DA ITAD BIR Ruling No. 075-06

June 23, 2006 DA ITAD BIR RULING NO. 075-06 RP-US Article 14 Tax Code of 1997; BIR Ruling No. ITAD 104-02 SPI Technologies, Inc . SPI Building, Pascor Drive Sto. Nio, Paraaque City Philippines Attention: Redentor R. Gabinete Director for Taxation Gentlemen : This refers to your application for relief from double taxation dated June 2, 5, 7 and 21, 2006, requesting confirmation of your opinion that the gains to be realized by SPI Tech., L.P. (formerly known as THLPV Acquisition, L.P.) (SPI Tech) from the acquisition of its shares in SPI Technologies, Inc. (formerly known as SPI Acquisition Co. Inc.) (SPI) by ePLDT, Inc. (ePLDT) are exempt from capital gains tax pursuant to the Philippine-United States of America tax treaty (RP-US tax treaty). It is represented that SPI Tech is a corporation duly organized and existing under the laws of Delaware, USA, with office located at 2711 Centerville Road, Suite 400, Wilmington, DE 19808 County of New Castle Delaware, USA; that it is not registered as either a corporation or a partnership in the Philippines per certification issued by the Securities and Exchange Commission dated May 17, 2006; that SPI is a corporation organized and existing under the laws of the Philippines with principal office address at SPI Building, Pascor Drive, Sto. Nio, Paraaque, Philippines; that on July 23, 2004 the Securities and Exchange Commission approved the amended articles of incorporation of SPI in order to show an increase in its authorized capital stock from an amount of P11,260,000.00 to P75,330,000.00 divided into 112,600 and 2,511 shares, respectively and the change in the par value of the shares from P100.00 to P30,000.00; that out of 2,511 shares of stock of SPI, SPI Tech owns 2,480 (as evidenced by its Stock Certificate No. 13) shares with a par value of P30,000.00 per share; that ePLDT is a wholly owned subsidiary of the publicly listed Philippine Long Distance Company (PLDT); that as of December 31, 2005, the Balance Sheet of SPI shows that its Property and Equipment amounts to $1,363,458 (Net of Accumulated Depreciation) while its total assets amounts to $101,720,489 thereby showing that SPI's real properties interest in the Philippines does not comprise more than 50% of its total assets but approximately one percent and 34/100 percent (1.34%) of its total asset. It is further represented that on May 23, 2006, a Letter of Intent (LOI) was executed by ePLDT which sets forth ePLDT's proposal to "acquire all of the shares of SPI from SPI Tech including all shares, options, warrants, convertible and equity-linked securities of SPI issued and outstanding as of the date of that Acquisition is contemplated (the 'Closing'), as would be set forth in a definitive share purchase agreement executed by the parties (the 'Share Purchase Agreement')"; and that on May 24, 2006, SPI Tech agreed to such proposal. In reply, please be informed that Article 14 of the RP-US tax treaty provides as follows, viz: "Article 14 "CAPITAL GAINS 1. Gains from the alienation of tangible personal (movable) property forming part of the business property of a permanent establishment which a resident of a Contracting State has in the other Contracting State or of tangible personal (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 independent personal 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. However gains derived by a resident of a Contracting State from the alienation of ships; aircraft or containers operated by such resident in international traffic shall be taxable only in that State, and gains described in Article 13 (Royalties) shall be taxable only in accordance with the provisions of Article 13. 2. Gains from the alienation of any property other than those mentioned in paragraph (1) or in Article 7 (Income From Real Property) shall be taxable only in the Contracting State of which the alienator is a resident." Furthermore, the Reservation Clause of the same treaty provides, in part, as follows: "Article I Notwithstanding the provisions of Article 14 of the Convention relating to the capital gains, both the Philippines and the United States may tax gains from the disposition of an interest in a corporation if its assets consists principally of a real property interest located in the 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." It is clear from the aforequoted provisions that any capital gains which may be derived by SPI Tech from the alienation of any property other than those mentioned in paragraph (1) of Article 14 of the RP-US Tax Treaty shall be taxable only in the State where the alienator is a resident. However, 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, the value of the real property interest of SPI located in the Philippines as appearing in its audited financial statements for the calendar year December 31, 2005 is less than 50% of the value of its total assets. Thus, this Office is of the opinion and so holds that the gains that may be derived by SPI Tech from the proposed sale of its shares in SPI to ePLDT shall be taxable only in United States of America as paragraph 1 of the Article 14 (Reservation Clause of Article I) clearly states that "any capital gains from the alienation of any property, other than those mentioned in paragraph 1 Article 14 of the Philippines-United States of America tax treaty shall be taxable only in the Contracting State of which the alienator is a resident". cHDEaC In sum, inasmuch as the assets of SPI do not consist principally of real property interest located in the Philippines, your opinion that the gains from the sale of shares of stock by SPI Tech to ePLDT are not subject to capital gains tax is hereby confirmed. This ruling shall be without force and effect unless and until an actual agreement or contract, which stipulations are found to be consistent with the representations made herein, has been entered into by the parties involved. Thus, upon the execution of the Share Purchase Agreement as agreed upon pursuant to the May 23, 2006 Letter of Intent signed by both ePLDT and SPI Tech, the same must be presented to the International Tax Affairs Division of this Bureau within 15 days from its due execution for verification whether the representations made herein upon which this ruling is based are consistent with the actual facts of the transaction; and for the issuances of a corresponding certification based upon a duly accomplished BIR Form No. 1928 [Application for Relief from Double Taxation (Gains from Sale or Transfer of Shares of Stock in Philippine Corporation)] confirming that the aforementioned sale is not subject to capital gains tax pursuant to Revenue Memorandum Order No. 30-2002 but such transfer of shares shall be subject to Documentary Stamp Tax under Section 175 of the National Internal Revenue Code of 1997, as amended by Republic Act 9243, which became effective on March 20, 2004. The application (BIR Form No. 1928) which shall be submitted to this Office must be accompanied by complete documents required as enumerated at the back of the Form, and accompanied by a proof of payment of documentary stamp taxes and the filing fee of P5,000. This ruling is issued on the basis of the foregoing facts as represented. However, if upon investigation it shall be disclosed that the facts are different, then this ruling shall be considered null and void. (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service