BIR Ruling [UN-277-95]

July 31, 1995 BIR RULING [UN-277-95] Atty. Norberto S. Gonzales 502 Roman R. Santos Building Plaza Lacson, Manila S i r : This refers to your letters dated March 9 and October 20, 1994 requesting for and in behalf of Miles Inc., a foreign corporation with offices at 1127 Myrtle Street, Elkhart, Indiana, U.S.A., tax treaty relief from the imposition of capital gains tax on the sale of Miles Inc. interest of 24,418 shares of capital stock in Bayer Philippines, Inc. to Bayer Aktiengesellschaft, another foreign corporation with offices at D-51568 Leverkusen, Germany, under Article 14(2) of the Philippines-U.S.A. Tax Treaty. In reply thereto, please be informed that gains which may be realized by Miles Inc. from the sale of its shares of stock in Bayer Philippines, Inc. to Bayer Aktiengesellschaft 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." 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) In the instant case, Bayer Philippines, Inc. Financial Condition for the years ended December 31, 1993 and 1992 show that its real property or fixed assets is less than 50% of the value of its total assets. (BIR Rulings No. 042-87 dated February 10, 1987) cdtech Very truly yours, ALICIA P. CLEMENO Assistant Commissioner (Legal Service)