DA ITAD BIR Ruling No. 055-06

May 15, 2006 DA ITAD BIR RULING NO. 055-06 Article 13 of the Philippines-Japan tax treaty; Section 175 of the NIRC of 1997; BIR Ruling No. 052-99 Platon Martinez Flores San Pedro & Leao 6th & 7th Floor Tuscan Building, 114 V.A. Rufino Street (formerly Herrera) Legaspi Village, Makati City Attention: Atty. Anthony Brett M. Abenir Atty. Joey Serrano Arcilla Gentlemen : This refers to your application for relief from double taxation dated August 30, 2005, on behalf of your client, Dentsu, Inc. (Dentsu-Japan), requesting confirmation of your opinion that the sale of its shares of stock in Dentsu, Young & Rubicam-Alcantara, Inc. (DYR-Phils) to Y & R Far East Holdings, Inc. (Y&R-US) is exempt from the payment of capital gains tax, pursuant to Article 13 of the Philippines-Japan tax treaty. It is represented that DYR-Phils is a corporation organized and existing in accordance with the laws of the Republic of the Philippines with business address at the 20th Floor, Yuchengco Tower, RCBC Plaza, Makati City; that Dentsu-Japan is a nonresident corporation organized and existing in accordance with the laws of Japan with principal place of business at 1-8-1 Higashi-shimbashi, Minato-ku, Tokyo 105-7001, Japan; that Y&R-US is also a nonresident foreign corporation organized and existing under the laws of the United States of America with business address at 285 Madison Avenue, New York 10017, USA; that Dentsu-Japan is the registered owner of 16,980 common shares without par value in the capital stock of DYR-Phils; that the said 16,980 common shares were originally issued by DYR-Phils on July 27, 1998; that on May 11, 2005, Dentsu-Japan executed and entered into a Deed of Absolute Sale of Shares with Y&R-US, wherein the former sold, transferred, conveyed and delivered to the latter 8,490 shares out of the said 16,980 common shares, for and in consideration of the amount of One Hundred Seven Thousand Three Hundred and Eight U.S. Dollars (US$107,308.00);and that per audited financial statements of DYR-Phils as of calendar year ending December 31, 2004, the properties of DYR-Phils do not consist principally of immovable property located in the Philippines. In reply, please be informed that Article 13 of the Philippines-Japan tax treaty provides as follows, viz: HScaCT "Article 13 xxx xxx xxx "(4) Gains from the alienation of shares of a company, a partnership or a trust the property of which consists principally of immovable property situated in a Contracting State, may be taxed in that Contracting State. "(5) Gains from the alienation of any property other than those referred to in paragraphs (1),(2),(3) and (4) shall be taxable only in the Contracting State of which the alienator is a resident." Based on the foregoing, the gains which will be realized by Dentsu-Japan from the transfer of its shares of stock in DYR-Phils to Y&R-US shall be taxable only in Japan. However, under paragraph 4 of the aforequoted provision, the Philippines may tax the gains derived from the disposition of interest in a corporation if its entire assets consist principally of real property interest located in the Philippines. "Real Property Interest" means interest on properties enumerated in Section 3 of Revenue Regulations No. 4-86 which are not, however, exclusive of others that are similarly situated. As used in the treaties and in the Regulations, it shall be understood to include real properties as understood under Philippine laws. Moreover, "Principally" means more than 50% of the entire assets in terms of value (Sec. 2 (a) and (b), Revenue Regulations No. 4-86). ( BIR Ruling No. 007-96 ) Verification of the Financial Statements of DYR-Phils as of the date of the subject Deed of Absolute Sale disclosed that its real property interest located in the Philippines represents less than 50% of its total assets, thereby making the assets of DYR-Phils not consisting principally of real property interest located in the Philippines. Accordingly, your opinion that the gains from the sale of shares of stock by Dentsu-Japan to Y & R Far East are not subject to capital gains tax is hereby confirmed. However, the Deed of Absolute Sale executed by and between Dentsu-Japan and Y & R Far East for the sale of the subject shares of stocks without par value shall be subject to the documentary stamp tax (DST) equivalent to twenty-Five percent of the DST paid upon the original issue of said stock ( BIR Ruling No. 052-99 dated April 16, 1999 ) imposed under Section 175 of the Tax Code of 1997, as amended by Republic Act No. 9243, viz : "Section 175. Stamp Tax on Sales, Agreements to Sell, Memoranda of Sales. Deliveries or Transfer of Shares or Certificates of Stock . On all sales, or agreements to sell, or memoranda of sales, or deliveries, or transfer of shares or certificates of stock in any association, company, or corporation, or transfer of such securities by assignment in blank, or by delivery, or by any paper or agreement, or memorandum or other evidences of transfer or sale whether entitling the holder in any manner to the benefit of such stock, or to secure the future payment of money, or for the future transfer of any stock, there shall be collected a documentary stamp tax of Seventy-five centavos (P0.75) on each Two hundred pesos (P200),or fractional part thereof of the par value of such stock: Provided ,That only one tax shall be collected on each sale or transfer of stock is issued, indorsed, or delivered in pursuance of such sale or transfer: and Provided, further, That in the case of stock without par value the amount of the documentary stamp tax herein prescribed shall be equivalent to twenty-five percent (25%) of the documentary stamp tax paid upon the original issue of said stock ".(emphasis supplied) In relation thereto, Section 175 ( i.e ., prior to the amendment of Republic Act No. 9243) 1 of the Tax Code of 1997, which was the law applicable on July 27, 1998, the date of the original issuance by DYR-Phils of the subject shares, provides: "Section 175. Stamp Tax on Original Issue of Shares of Stock . On every original issue, whether on organization, reorganization or for any lawful purpose, of shares of stock by any association, company or corporation, there shall be collected a documentary stamp tax of Two pesos (P2.00) on each Two hundred pesos (P200),or fractional part thereof, of the par value, of such shares of stock: Provided, That in the case of the original issue of shares of stock without par value, the amount of the documentary stamp tax herein prescribed shall be based upon the actual consideration for the issuance of such shares of stock :..." Accordingly, the DST due on the Deed of Absolute Sale between Dentsu-Japan and Y&R-US shall be computed based on the aforequoted (old) provision in relation to the present Section 175 of the Tax Code of 1997, as amended by Republic Act No. 9243. No transfer of ownership of the subject shares shall be recorded unless the DST thereon has been duly paid in accordance with Section 201 of the same Tax Code. (Section 4, Revenue Regulations No. 13-04) 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, and/or any of the requirements imposed in this letter are not complied with, then this ruling shall be considered null and void. EHaDIC Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Footnotes 1. An Act Rationalizing the Provisions on the Documentary Stamp Tax of the National Internal Revenue Code of 1997, As Amended, and For Other Purposes.