DA ITAD BIR Ruling No. 063-10

June 18, 2010 DA ITAD BIR RULING NO. 063-10 Article 13, Philippine-Singapore tax treaty; BIR Ruling No. ITAD 070-04; BIR Ruling No. [DA-478-99]; BIR Ruling No. ITAD 002-05; BIR Ruling No. ITAD 201-02 Sycip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Attention: Lucil Q. Vicerra Principal, Tax and Customs Services Gentlemen : This refers to your application for relief from double taxation dated February 9, 2009, on behalf of your client Amkor Technology Philippines, Inc. (ATP), requesting for confirmation of your opinion that the liquidating dividends to be distributed/remitted by ATP to its sole stockholder, Amkor Technology Singapore Philippines Holding Pte. Ltd. ("ATSPH") shall not be subject to Philippine income/capital gains tax, pursuant to Article 13 (3) of the Philippines-Singapore tax treaty. Facts It is represented that ATSPH is corporation organized and existing under the laws of Singapore with office address at No. 2 Science Park Drive, Singapore, as evidenced by the Memorandum and Articles of Association of ATSPH authenticated by the Embassy of the Philippines in Singapore and signed by Reichel P. Quinones, Vice Consul dated December 14, 2008; that ATP (formerly Amkor Technology Philippines (P1/P2), Inc.) is a corporation organized and existing under the laws of the Philippines with office address at NSC Compound, Km-22 East Service Road, South Superhighway, Muntinlupa City; that it is primarily involved in the assembly and test of semiconductor devices; that based on the worldwide corporate structure, the following is the ownership structure of the Amkor Group of Companies: a. Guardian Assets (GAI-U.S.) is 100%-owned by Amkor Technology, Inc. (ATI), the ultimate parent; b. Amkor Technology Limited (ATL-Cayman) is 100%-owned by GAI-U.S.; c. Amkor Technology Singapore Investment Pte. Ltd. (ATSI-Singapore) is 100%-owned by ATL-Cayman; and d. Amkor Technology Singapore Philippines Holding Pte. Ltd. (ATSPH-Singapore) is 100%-owned by ATSI-Singapore. It is represented further that ATI, GAI, ATL, ATSI, ATSPH and ATP all belong to the Amkor Group of Companies; that the following are the subsequent transfers: TAaHIE that GAI shall transfer 52,382,313 shares, which constitute 60% of the total outstanding capital stock in ATP with a par value of P1.00 per share, to ATL; that ATL shall transfer 87,303,854 shares, which constitute 100% of the total outstanding capital stock in ATP with a par value of P1.00 per share, to ATSI; that ATSI in turn shall transfer the 87,303,854 shares, which constitute 100% of the total outstanding capital stock in ATP with a par value of P1.00 per share, to ATSPH, who becomes the ultimate transferee. that on June 26, 2009, the implementation of the earlier mentioned worldwide corporate restructuring of the Amkor Group of Companies was completed and stock certificate No. 117 of ATP was eventually issued to ATSPH; that ATSPH now holds 100% of the outstanding capital stock of ATP; that as of June 26, 2009, ATP's 100% outstanding capital stock consists of 87,303,854 common shares including 5 nominal share with a par value of P1.00 is registered in the name of ATSPH; that on April 2, 2009, a Board of Directors Meeting was held to inform the need of the ATP to dissolve in order to carry out the worldwide corporate restructuring plan of the Amkor Group of Companies; that ATP will be dissolved and liquidating dividends will be distributed/remitted to its sole stockholder, ATSPH, and that ATP will shorten its corporate term and dissolve formally not later than December 31, 2009. That sometime in December 15, 2009, another Board meeting was held, and unanimously passed and recommended the following: RESOLVED, that the resolution passed by the Board on April 2, 2009 be and they hereby are cancelled; and be it FURTHER RESOLVED, that Article FOURTH of the Articles of Incorporation of the company be correspondingly amended to read as follows: FOURTH: That the term for which the corporation is to exist is up to December 31, 2010. that ATP amended Articles of Incorporation has been duly filed with the Securities and Exchange Commission to approve the dissolution of ATP by its issuance of "Certificate of Filing of Amended Articles of Incorporation"; that the audited financial statements of ATP as of December 31, 2009 show that ATP's assets do not consist primarily of real property interest located in the Philippines; Ruling In reply, please be informed of Section 28 (B) (5) (c) of the National Internal Revenue Code (Tax Code) of 1997, as amended by Republic Act No. 9337, which provides as follows: "SEC. 28. Rates of Income Tax on Foreign Corporations. (B) Tax on Nonresident Foreign Corporation. (5) Tax on Certain Incomes Received by a Nonresident Foreign Corporation. (c) Capital Gains from Sale of Shares of Stock not Traded in the Stock Exchange. A final tax at the rates prescribed below is hereby imposed upon the net capital gains realized during the taxable year from the sale, barter, exchange or other disposition of shares of stock in a domestic corporation, except shares sold, or disposed of through the stock exchange: HTcDEa Not over P100,000 5% On any amount in excess of P100,000 10% xxx xxx xxx". However, Section 32 (B) (5) of the same Tax Code provides as follows, to wit: "SEC. 32. Gross Income. xxx xxx xxx (B) Exclusions from Gross Income. The following items shall not be included in gross income and shall be exempt from taxation under this Title ( i.e., TITLE II TAX ON INCOME): xxx xxx xxx (5) Income Exempt under Treaty. Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines." In this light, the treaty involved is the Philippines-Singapore 1 tax treaty which, in its Article 13, provides as follows: Article 13 GAINS FROM THE ALIENATION OF PROPERTY 1. Gains from the alienation of immovable property may be taxed in the Contracting State in which such property is situated. 2. Gains from the alienation of movable property forming part of the business property of a permanent establishment which an enterprise of a Contracting State has in the other Contracting State or of movable property pertaining to a fixed base available to a resident of a Contracting State in the other Contracting State for the purpose of performing professional services, including such gains from the alienation of such permanent establishment (alone or together with the whole enterprise) or of such a fixed base may be taxed in the other State. However, gains derived by an enterprise of a Contracting State from the alienation of ships and aircraft operated in international traffic and movable property pertaining to the operation of such ships or aircraft, shall be taxable only in that State. 3. Gains from the alienation of shares of a company, the property of which consists principally of immovable property situated in a Contracting State, may be taxed in that State. Gains from the alienation of an interest in a partnership or a trust, the property of which consists principally of immovable property situated in a Contracting State, may be taxed in that State. 4. Gains from the alienation of any property, other than those mentioned in paragraphs 1, 2, and 3 shall be taxable only in the Contracting State of which the alienator is a resident. In addition, the ordinary connotation of liquidating dividend involves the distribution of assets by a corporation to its stockholder upon dissolution (Klein, Federal Income Taxation, 253-254 cited in the case of Wise & Co., Inc., et al. vs. Meer, et al., G.R. No. 48231, June 30, 1947) . When a corporation is dissolved and in the process of complete liquidation and its shareholders surrendered their stock to it and it paid sums of money to them in exchange, a transaction took place, which is no different in its essence from a sale of the same stock to a third party who paid therefor. (Read the case of Wise & Co., Inc., et al. vs. Meer, et al., supra) . In addition, the annotations on the Corporation Code of the Philippines by Paras, et al., define "liquidating dividends" as follows: "These are dividends that are declared when a corporation liquidates by redeeming its outstanding stock for cash or by distributing its assets to stockholders in exchange for their stock. Such distribution is also known as distribution in liquidation. For tax purposes, liquidating dividends are treated, in effect, as sales of stock; hence any gain or loss to the stockholder is treated as capital gain or loss." It is clear from the aforequoted provisions that the distribution of the remaining net asset by ATP to its stockholder ATSPH in exchange for the latter's stock known as liquidating dividends is treated as sales of stock for tax purposes, hence any gain or loss to the stockholder is treated as capital gains or loss; that any capital gains which may be realized by ATSPH from the alienation of any property other than those mentioned in paragraphs 1, 2, and 3 of Article 13 of the Philippines-Singapore tax treaty shall be taxable only in Singapore. However, under the aforequoted provision of paragraph 3 supra, 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. cDCIHT "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). Verification of the audited financial statements ending December 2009, 2008 and 2007 shows the following: Particulars Dec. 31, 2009 Dec. 31, 2008 Dec. 31, 2007 Property, Plant and Equipment 203,663,233.00 245,061,960.00 246,410,190.00 Total Assets 520,799,663.00 490,171,071.00 496,958,865.00 Percentage of Real Property Interest 39% 50% 50% Based on the above shown table, ATP's Audited Financial Statement as of December 31, 2009, disclosed that its property, plant and equipment is 39% of its total assets, thereby making the assets of ATP not principally consisted of real property interest located in the Philippines. Accordingly, this Office is of the opinion and so holds that any gain that may be realized by ATSPH as a result of distributing its liquidating dividends to its stockholders by ATP is not subject to the capital gains tax imposed under Section 28 (B) (5) (c) of the Tax Code of 1997, and pursuant to the Philippines-Singapore tax treaty (BIR Ruling No. ITAD 070-04 dated July 13, 2004; BIR Ruling No. [DA-478-99] dated August 20, 1999; BIR Ruling No. ITAD 002-05 dated January 6, 2005; BIR Ruling No. ITAD 201-02 dated November 25, 2002) . Nonetheless, this transaction is subject to documentary stamp tax pursuant to Section 175 of the Tax Code of 1997, as amended by Republic Act No. 9243. (BIR Ruling No. ITAD 201-02 dated November 25, 2002) . This ruling is issued on the basis of the facts as represented and is limited only as to the distribution of liquidating dividends by ATP to ATSPH. This does not cover however the previous transfer of shares undertaken by the Amkor Group of companies as mentioned in the representation. If upon investigation it shall be disclosed that the facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. Very truly yours, (SGD.) GREGORIO V. CABANTAC Deputy Commissioner Legal and Inspection Group Recommending Approval: (SGD.) NELSON M. ASPE Deputy Commissioner Operations Group (SGD.) NESTOR S. VALEROSO Assistant Commissioner Large Taxpayers Service Footnotes 1. Convention between the Republic of the Philippines and the Republic of Singapore for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income.