BIR Ruling [UN-218-94]

July 20, 1994 BIR RULING [UN-218-94] SyCip Salazar Hernandez & Gatmaitan 105 Paseo de Roxas 1200 Makati, Metro Manila Attention: Attys . Carlos Roberto Z . Lopez & Euney Marie J . Mata Gentlemen : This refers to your letter dated June 10, 1994 requesting for an in behalf of your client, McCann-Erickson Worldwide, Inc. (McCANN), a ruling to the effect that it is exempt from Philippine income tax on any gain realized from its sale of 12,000 shares of stock of Campaigns, Inc. It is represented that McCANN, a corporation duly organized and existing under the laws of the State of Delaware, with principal office address at 750 Third Ave., New York, New York 10017, U.S.A., sold its 12,000 shares of stock (worth P22,020,432.00) of Campaigns, Inc. a domestic corporation with office address at the 12th Floor, Valero Towers Condominium, Valero Street, Salcedo Village, Makati, Metro Manila, to various Filipino purchases represented by Ma. Yolanda Villanueva-Ong. cdtech In reply thereto, please be informed that gains which may be realized by McCANN from the sale of its shares of stock in Campaigns, Inc. to various Filipino individuals 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 interest in a corporation if its assets consist principally or 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 Campaigns, Inc. located in the Philippines as appearing on its financial statement for the year ending December 31, 1993 is only 7.08% of its total assets, which is less than 50% of the value of its total assets. (BIR Ruling No. 136-92 dated April 28, 1992) cdtech Very truly yours, ALICIA P. CLEMENO Acting Assistant Commissioner Legal Service