Net Capital Gains Tax Derived by Seller on Sale of Shares of Stock Shall Be Subject to Capital Gains Tax

October 14, 1998 BIR RULING NO. 146-98 27 (D) (2) 176-000-00-146-98 Sycip Gorres Velayo & Co. 6760 Ayala Avenue Makati City Attention: Atty . C . P . Noel Tax Division Gentlemen : This refers to your letter dated September 28, 1998 requesting for our confirmation of your opinion (1) that the net capital gains tax derived by the seller on the sale of shares of stock (hereinafter referred to as the "Shares") shall be subject to capital gains tax under Section 27(D)(2) of the Tax Code of 1997 at the rate of 5% for gains not exceeding P100,000 and 10% on the gains in excess of P100,000; (2) that the transfer of the Shares or certificates of stock representing the shares shall be subject to documentary stamp tax under Section 176 of the Tax Code of 1997 at the rate of P1.50 on each P200 or fractional part thereof, of the par value of such certificates of stock, and (3) that the sale of Shares is not subject to value added tax since the seller is not a dealer in securities. prLL It is represented that your client, San Miguel Corporation (SMC), a corporation organized and existing under the laws of the Philippines, is the owner and holder of P10,354,166 common shares (the Shares) of Nestle Philippines, Inc. (NPI), a Philippines, Inc. (NPI), a Philippine domestic corporation, with an aggregate par value of P1,035,416,600.00 at P100.00 per share; that Nestle S.A. is a corporation organized and existing under the laws of Switzerland; that SMC and Nestle S.A. (hereinafter referred to as the Seller and Purchaser, respectively) agreed to enter into an agreement for the sale and purchase of the Shares; that under the terms of the proposed sale, the Purchaser deposited US$591,535,264.30 in an interest bearing dollar denominated account; that this account will be converted into an escrow account upon execution of an escrow agreement between parties; that the escrow account will be under the control of the designated escrow agreement; that the purchase price or the consideration for the Shares shall be the total of the amount placed in escrow and interest earned thereon, net of any tax, withholding or otherwise paid or accruing, on such interest; that on Closing Date, the escrow agent will release the purchase price for the Shares to the Seller, in accordance with the terms of the escrow agreement; that the sale of the Shares is then consummated and all rights, title and interest of the Seller over the Shares are transferred to the Purchaser; and that in the event that the sale of the Shares is not consummated on the Closing Date for whatever reason, the escrow agent shall immediately release the amount deposited in the escrow account together with the interest earned thereon net of tax paid or accruing on the interest, to the Purchaser. In reply, please be informed that your opinion is hereby confirmed as follows: 1. The net capital gains derived by the Seller on the sale of the Shares of domestic corporation not traded in the local stock exchange realized during the taxable year shall be subject to capital gains tax under Section 27(D)(2) of the Tax Code of 1997 at the rate of 5% for net gains not exceeding P100,000 and 10% on the net gains in excess of P100,000. The net capital gains is the difference between the gross selling price or fair market value (FMV) of the shares, whichever is higher, and the acquisition cost of the Shares Gross selling price, for this purpose, is defined as "the total amount of money or its equivalent which the purchaser pays the vendor to receive or get the goods." On the other hand, the FMV of shares is as follows: In the case of shares not traded through but listed in the stock exchange, the highest closing price on the day the shares were sold, transferred or exchanged, shall be the FMV. When no sale is made in the stock exchange, the highest selling price on the day nearest to the day of sale, transfer or exchange of the shares shall be the FMV. The FMV of shares not listed in the stock exchange shall be the book value nearest the valuation date. The gross selling price of the Shares of the Seller, in this particular case, shall be the purchase price or the consideration for the Shares which is the total of the amount placed in escrow and interest earned thereon, net of any tax, withholding or otherwise, paid or accruing, on such interest. 2. The transfer of the Shares or certificates of stock representing the Shares shall be subject to documentary stamp tax under Section 176 of the Tax Code at the rate of P1.50 on each P200 or fractional part thereof, of the par value of such certificates of stock. 3. The sale of the Shares is not subject to the value-added tax since the Seller is not a dealer in securities. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. cdlex Very truly yours (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue