BIR Ruling [UN-398-95]

November 14, 1995 BIR RULING [UN-398-95] Romulo Mabanta Buenaventura Sayoc & De los Angeles Fourth Floor, King's Court 1 2129 Chino Roces Avenue Makati City Attention: Attys . Carlos G . Baniqued and Edmundo P . Guevara Gentlemen : This refers to you letter dated July 28, 1995 stating that International Hairgoods, Inc. (IHI) is a non-resident foreign corporation organized and existing under the laws of the United States with office address at Baker Technology Plaza, 5909 Baker Road, Suite 505, Minnetonka, Minnesota 55345, U.S.A.; that Allen Arthur (Manila), Inc. (AAMI) is a domestic corporation organized and existing under Philippine laws; that IHI owns one million (1,000,000) fully paid shares (inclusive of nominee shares) of the capital stock of AAMI with a par value of ten pesos (P10.00) per share (AAMI shares); that according to the financial statements of AAMI for the year ended June 30, 1995, it does not have any real property assets; that likewise, per financial statements of AAMI as of June 30, 1995, it has a negative book value of P6,815,399 or on a per share basis, each share of AAMI has a negative book value of P6.82; that IHI will sell its AAMI shares for One U.S. dollar ($1.00) to Aderans Kohgei Company Limited (Aderans), a non-resident foreign corporation organized and existing under the laws of Japan with office address at 1-1 Hiranedai Nakajo-Machi Kitakanbara-Gun, Niigata, Japan. In connection therewith, you are requesting confirmation of your opinion to the effect that the gain, if any, on the sale by IHI of its shares of stock in AAMI to Aderans is not subject to income tax pursuant to Section 14 of the RP-US Tax Treaty in relation to paragraph 1 of the protocol to the said treaty or to the donor's tax. In reply thereto, please be informed that gains which may be realized by IHI from the sale of its shares of stock in AAMI to Aderans 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 currencies 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 which means more than 50% of real property interest located in the Philippines. In the instant case, AAMI Financial Statements for the years ended December 31, 1994 and 1993 show that it has no real property or fixed assets. (BIR Ruling No. 082-91 dated May 14, 1991). Moreover, the transaction is not subject to donor's tax even though the 1,000,000 shares of stock of AAMI was sold by IHI to Aderans for U.S. $1.00 because there is no intent on the part of IHI to donate the AAMI shares of stock to Aderans, aside from the fact that the AAMI shares has a negative book value of P6.82 per share as shown by the Financial Statements for June 30, 1995 of AAMI. 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. Very truly yours, ALICIA P. CLEMENO Assistant Commissioner (Legal Service)