Navarro Amper and Co.

June 3, 2019 ITAD BIR RULING NO. 010-19 Article 13 (Gains from the Alienation of Property) Philippines- Singapore tax treaty Navarro Amper and Co. 19th Floor, Net Lima Plaza 5th Avenue corner 26th Street Bonifacio Global City 1634 Taguig City Attention: AAA __________ BBB __________ Gentlemen : This refers to your tax treaty relief application filed on July 17, 2013 requesting confirmation that capital gains derived by NatSteel Asia Pte. Ltd. (" NatSteel ") (formerly NatSteel AsiaSteel Pte. Ltd. ) from the sale of its shares of stock in SteelAsia Manufacturing Corporation (" SteelAsia ") (formerly Tempcore Steel Corporation ) to PlaridelSteel, Inc. (" PlaridelSteel ") are exempt from income tax pursuant to the Convention between the Republic of the Philippines and the Republic of Singapore for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (" Philippines-Singapore tax treaty "). FACTS NatSteel is a foreign corporation organized and existing under the laws of Singapore and a resident thereof based on its amended Memorandum and Articles of Association and Certificate of Residence issued by the Inland Revenue Authority of Singapore. NatSteel is engaged in the business of iron masters, steel makers, steel converters, colliery proprietors, coke manufacturers, miners, smelters, engineers, among others. It is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration of Company issued by the Securities and Exchange Commission. On the other hand, SteelAsia and PlaridelSteel are domestic corporations. SteelAsia is engaged in manufacturing and processing of steel billets into steel bars, based on its Audited Financial Statements as of December 31, 2012. SteelAsia is 60% owned by Filipinos and 40% by NatSteel , a wholly-owned subsidiary of Tata Steel Ltd. (a publicly listed company in India). Based on the Corporate Secretary's Certificate, NatSteel owns 20,000,000 Class C common shares of SteelAsia accounting for 40% ownership in SteelAsia as of June 18, 2013. Each share has a par value of Php10.00, or a total of Php200,000,000. On July 5, 2013, NatSteel and PlaridelSteel entered into a Deed of Assignment of Shares where the former sold all its 20,000,000 Class C common shares in SteelAsia to the latter for Php1,096,762,169.00. Based on SteelAsia 's Interim Financial Statements as of March 31, 2013 and Audited Financial Statements as of December 31, 2012, SteelAsia 's real property interest as of those dates is 13.49% and 15.05%, respectively, as computed below: March 31, 2013 December 31, 2012 A. Real property Building and building improvements Php__________ Php__________ Machinery and equipment __________ __________ Furniture, fixtures and equipment __________ __________ Leasehold improvements __________ __________ Refundable deposits __________ __________ Investment properties (land, condominium and others) __________ __________ Construction in-progress __________ - Total __________ __________ B. Total assets __________ __________ Real property interest (A/B) 13.49% 15.05% Under Revenue Regulations No. 4-86, 1 capital gains derived by residents of other Contracting States from the disposition of a share or an interest in a Philippine corporation are taxable in the Philippines only if the assets of the corporation consist principally of real property interest ("RPI") , i.e. , more than fifty percent (50%) of the entire assets in terms of values, thus: " SECTION 2. Definitions. For purposes of these regulations, the following terms and phrases shall be understood to mean: xxx xxx xxx b) 'Principally,' 'wholly or principally,' 'directly principally' or 'attributable' more than fifty percent of the entire assets in terms of value;" Based on the data above, the assets of SteelAsia do not consist principally of RPI. Also, donor's tax amounting to Php__________ were imposed and paid on the transfer as evidenced by BIR Form 0605 (Payment Form) filed with Revenue District Office No. 39-South Quezon City on July 17, 2013. The donor's tax is computed below: Donor's tax = [Fair market value of shares (Php __________ ) selling price of shares (Php __________ )] x 30% = Php __________ The donor's tax was paid under protest. Based on a sworn statement issued by SteelAsia , the income subject of this ruling is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal. RULING A. Income tax In reply, please be informed that under Section 28 (B) (5) (c) of the National Internal Revenue Code of 1997 ("Tax Code") , as amended, capital gains derived by a nonresident foreign corporation from the disposition of shares in a domestic corporation not traded thru a stock exchange are subject to income tax at the rate of 5% to 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, such gains shall be 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-Singapore tax treaty provides that 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, thus: "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." Accordingly, since SteelAsia 's real property interest prior to the alienation of its shares on July 5, 2013 is 13.49% as of March 31, 2013, and 15.05% as of December 31, 2012, which is not more than 50%, SteelAsia 's assets do not consist principally of immovable property under Section 2 (b) of Revenue Regulations No. 4-86. This being the case, capital gains derived by NatSteel from the sale of all its shares in SteelAsia to PlaridelSteel are exempt from income tax pursuant to paragraph 3, Article 13 of the Philippines-Singapore tax treaty. B. Donor's tax Under Section 100 of the Tax Code, where property (other than real property) is transferred for less than an adequate and full consideration in money or money's worth, the excess between the higher fair market value of the property and the lower consideration received by the transferor is deemed a gift subject to donor's tax, 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." As of the date of sale, the consideration received by NatSteel from the sale of its shares in SteelAsia to PlaridelSteel was Php__________, which was below the fair market value of the shares at Php__________. The deficit (Php__________) shall be deemed a gift subject to donor's tax under Section 100 of the Tax Code. Note that Section 100 does not require any donative intent on the part of the transferor for the imposition of this tax as emphasized by the phrase "deemed a gift," especially if the transferor completely relinquished his ownership over the transferred property. In the instant case, SteelAsia completely relinquished ownership of its common shares in SteelAsia when it sold these shares to PlaridelSteel ; hence, the donor's tax. C. Documentary stamp tax Finally, under Section 175 of the Tax Code, the transfer of shares in SteelAsia is subject to documentary stamp tax equivalent to Php0.75 on every Php200.00, 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." Beginning January 1, 2018, the documentary stamp tax imposed on transfer of shares or certificate of stock shall now be Php1.50 on every Php200.00, or fractional part thereof, of the par value of the shares, pursuant to Section 52 of Republic Act No. 10963 , otherwise known as the Tax Reform for Acceleration and Inclusion or TRAIN Law . Section 175 of the Tax Code now reads as follows: " 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 One peso and fifty centavos (P1.50) on each Two hundred pesos (P200), or fractional part thereof, of the par value of such 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. Entitled Determination of Whether the Assets of a Corporation Consist Principally of Real Property Interest under the Philippine Tax Treaties .