BIR Ruling [UN-018-96]

January 11, 1996 BIR RULING [UN-018-96] Sycip Gorres Velayo & Co. 6760 Ayala Avenue Makati City Attention: Atty . C . P . Noel Tax Division Gentlemen : This refers to your letter dated December 11, 1995 requesting confirmation of your opinion that any capital gain which may be realized from the sale by Griffith Laboratories USA, Inc. (Griffith USA), a non-resident American corporation, of its stockholding in Griffith Laboratories Philippines, Inc. (Griffith Phil.), a domestic corporation, to Edward Keller Philippines, Inc. (Keller), another domestic corporation, is not subject to capital gains tax under the RP-US Tax Treaty. It is represented that Griffith USA plans to sell its shareholdings in Griffith Phil. to Keller; that as per the latest financial statement of Griffith Phil., a copy of which has been submitted to this Office, its real property interest does not exceed 50% of its total assets; and that the total real property asset of Griffith Phil. for 1995 consisting of machinery and equipment, furniture, fixtures and equipment leasehold improvements and transportation equipment is P21,400,146.00 out of the total assets of P107,323,767.00 or a mere 19.93% thereof. In reply thereto, please be informed that your opinion is hereby confirmed. Gains which may be realized by Griffith USA from the sale of its shares of stock in Griffith Phil. to Keller 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. cdtech 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." does not apply in this case. It is to be noted that under the Reservation Clause, the Philippines may tax gains derived from the disposition of interests in a corporation if its assets consist 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). In the instant case, it is represented that the real property interest of Griffith Phil. is less than fifty percent (50%) of its entire assets, or a mere 19.93% thereof, as shown in its financial statements for the fiscal year ended September 30, 1995. (BIR Ruling No. 007-89 dated January 26, 1989) 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. cdll Very truly yours, ALICIA P. CLEMENO Assistant Commissioner (Legal Service)