DA ITAD BIR Ruling No. 065-09

June 18, 2009 DA ITAD BIR RULING NO. 065-09 Art. 13, Philippines-Netherlands tax treaty; Section 175, NIRC of 1997; BIR Ruling No. DA-ITAD 37-08 Sycip Gores Velayo & Co. 6760 Ayala Avenue 1226 Makati City Philippines Attention: Emmanuel C. Alcantara Co-Head, Tax Services Gentlemen : This refers to your letter dated 9 June 2009 requesting confirmation of your opinion that the transfer by Axia Power Holdings B.V. (AXIA) of its 500 common and 470,581 preferred shares of stock in San Roque Power Corporation (SRPC) to KPIC Netherlands B.V. (KPN) is not subject to Philippine income tax (CGT), pursuant to Article 13 (4) of the RP-Netherlands Tax Treaty. aSCDcH It is represented that AXIA is a limited liability company organized and existing under the laws of the Netherlands with principal office located at 1077 XX Amsterdam, Strawinskylaan 1327, the Netherlands per Declaration of Residence issued by H.H. Dissel on behalf of the inspector of the Tax Administration dated 10 June 2009; that it is not registered either as a corporation or as a partnership in the Philippines per Certification issued by the Philippines Securities and Exchange Commission dated 2 June 2009; that KPN is a limited liability company organized and existing under the laws of the Netherlands with principal office located at De Boelelaan 7 Officia 1, 1083HJ Amsterdam; that it is not registered either as a corporation or as partnership licensed to do business in the Philippines; and that SRPC is a domestic corporation duly organized and existing under and by virtue of the laws of the Philippines, with registered office and principal place of business at Barangay San Roque, San Manuel, Pangasinan. It is further represented that as of 9 June 2008, AXIA is the registered/legal and beneficial owner of 470,581 redeemable preferred shares and 498 common shares of SRPC as well as the beneficial owner of two common shares registered in the name of its two nominee directors, with a par value of Ten Pesos (P10.00) per share; that the foregoing shares represent 25% of the issued and outstanding capital stock of SRPC; and that pursuant to a Deed of Conditional Sale dated 10 June 2009 between AXIA and KPN, AXIA will sell and transfer to KPN, 470,581 preferred shares and 500 common shares of SRPC for an aggregate purchase price of US$105,000,000. This office had occasion to rule on an exactly similar transaction involving the same parties in DA-ITAD 37-08. We ruled, as in this case, that Section 28 (B) (5) (c) of the National Internal Revenue Code (Tax Code) of 1997, as amended by Republic Act No. 9337, provides as follows, viz. : "SEC. 28. Rates of Income Tax on Foreign Corporations. xxx xxx xxx (B) Tax on Nonresident Foreign Corporation. xxx xxx xxx (5) Tax on Certain Incomes Received by a Nonresident Foreign Corporation. xxx xxx xxx (c) Capital Gains from the 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: caHIAS 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 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: 1 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 particular case, the treaty being invoked is the Philippines-Netherlands tax treaty which, in its Article 13, provides as follows, viz. : "Article 13 Gains from the Alienation of Property 1. Gains from the alienation of immovable property, as defined in paragraph 2 of Article 6, may be taxed in the 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 one of the States has in the other State, or of movable property pertaining to a fixed base available to a resident of one of the States in the other State for the purpose of performing professional services, including such gains from the alienation of such a permanent establishment (alone or together with the whole enterprise) or of such a fixed base, may be taxed in the other State. EcHIDT 3. Notwithstanding the provisions of paragraph 2, gains derived by an enterprise of one of the States 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. 4. Gains from the alienation of any property other than those mentioned in paragraphs 1, 2 and 3, shall be taxable only in the State of which the alienator is a resident. xxx xxx xxx." The Philippines-Netherlands is just one of a number of bilateral treaties which the Philippines has entered into for the avoidance of double taxation. The purpose of these international agreements is to reconcile the national fiscal legislations of the contracting parties in order to help the taxpayer avoid simultaneous taxation in two different jurisdictions. More precisely, the tax conventions are drafted with a view towards the elimination of international juridical double taxation, which is defined as the imposition of comparable taxes in two or more states on the same taxpayer in respect of the same subject matter and for identical periods. (Commissioner of Internal Revenue vs. S.C. Johnson and Son, Inc., et al., G.R. No. 127105, 25 June 1999) . It is clear from the aforequoted provisions of the Philippines-Netherlands tax treaty that the capital gains from the alienation of any property other than those mentioned in paragraphs 1, 2 and 3 shall be taxable only in the State where the alienator is a resident. Considering that the sale of shares of stock is not among those mentioned in paragraphs 1, 2 and 3, the gains that may be derived by AXIA from the sale of its shares of stock in SRPC shall not be subject to Philippine income tax under Section 28 (B) (5) (c) of the Tax Code of 1997, as amended, but are subject to tax only in the Netherlands. (BIR Ruling No. ITAD-036-01 dated 21 March 2001) As of this date, however, the granting of a relief from international juridical double taxation on the subject transaction is still pre-mature absent a Deed of Absolute Sale, since the subject Deed of Conditional Sale is a contract to sell. Thus, while Article 13 of the tax treaty refers to an "alienation", capital gains tax imposable under Section 28 (B) (5) (c) of the Tax Code of 1997, as amended refers to a "sale". Consequently, without a deed of absolute sale, no capital gains tax is yet due on the transaction and international juridical double taxation for the subject transaction does not yet arise. In view thereof, this Office will issue a ruling or certification on the capital gains tax exemption on the sale by AXIA of some of its shares of stock in SRPC to KPN, upon the execution of a Deed of Absolute Sale between the parties and upon filing with this Bureau of an Application for Relief from Double Taxation (BIR Form No. 1928), together with all the required supporting documents. (BIR Ruling No. DA-ITAD-37-08 dated 29 May 2008) aAHISE In addition to the documents prescribed in BIR Form No. 1928, proof of payment of the documentary stamp tax due on the Deed of Conditional Sale must be submitted to this office relative to the application for relief from double taxation on the sale of the subject shares since under Section 175 of the Tax Code of 1997, as amended by Republic Act No. 9243, prescribes that a mere "agreement to sell" is already subject to the DST. Section 175 provides: "SEC. 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 sales 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 (P200.00), or fractional part thereof, of the par value such stock: Provided, That only one tax shall be collected on each sale or transfer of stock from one person to another, regardless of whether or not a certificate 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." In relation to thereto, Section 4 of Revenue Regulations No. 13-2004, 3 n in part, provides as follows: "Agreements to sell shares of stock are also subject to DST. It is not only actual sales or transfers that are taxable but also agreements to sell such stock or executory contracts for the sale or transfer of shares of stock. However, if the DST has been paid on the agreement to sell or memoranda of sale, the actual sale or transfer of the stocks pursuant to the agreement will no longer be subject to DST." (Emphasis supplied) ASHECD Please be guided accordingly. Very truly yours, Commissioner of Internal Revenue By: (SGD.) GREGORIO V. CABANTAC Deputy Commissioner Footnotes 1. TITLE II TAX ON INCOME. n Note from the Publisher: Copied verbatim from the official document.