DA ITAD BIR Ruling No. 085-08

October 31, 2008 DA ITAD BIR RULING NO. 085-08 Philippine-Netherlands tax treaty; Section 175 of the Tax Code of 1997, as amended by Republic Act No. 9243; BIR Ruling No. 009-96 Compass Group Philippines, Inc. Antel Global Bldg., Unit 1609 16th Floor Julia Vargas Avenue, Ortigas Center Pasig City Attention: Anil Maker Chairman and Director Gentlemen : This refers to your letter dated 26 September 2006, which was filed on behalf of Compass Group International B.V. (CGIBV), requesting confirmation of your opinion (1) that the sale of shares of stock of CGIBV in MacroAsia-Eurest Catering Services, Inc. (MAECSI) to MacroAsia Corporation (MAC) is not subject to the Philippine income tax, pursuant to the Philippine-Netherlands tax treaty, and (2) that MAC has no duty whatsoever to withhold any capital gains tax on its payment to CGIBV for the transfer/assignment of the aforementioned shares of stock. CIScaA It is represented that CGIBV is a corporation organized and existing under and by virtue of the laws of Netherlands, with principal office at Laarderhoogtweg 11, 1101 DZ Amsterdam, The Netherlands; that it is not registered either as a corporation or partnership in the Philippine per certification dated 5 July 2006 issued by the Securities and Exchange Commission; that MAECSI is a corporation organized and existing under the laws of the Philippines; and that MAC is a company organized and existing under the laws of the Philippines and is a publicly listed company in the Philippine Stock Exchange. It is further represented that CGIBV is the stockholder of record of 162,500 shares with par value of PhpP100 per share of MAECSI, which shares of stock make up thirteen percent (13%) of the subscribed and paid-up capital stock of MAECSI; that on 28 June 2006, a Deed of Absolute Sale was executed by and between CGIBV and MAC, whereby CGIBV, for and in consideration of PhP36,400,000.00 sold, assigned, transfer and conveyed, absolutely and in perpetuity, in favor of MAC, all its rights, titles and interest in and to the said 162,500 shares, free from all liens and encumbrances; and that the issue/s or transaction subject of the above request for ruling is/are not under any investigation, on-going audit, administrative protest, collection proceedings, or a judicial appeal of the taxpayers involved. In reply, please be informed that Section 28 (B) 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: IAETSC 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 ( 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 particular case, the treaty involved is the Philippines-Netherlands tax treaty which, in its Article 13, provides as follows, viz. : "Article 13 Gain 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 based 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 permanent establishment (alone or together with the whole enterprise) or of such a fixed base, may be taxed in the other State. 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 paragraphs 1, 2 and 3, shall be taxable only in the State of which the alienator is a resident. xxx xxx xxx" It is clear from the aforequoted provision of the Philippines-Netherlands tax treaty that capital gains from the alienation of any property other than those mentioned in paragraphs 1, 2 and 3 thereof shall be taxable only in the State where the alienator is a resident. Considering that shares of stock is not among those property mentioned in said paragraphs 1, 2 and 3 of Article 13 of the Philippines-Netherlands tax treaty, the gains derived by CGIBV, a nonresident foreign corporation, from the sale of its shares of stock in MAECSI, a domestic corporation, shall be exempt from 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. (Refer to BIR Ruling No. 009-96 dated 23 January 1996) EHSTcC Normally, the obligation to withhold is imposed upon the buyer-payor of income although the burden of tax is really upon the seller-income earner [Section 2.57.3, Revenue Regulations No. 2-98, as amended by Revenue Regulations No. 30-03] . However, even when the capital gains tax on the sale of shares of stock in a domestic corporation is subject to withholding under Section 57 (A) of the Tax Code of 1997, MAC shall not be required to withhold the said capital gains tax for the simple reason that the subject transaction is exempt from income tax as above-stated. It must be emphasized, however, that the subject sale of shares is subject to the documentary stamp tax, pursuant to Section 175 of the Tax Code of 1997, as amended by Republic Act No. 9243. 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, (SGD.) GREGORIO V. CABANTAC Deputy Commissioner