ITAD BIR Ruling No. 004-09

January 26, 2009 ITAD BIR RULING NO. 004-09 Articles 13, 27, Philippines-Netherlands tax treaty; Secs. 28 (B) (5) & 32 (B) (5) of the NIRC Sycip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Attention: Atty. Ma. Fides A. Balili Tax Division Gentlemen : This refers * your letter dated 19 September 2007, filed on behalf of your client, Orkam Holding Asia N.V. (Orkam), requesting confirmation of your opinion that the transfer by Orkam of its shares of stock in Pilipinas Makro, Inc. (PMI) to Panther (BVI) Ltd. (Panther) is not subject to Philippine income tax or capital gains, tax pursuant to Article 13 (4) of the Philippines-Netherlands tax treaty. SAHIaD It is represented that Orkam is a nonresident foreign corporation existing and incorporated under the laws of the Netherlands Antilles and with principal office located at Rijnkade 1, 3511 LC Utrecht, The Netherlands; that under the domestic laws of The Netherlands, Orkam is considered a resident of The Netherlands, even if it was incorporated in the Netherlands Antilles, because its place of management, its head office, its directors and its business are all located in and conducted in The Netherlands; that Orkam's residence in The Netherlands is evidenced by a duly authenticated Certificate of Residence dated 19 December 2007, issued by the Utrecht Tax Office, Tax and Customs Administration of The Netherlands, which bears the official seals of the Utrecht Tax Office and Netherland's Ministerie Van Financien (Ministry of Finance), and also evidenced by a duly authenticated copy of Orkam's registration with the Dutch Chamber of Commerce; that the Dutch Chamber of Commerce is an organization incorporated under Dutch public law and is a public independent governing body under the supervision of the Netherlands' Ministerie van Economische Zaken (Ministry of Economic Affairs); that Orkam was given Tax Identification Code No. 92.52.733 as a taxpayer in The Netherlands; that as a taxpayer in The Netherlands, Orkam has been filing its accounts and tax declarations/returns with the Utrecht Tax Office; that it is not registered either as a corporation or partnership licensed to do business in the Philippines per Certification issued by the Securities and Exchange Commission dated 21 August 2007; that Panther is a wholly-owned subsidiary of Orkam and it is incorporated under the laws of the British Virgin Islands with principal office located at Walkers (BVI) Limited, Walkers Chambers, P.O. Box 92, Road Town, Tortola, British Virgin Islands; and that PMI is a corporation organized and existing under the laws of the Philippines with address at KM. 21 East Service Road, South Superhighway, Sucat, Muntinlupa City, Philippines. It is further represented that as of 29 August 2007, Orkam is a registered and beneficial owner of One Million Eighty-Five Thousand Two Hundred (1,085,200) common shares of PMI with a par value of One Thousand Pesos (P1,000.00), equivalent to forty percent (40%) of the issued and outstanding capital stock of PMI; that on the same date Orkam and Panther executed a Deed of Conveyance for the sale and transfer of 1,085,200 common shares in consideration of the aggregate amount of One Billion Four Hundred Forty-Four Million Eight Hundred Fifty-Six Thousand Nine Hundred and Eighty-Four Pesos (P1,444,856,984.00) by Orkam to Panther as additional paid-in capital of PMI. Based on the facts represented, it is requested that any capital gains derived by Orkam from the transfer of its shares of stock in PMI to Panther are not subject to income tax or capital gains tax in the Philippines, pursuant to Article 13 (4) the Philippines-Netherlands tax treaty, emphasizing that Orkam is, under the domestic laws of the Netherlands, considered a resident of The Netherlands Europe and incorporated in the Netherlands, Antilles. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue 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 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: Not over P100,000 5% On any amount in excess of P100,000 10%" 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 being invoked is the Philippines-Netherlands tax treaty, specifically its Article 13, which 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. SEcADa 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. 5. The provisions of paragraph 4 shall not affect the right of each of the States to levy according to its domestic law a tax on gains from the alienation of any property derived by an individual who is a resident of the other State and has been a resident of the first-mentioned State at any time during the six years immediately preceding the alienation of the property. In determining whether the aforequoted provision of the Philippines-Netherlands Tax Treaty may be applied to the instant case, we look into Articles 1 and 4 of the same treaty which provide: "Article 1 PERSONAL SCOPE 1. This Convention shall apply to persons who are residents of one or both of the States. xxx xxx xxx Article 4 FISCAL DOMICILE 1. For the purposes of this Convention, the term "resident of one of the States" means any person who, under the law of that State, is liable to taxation therein by reason of his domicile, residence, place of management or any other criterion of a similar nature. " TIAEac As clearly stated in the above provisions, the treaty shall apply to any person who is a resident of the Netherlands, because such person is, under the laws of the Netherlands, subject to tax in the Netherlands, either because of his domicile, residence, place of management in the Netherlands, or other criterion similar in nature whether or not such person is incorporated in the Netherlands. It is your contention, that since Orkam has its major place of business and its stable seat in Utrecht, the Netherlands, the law of the Netherlands governs Orkam's internal affairs. Verily, by virtue of the "real seat doctrine" the Tax and Customs Administration of the Netherlands Europe issued Orkam a Certificate of Residence, that it is, notwithstanding its place of incorporation in Netherlands Antilles, a resident of the Netherlands Europe within the meaning of Article 4 of the Philippines-Netherlands tax treaty. However, it is noteworthy that Article 27 of the Philippines-Netherlands tax treaty provides as follows: Article 27 TERRITORIAL EXTENSION 1. This Convention may be extended either in its entirety or with any necessary modifications to the Netherlands Antilles and/or to Aruba. HESAIT 2. Unless otherwise agreed the termination of the Convention shall also terminate the application of the Convention to the Netherlands Antilles and/or to Aruba. The foregoing provision is a manifestation that the Philippines, in entering into the said tax treaty, did not intend to automatically include other territories to which the Netherlands is responsible, apart from the Netherlands itself. 1 A process has yet to be observed. Specifically, the exchanging of notes has to be done through diplomatic channels of both contracting states. As of this writing, however, there are no notes that have been exchanged to extend to any territory the application or coverage of the said tax treaty. Such being the case, it is worth mentioning that, viz. : "Statutes should be construed in the light of the object to be achieved and the evil or mischief to be suppressed and they should be given such construction as will advance the object, suppress the mischief and secure the benefits intended. A statute should therefore be read with reference to its leading idea, and its general purpose and intention should be gathered from the whole act, and this predominant purpose will prevail over the literal import of particular terms or clauses, if plainly apparent, operating as a limitation upon some and as a reason for expanding the signification of others, so that the interpretation may accord with the spirit of the entire act, and so that the policy and object of the statute as a whole may be made effectual and operative to the widest possible extent. (RAOUL B. DEL MAR, PETITIONER, VS. PHILIPPINE AMUSEMENT AND GAMING CORPORATION, BELLE JAI-ALAI CORPORATION, FILIPINAS GAMING ENTERTAINMENT TOTALIZATOR CORPORATION)" In this light, Article 27 is deemed to consciously limit the application of the Article 4 to exclude corporation that is incorporated in Netherlands, Antilles. In relation to this, we must be reminded of the rule that in construing a statute (tax treaties), courts "have to take the thought conveyed by the statute as a whole; construe the constituent parts together; ascertain the legislative intent from the whole act; consider each and every provision hereof in the light of the general purpose of the statute; and endeavor to make every part effective, harmonious and sensible", pursuant to the rule expressio unius est exclusio alterius. (citing Agpalo, Statutory Construction) aEHTSc Furthermore, in a letter dated 14 February 2000, from the Office of Legal Affairs of the Department of Foreign Affairs (DFA), it was clarified that pursuant to paragraph 1, Article 27 in relation to Article 3 (b) of the said Convention, however, it is apparent that its provision ". . . may be extended either in its entirety or with any necessary modifications to the Netherlands Antilles, the DFA submit that Article 27 of the Convention is not self executing. The DFA reasoned that "(i)f the contracting parties really intended to automatically extend the coverage of the Convention to the Netherlands Antilles and Aruba, then they could have readily included them in the definition of the territory of the "Kingdom of Netherlands" under Article 3 (b) without the necessity of adding Article 27. Based on the foregoing, the provisions of the Philippines-Netherlands tax treaty may not be extended to the Netherlands Antilles. The question thus arises: May Orkam, a corporation incorporated in the Netherlands Antilles, which was able to obtain residency in the Netherlands for purposes of the Philippines-Netherlands tax treaty, avail of the tax exemption granted under the above-quoted Article 13 of the same tax treaty? The answer is in the negative. Granting treaty benefits to Orkam, as a resident of the Netherlands which is incorporated in the Netherlands Antilles, would have the effect of extending the coverage of the Philippines-Netherlands tax treaty to an otherwise excluded territory of the Netherlands under the above-quoted Article 27 of the same tax treaty. It must be emphasized further that not only is the Netherlands Antilles expressly and specifically excluded from the application of the Philippines-Netherlands tax treaty but it is, more importantly, a tax haven. 2 Tax havens undermine the interest of poor countries in four major ways. 3 1. Secret bank accounts and offshore trusts in tax havens provide wealthy elites and companies with the means to escape their tax obligations. IAcTaC 2. Multinationals' ability to substantially lower their tax burden by routing capital flows through mailbox companies in tax havens provides them with unfair competitive advantages vis--vis their often smaller competitors in developing countries. 3. Banking secrecy and offshore trusts offered by financial institutions in tax havens make it possible to launder the proceeds of political corruption, illicit arms deals, embezzlement, and global drug trade. The lack of transparency in international financial market contributes to the spread of global crime, terrorism, bribery and the looting of natural resources by the elite. aSACED 4. Tax havens have contributed to the rising incidence of financial crisis that can destroy livelihoods in poor countries. At this juncture, it should be recalled that the objective of tax treaties is not only to facilitate trade and investment by eliminating the tax impediments to cross border flows, but more importantly, to eliminate double taxation and to prevent fiscal evasion. Thus, it should be underscored that benefits such as the use of preferential tax rates should not overshadow the corresponding obligations imposed under tax treaties as embodied in provisions such as Exchange of Information and Mutual Agreement Procedures. With this in mind, it may be concluded that allowing companies incorporated in tax havens to take advantage of treaty provisions at its convenience may constitute harmful tax practice because corresponding treaty obligations such as exchange of information may not be imposed upon them. Moreover, it is very unusual for individuals to go through the trouble of setting up a company in a tax haven (like Netherlands Antilles) and then allow itself to be taxed on its worldwide income in a country (like the Netherlands). While tax avoidance schemes and arrangements are not prohibited, tax laws cannot be circumvented in order to evade the payment of just taxes. (Commissioner of Internal Revenue vs. Lincoln Phil. Life Insurance Co., Inc., et al., G.R. No. 119176, 19 March 2002) A closer look into the domestic laws of the Netherlands would show why it is harmful for the Philippines to promote arrangements such as the case subject of the instant request for treaty relief. Under the tax laws of the Netherlands, a non-resident taxpayer may opt for residence status and as such shall be required to report their entire worldwide income. 4 Thus, non-resident companies incorporated under the laws of other jurisdictions may become a resident of the Netherlands through the simple of process of registration/filling out of a tax form. This is called the right of option. 5 This right of option means that a taxpayer can opt for treatment as a taxpayer resident in the Netherlands throughout the year. If a taxpayer opts for resident status, the taxpayer will receive the same tax treatment as a resident of the Netherlands throughout the calendar year. Thus, the taxpayer who opts for resident status must declare both income from the Netherlands and its foreign income ( i.e. , worldwide income) in relation to its year of immigration. 6 What is most interesting about this arrangement is that as long as the assessment in the tax year concerned has not become final and conclusive, a taxpayer may alter this option to be treated as a resident of the Netherlands. 7 In other words, under the income tax laws of the Netherlands, a non-resident taxpayer is allowed to opt in and out of a resident status. A non-resident who is allowed to elect a resident status in the Netherlands is also allowed to avail of treaty benefits from the Netherlands' tax treaties. This means that, in a year, a non-resident corporation who has opted to be a resident of the Netherlands for tax purposes may be qualified to derive benefits from tax treaties for the year that the said corporation is considered a resident. However, once this corporation chooses to change its status back to a non-resident taxpayer, not only does it cease to be qualified to avail of treaty benefits, but corresponding tax treaty obligations ( e.g. , exchange of information) with respect to such taxpayer may consequently and possibly be denied to the treaty partner of the Netherlands. This situation puts that tax treaty partner at a disadvantage, as certain treaty obligations with respect to the investigation or imposition of tax on companies related to the subject corporation may not be complied with by the Netherlands for the simple reason that the taxpayer has already ceased to be its resident. A situation which promotes the possibility that a treaty partner may fail to fulfill its obligations under its tax treaty should not be condoned. Again, it is emphasized that treaty benefits should not be made available to those upon whom corresponding treaty obligations to further the objective of preventing fiscal evasion may not be imposed. Therefore, a company who may, at any time, chose to become a resident and who, at the same time, may withdraw from such status at any time, should not be allowed to derive benefits from tax treaties. HIETAc In addition to all the foregoing, it is noted that the shares of stock subject of this request are going to be transferred to a company incorporated in the British Virgin Islands, which is another tax haven. It has been held time and again that laws granting exemption from tax are construed strictissimi juris against the taxpayer and liberally in favor of the taxing power, and he who would seek to be thus privileged must justify it by words too plain to be mistaken and too categorical to be misinterpreted (Sea-Land Service, Inc. vs. Court of Appeals, et al., G.R. No. 122605, 30 April 2001) . Otherwise stated, any exemption from the payment of a tax must be clearly stated in the language of the law; it cannot be merely implied therefrom. (Davao Gulf Lumber Corp. vs. Commissioner of Internal Revenue, et al., G.R. No. 117359, 23 July 1998) Therefore, we regret to inform you that your request for a certification and ruling confirming your understanding that the sale by Orkam of its shares in PMI to Panther is not subject to capital gains tax pursuant to Article 13 (4) of the Philippines-Netherlands tax treaty, is hereby DENIED. Finally, please be informed that the sale of the shares of stock in PMI, by Orkam to Panther, is subject to documentary stamp tax at the rate of Seventy-Five centavos (P0.75) on each Two Hundred Pesos (P200), or fractional part thereof, of the par value of such stock, pursuant to Section 175 of the Tax Code of 1997, as amended by Republic Act No. 9243 (An Act Rationalizing the Provisions on the Documentary Stamp Tax of the National Internal Revenue Code of 1997, as Amended and for Other Purposes). All rulings and revenue issuances which are inconsistent herewith are deemed revoked, amended or modified accordingly. Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Commissioner of Internal Revenue Footnotes 1. The term "Netherlands", as used in the Philippines-Netherlands tax treaty, is defined as: 1. In this Convention, unless the context otherwise requires: a) the term "State" means the Netherlands or the Philippines, as the context requires; the term "States" means the Netherlands and the Philippines; b) the term "the Netherlands" comprises the part of the Kingdom of the Netherlands that is situated in Europe and the part of the sea bed and its sub-soil under the North Sea, over which the kingdom of the Netherlands has sovereign rights in accordance with international law; c) the term "Philippines" used in a geographical sense means the national territory comprising the Republic of the Philippines; d) the term "person" comprises an individual, a company, an estate, an irrevocable trust, and any other body of persons; e) the term "company" means any body corporate or any other entity which is treated as a body corporate for tax purposes; f) the terms "enterprise of one of the States" and "enterprise of the other State" mean respectively an enterprise carried on by a resident of one of the States and an enterprise carried on by a resident of the other State; g) the term "competent authority" means the Minister or Secretary of Finance of one of the States or his duly authorized representative; h) the term "national" means: (i) any individual possessing the nationality or citizenship of one of the States; (ii) any legal person, partnership and association created, organized or incorporated under the laws of one of the States; i) the term "international traffic" means any transport by ship or aircraft operated by an enterprise of one of the States, except when the ship or aircraft is operated solely between places in the other State. 2. As regards the application of the Convention by either of the States, any term not otherwise defined shall, unless the context otherwise requires, have the meaning which it has under the laws of that State relating to the taxes which are the subject of this Convention. (Article 3, Philippines-Netherlands tax treaty) 2. A tax haven is a place where certain taxes are levied at a low rate or not at all. (http://en.wikipedia.org/wiki/Tax_haven). 3. "The Netherlands: A Tax Haven" by Michiel va Djik, Francis Weyzig & Richard Murphy (November 2006), citing Murphy R, Christensen J. Kimmis K, 'Tax Us If You Can', The Tax Justice Network, London, 2005. 4. http:/wwwbelastingdienst.nl/variable/buitenland/en/private_taxpayers. 5. Ibid. 6. When you take up residence in the Netherlands, you are usually immigrating to this country. (http:/wwwbelastingdienst.nl/variable/buitenland/en/private_taxpayers). 7. Right of option for non-resident taxpayers. If you live in a country that belongs to the European Union, or in another country with which the Netherlands has concluded a tax treaty that provides for exchanges of information (all treaty countries, with the exception of Switzerland), you may re-elect each year to be taxed in accordance with the rules applicable to residents of the Netherlands. This possibility is known as the 'right of option'. It means that the income tax will be calculated on the basis of your total worldwide income, not just your Dutch income. If you have a partner, your partner, too, may elect to be taxed in accordance with the rules applicable to residents of the Netherlands. Opting for resident taxpayer status may be advantageous if your partner has little or no income, or if you have certain deductible expenditure, e.g. , the (mortgage) interest in relation to an owner-occupied property, medical expenses or study costs. Such deductible expenditure may then result in a lower tax burden in the Netherlands. The right of option does not mean that you can choose where you pay tax: this is determined on the basis of international regulations. You will therefore remain taxable in your country of residence as well. Insofar as your worldwide income includes net positive foreign income, you will be entitled to double tax relief. Consequently, you will not pay tax twice on the same amount. Stating option when filing a tax return For income tax you may annually opt for treatment as a resident taxpayer. As long as the assessment in the tax year concerned has not become final and conclusive, you may alter your choice. You can state your choice in the income tax return. Each year you have to state again whether you prefer a tax treatment as resident taxpayer. Income review You can decide each year again to opt for resident taxpayer status. However, if you do not elect this status in a particular year, an income review will take place (this is also known as the reappropriation scheme). Under such a review, your income from the preceding year will be increased, so that you will have to repay a tax benefit enjoyed earlier. This increase will be equal to the total sum of certain amounts that were deducted from your income over the last eight years. This involves the deductible expenditure that is available to a resident of the Netherlands, but not to you a resident of another country if you do not elect resident taxpayer status. The following elements will be left out of the income review: tax credits expenditure on income insurance: annuities and other premiums (for the years 2001 up to and including 2005) expenditure on childcare (for the years 2001 up to and including 2005) personal allowance items (http:/wwwbelastingdienst.nl/variable/buitenland/en/private_taxpayers).