BIR Ruling [UN-039-95]

January 17, 1995 BIR RULING [UN-039-95] Sycip, Salazar, Hernandez & Gatmaitan 105 Paseo de Roxas 1200 Makati, Metro Manila Attention: Atty . Rocky Alejandro L . Reyes and Atty . Ma . Melina B . Saldajeno Gentlemen : This refers to your letter dated December 7, 1994 requesting for a ruling exempting your client, American Express Bank, Limited (AEB) from the payment of capital gains tax on the proposed sale of its shares of stock in the Investment and Capital Corporation of the Philippines (ICCP), a domestic corporation, in favor of Development Bank of Singapore (DBS) pursuant to Article 14, paragraph (2) of the RP-US Tax Treaty. It is represented that AEB is a corporation existing under the laws of the State of New York, U.S.A., while DBS is a corporation organized and existing under the laws of Singapore; and that AEB is considering the sale of its 200,000 shares of common stock in ICCP, with a par value of P100.00 per share or an aggregate value of P20,000,000. In reply, please be informed that the gains which will be realized by AEB from its sale of shares of stock in ICCP to DBS shall be taxable only in the United States, pursuant to Article 14(2) of the RP-US Tax Treaty. Hence, said gain will not be 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 of 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 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). The value of the real property interest of ICCP located in the Philippines as appearing in its financial statements as of December 31, 1993 is only 1.27% which is less than 50% of the value of its total assets. (BIR Ruling No. 136-92, dated April 28, 1992) However, notwithstanding this exemption, the proposed sale is subject to the documentary stamp tax in accordance with Section 176 of the Tax Code, as amended. This ruling is issued on the basis of the foregoing as represented. However, if upon investigation it will be disclosed that the facts are different and/or the requirements of this letter are not complied with, then this ruling shall be declared null and void. cdtech Very truly yours, ALICIA P. CLEMENO Assistant Commissioner (Legal Service)