BIR Ruling No. 146-83

August 10, 1983 BIR RULING NO. 146-83 Gentlemen : This refers to your letter dated July 19, 1983 requesting a ruling on the tax consequences of the proposed transactions herein below described. It is represented that Mobil Petroleum Corporation (Mobilpet), a non-resident U.S. corporation not doing business in the Philippines, and the Philippine National Oil Company (PNOC) own all the issued and outstanding capital stocks of the Bataan Refining Corporation (BRC), in the proportion of 60%-40% in favor of PNOC; that BRC is a domestic corporation engaged in the processing of crude oil into various petroleum products; that concomitant with such equity ownership, both PNOC and Mobilpet enjoy the right to have their crude processed by BRC, with Mobilpet assigning, however, said processing right to its Philippine subsidiary, Mobil Oil Philippines, Inc. (MOPI); that having decided to divest itself of its investments in the Philippines, Mobilpet has entered into a agreement with PNOC and/or BRC whereby Mobilpet shall transfer to PNOC all of Mobilpet's shares of stock in BRC and as consideration therefor, PNOC and/or BRC shall grant Mobilpet assignable processing rights at BRC's refinery which will entitle Mobilpet to process 18.25 million barrels of crude over a period of five (5) years or at the rate of 10,000 barrels per day; that on or before the closing date of the transfer of Mobilpet's BRC shares to PNOC, an agreement will be executed covering the assignment by Mobilpet of its processing right to Caltex (Philippines) Inc. (CPI) for which CPI shall pay to Mobilpet on closing date, the equivalent in Philippine currency of US$9,125,000, and the amount of US$9,125,000 in New York, both payments to be spread in equal annual installments over said period of five years. cdti In reply, please be informed that any gain which may be realized by Mobilpet from the date of its shares of stock or 40% equity in BRC to PNOC as well as from the assignment of its processing right to CPI shall be taxable only in the United States, pursuant to Article 14(2) of the 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 a real property interest located in that country . Likewise, both countries may tax gain 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 interest in a corporation if its assets consist principally, which means more than 50% , of real property interest located in the Philippines. In the instant case, BRC's audited balance sheet as of December 31, 1982 shows that its real property or fixed assets is less than 50% of its total assets. Very truly yours, (SGD.) RUBEN B. ANCHETA Acting Commissioner Bureau of Internal Revenue