Taishan Insurance Brokers Philippines, Inc.

February 2, 2018 ITAD BIR RULING NO. 010-18 Article 13 (Gains from the Alienation of Property) Philippines- Malaysia tax treaty Taishan Insurance Brokers Philippines, Inc. Suite 1801, 88 Corporate Center Sedeo corner Valero Streets Salcedo Village 1227 Makati City Attention: AAA __________ Gentlemen : This refers to your tax treaty relief application filed on October 18, 2016 requesting confirmation that capital gains derived by JAB Capital Berhad (" JAB Capital ") (originally Jerneh Asia Berhad ) from the sale of its shares of stock in Taishan Insurance Brokers Philippines, Inc. (" Taishan Philippines ") to JCIP Holdings Philippines, Inc. (" JCIP Holdings ") are exempt from capital gains tax pursuant to the Agreement between the Government of the Republic of the Philippines and the Government of Malaysia for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (" Philippines-Malaysia tax treaty "). SCaITA FACTS JAB Capital is a foreign corporation organized and existing under the laws of Malaysia and a resident thereof based on its Memorandum and Articles of Association and Certificate of Residence issued by the Inland Revenue Board of Malaysia. The primary object of JAB Capital is to insure all or any risks, and to carry on and undertake all kinds of insurance business and assurances of every and any kind, against every and any contingency. JAB Capital is not registered as a corporation or partnership in the Philippines based on a Certification of Non-Registration issued by the Securities and Exchange Commission. On the other hand, JCIP Holdings is a domestic corporation which currently conducts business as an investment holding company. Taishan Philippines is also a domestic corporation which is presently engaged in the business of insurance brokering and other related services and activities incidental to the operations of an insurance broker. Based on Taishan Philippines ' General Information Sheet, and Audited Financial Statements (" AFS ") as of November 30, 2015 and December 31, 2014, and Corporate Secretary's Certificate, the company has 480,001 outstanding common shares with a par value of P_____ each, or total value of P__________, which account for all capital stock of Taishan Philippines . Those shares are held by JAB Capital (479,996) and five nominee individuals with one share each. On November 26, 2015, JAB Capital and JCIP Holdings entered into a Deed of Assignment where JAB Capital sold and transferred all its 480,001 common shares in Taishan Philippines to JCIP Holdings for consideration of P__________. As of November 30, 2015 and December 31, 2014, Taishan Philippines ' ratio of immovable property over total assets of is 9.75% and 9.01%, respectively. Also, as of December 31, 2014, the fair market value of the subject 480,001 shares is P__________, which is greater than the consideration received for those shares. Based on a sworn statement issued by JAB Capital , the capital gains 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 Capital gains tax In reply, please be informed that under Section 28 (B) (5) (c) of the National Internal Revenue Code of 1997, as amended (" Tax Code "), net capital gains derived by a foreign corporation not engaged in trade or business from the disposition of shares in a domestic corporation not disposed through a stock exchange are subject to capital gains tax at the rate of 5% or 10%, to wit: " 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: Not Over P100,000 5% On any amount in excess of P100,000 10%" However, under Section 32 (B) (5) of the Tax Code, income is exempt to the extent required by any treaty obligation binding upon the Philippine government, 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, paragraph 3, Article 13 (Gains from the Alienation of Property) of the Philippines-Malaysia tax treaty provides: "3. Gains from the alienation of shares of a company, the property of which consists principally of immovable property situated in a Contracting State, may be taxed in that State. Gains from the alienation of an interest in a partnership or a trust, the property of which consists principally of immovable property situated in a Contracting State, may be taxed in that State." Under Article 13, gains from the alienation of shares of a company, the property of which consists principally of immovable property situated in a Contracting State, may be taxed in that State. In connection therewith, Section 2 (b) of Revenue Regulations No. 4-86 (" RR 4-86 ") 1 defines the term "principally of immovable or real property" as used in tax treaties to mean more than 50% of the corporation's entire assets in terms of value, thus: " 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, since Taishan Philippines ' ratio of immovable property over total assets as of November 30, 2015 and December 31, 2014 is 9.75% and 9.01%, respectively, which is not more than 50%, Taishan Philippines ' assets do not consist principally of immovable property under Section 2 (b) of RR 4-86. This being the case, capital gains derived by JAB Capital from the sale of its shares in Taishan Philippines to JCIP Holdings are exempt from capital gains tax pursuant to paragraph 3, Article 13 of the Philippines-Malaysia tax treaty. Donor's tax However, since the fair market value (" FMV ") of those shares is greater than the consideration received, the excess between the higher FMV and the lower consideration is subject to donor's tax, pursuant to Section 100 of the Tax Code, as implemented by Section 7 (c.1.4) of Revenue Regulations No. 6-2008, 2 thus: " SEC. 100. Transfer for Less Than Adequate and Full Consideration . Where property, other than real property referred to in Section 24(D), is transferred for less than an adequate and full consideration in money or money's worth, then the amount by which the fair market value of the property exceeded the value of the consideration shall, for the purpose of the tax imposed by this Chapter, be deemed a gift, and shall be included in computing the amount of gifts made during the calendar year." " SEC. 7. S ALE, BARTER OR EXCHANGE OF SHARES OF STOCK NOT TRADED THROUGH A LOCAL STOCK EXCHANGE PURSUANT TO SECS. 24(C), 25(A)(3), 25(B), 27(D)(2), 28(A)(7)(c), 28(B)(5)(c) OF THE TAX CODE, AS AMENDED. xxx xxx xxx (c) Determination of Amount and Recognition of Gain or Loss. (c.1) Determination of Selling Price . In determining the selling price, the following rules shall apply: xxx xxx xxx (c.1.4) In case the fair market value of the shares of stock sold, bartered, or exchanged is greater than the amount of money and/or fair market value of the property received, the excess of the fair market value of the shares of stock sold, bartered or exchanged over the amount of money and the fair market value of the property, if any, received as consideration shall be deemed a gift subject to the donor's tax under Sec. 100 of the Tax Code, as amended." The application of the donor's tax in such transaction is confirmed by the Supreme Court in The Philippine American Life and General Insurance Company vs. The Secretary of Finance and the Commissioner of Internal Revenue , * G.R. No. 210987, November 24, 2014 (" Philam case "), to wit: AHDacC "The price difference is subject to donor's tax. Petitioner's substantive arguments are unavailing. The absence of donative intent, if that be the case, does not exempt the sales of stock transaction from donor's tax since Sec. 100 of the NIRC categorically states that the amount by which the fair market value of the property exceeded the value of the consideration shall be deemed a gift. Thus, even if there is no actual donation, the difference in price is considered a donation by fiction of law." Furthermore, under Section 10 (B) of Revenue Regulations No. 2-2003, 3 and as mentioned in the Philam case, donation made between business organizations is deemed donation made to a stranger subject to donor's tax at the rate of 30%, thus: " SEC. 10. RATES OF DONOR'S TAX. xxx xxx xxx (B) Tax payable by the donor if donee is a stranger. When the donee or beneficiary is a stranger, the tax payable by the donor shall be thirty per cent (30%) of the net gifts. xxx xxx xxx Donation made between business organizations and those made between an individual and a business organization shall be considered as donation made to a stranger." Documentary stamp tax Finally, under Section 175 of the Tax Code, the transfer by JAB Capital of its shares in Taishan Philippines to JCIP Holdings is subject to documentary stamp tax equivalent to P0.75 for every P200.00, or fractional part thereof, of the par value of the shares, to wit: " 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. cAaDHT Very truly yours, (SGD.) CAESAR R. DULAY Commissioner of Internal Revenue Footnotes 1. Entitled Determination of Whether the Assets of a Corporation Consist Principally of Real Property Interest under the Philippine Tax Treaties . 2. Entitled Consolidated Regulations Prescribing the Rules on the Taxation of Sale, Barter, Exchange or Other Disposition of Shares of Stock Held as Capital Assets . 3. Entitled Consolidated Revenue Regulations on Estate Tax and Donor's Tax Incorporating the Amendments Introduced by Republic Act No. 8424, the Tax Reform Act of 1997 .