ITAD BIR Ruling No. 002-17

January 12, 2017 ITAD BIR RULING NO. 002-17 Article 14 (Capital Gains) Philippines-United States tax treaty Angara Abello Concepcion Regala and Cruz Law Offices 22nd Floor, ACCRALAW Tower 2nd Avenue corner 30th Street Crescent Park West Bonifacio Global City Taguig City Attention: AAA BBB Gentlemen : This refers to your tax treaty relief application filed on January 4, 2013 requesting confirmation that capital gains derived by Health Care Corporation of America International (" HCCA International ") (formerly Hospital Corporation Associates International ) from the transfer of its shares of stock in HCCA Philippines, Inc. (" HCCA Philippines ") and HCCA Health Connections, Inc. (" HCCA Health Connections ") to HCCA Philippines Holdco, Inc. (" HCCA Philippines Holdco ") are exempt from income tax pursuant to the Convention between the Government of the Republic of the Philippines and the Government of the United States of America with Respect to Taxes on Income (" Philippines-United States tax treaty "). ETHIDa HCCA International is a foreign corporation organized and existing under the laws of the United States and a resident thereof based on its Charter dated August 19, 1993 filed with the State of Tennessee on that date, and on the Certificate of Existence issued by the State of Tennessee on December 5, 2012, and also on its Certificate of Residence issued by the Internal Revenue Service on October 7, 2013. HCCA International is in the business of operating hospitals in the United States and other countries. On the other hand, HCCA Philippines and HCCA Health Connections are domestic corporations organized and existing under the laws of the Philippines. HCCA Philippines ' primary purpose is to provide orientation and preparation assistance to HCCA International 's future employees from the Philippines. HCCA Health Connections ' purpose is to operate a modern clinical production that will provide clinical process outsourcing services for HCCA International . Based on the General Information Sheets of HCCA Philippines and HCCA Health Connections as of May 28, 2012, HCCA International owns all of the outstanding and issued common shares of HCCA Philippines and HCCA Health Connections with a total of 106,800 shares (including 5 nominees) and 17,500 shares (including 5 nominees), respectively, with a par value of P100 each. On December 18, 2012, HCCA International and HCCA Philippines Holdco entered into a Contribution and Exchange Agreement where HCCA International transferred all its shares in HCCA Philippines and HCCA Health Connections to HCCA Philippines Holdco thereby making the latter the new owner of the domestic companies. In exchange, HCCA Philippines Holdco will issue 1,000 shares to HCCA International with a par value of $776 each or equivalent to a total of P31,847,040. 1 HCCA Philippines Holdco is a foreign corporation organized and existing under the laws of the United States based on its Certificate of Incorporation dated December 14, 2012. Its purpose is to engage in any lawful act or activity for which corporations may be organized and to possess and exercise all of the powers and privileges conferred by the laws of the State of Delaware. HCCA Philippines Holdco has 1,000 authorized common shares of stock with par value of $776 each. Based on Sworn Certifications issued by HCCA International and HCCA Philippines Holdco on December 14, 2012, the transactions subject of this ruling are not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceeding, or judicial appeal. RULING In reply, please be informed that capital gains from the disposition of unlisted shares of a domestic corporation and derived by a foreign corporation are subject to income tax at the rate of 5 or 10 percent. Section 28 (B) (1) of the National Internal Revenue Code of 1997, as amended (" Tax Code ") provides: " SEC. 28. Rates of Income Tax on Foreign Corporations. xxx xxx xxx (B) Tax on Nonresident Foreign Corporation. (5) Tax on Certain Incomes Received by a Nonresident Foreign Corporation. xxx xxx xxx (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: cSEDTC Not Over P100,000 5% On any amount in excess of P100,000 10%" (Underscoring supplied) However, under Section 32 (B) (5) of the Tax Code, such income is exempt or subject to reduced tax to the extent required by any treaty obligation on the Philippines, thus: " 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: 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." Relative thereto, the Reservation Clause to Article 14 (Capital Gains) of the Philippines-United States tax treaty provides relief as follows: "(1) reservation that, notwithstanding the provisions of Article 14 relating to capital gains, both the United States and the Philippines may tax gain from the disposition of an interest in a corporation if its assets consist principally of a real property interest located in that country. Likewise, both countries may tax gain 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" ; (Underscoring supplied) Under Article 14, the Philippines may tax gains from the disposition of an interest in a corporation if its assets consist principally of real property located in the Philippines. In the instant case, the transfer of shares of HCCA Philippines and HCCA Health Connections from HCCA International to HCCA Philippines Holdco is considered disposition and subject to capital gains tax under the Tax Code and covered by relief under the Philippines-United States treaty. Relative thereto, under Section 2 (b) of Revenue Regulations No. 4-86, 2 the term consisting principally of real or immovable property means that the ratio of real or immovable property over the total assets ( "real property interest" or "RPI" ) of the corporation is more than 50 percent : " SECTION 2. Definitions. For purposes of these regulations, the following terms and phrases shall be understood to mean b) 'Principally,' 'wholly or principally,' 'directly principally' or 'attributable' more than fifty percent of the entire assets in terms of value" ; (Emphasis ours) Accordingly, for HCCA Philippines , since its RPI is 20.26 and 14.40 percent 3 based on its audited financial statements as of December 31, 2011 and interim financial statements as of December 18, 2012, respectively, capital gains derived by HCCA International from the transfer of its shares in HCCA Philippines to HCCA Philippines Holdco are exempt from capital gains tax percent pursuant to Article 14 of the Philippines-United States tax treaty. On the other hand, since HCCA Health Connections ' RPI is 87.71 and 78.65 percent 4 based on its audited financial statements as of December 31, 2011 and interim financial statements as of December 18, 2012, respectively, capital gains derived by HCCA International from the transfer of its shares in HCCA Health Connections to HCCA Philippines Holdco are subject to capital gains percent pursuant to Article 14 of the Philippines-United States tax treaty in relation to Section 28 (B) (1) of the Tax Code. Finally, the transaction is subject to documentary stamp tax pursuant to Section 175 of the Tax Code which provides: SDAaTC " 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 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 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." This ruling is issued on the basis of the facts as represented. However, if upon investigation it shall be disclosed that the actual facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. Very truly yours, (SGD.) CAESAR R. DULAY Commissioner of Internal Revenue Footnotes 1. Based on online historical exchange rate of Bangko Sentral ng Pilipinas: http://www.bsp.gov.ph/dbank_reports/ExchangeRates_2.asp ; As of December 18, 2012, 1 US dollar equals 41.04 pesos . 2. Determination of Whether the Assets of a Corporation Consist Principally of Real Property Interest under the Philippine Tax Treaties . 3. HCCA Philippines ' RPI: As of December 31, 2011 (Audited Balance Sheet) As of December 18, 2012 (Unaudited Balance Sheet) A. Total assets $__________ $__________ B. Real property B.1 Property and equipment __________ __________ B.2 Security deposits (office lease) __________ __________ Total __________ __________ C. Real property interest (B/A * 100) 20.26% 14.40% 4. HCCA Health Connections ' RPI: As of December 31, 2011 (Audited Balance Sheet) As of December 18, 2012 (Unaudited Balance Sheet) A. Total assets __________ __________ B. Real property B.1 Property and equipment __________ __________ B.2 Security deposits (office lease) __________ __________ Total __________ __________ C. Real property interest (B/A * 100) 87.71% 78.65%