in-Charge