ITAD BIR Ruling No. 011-12

January 10, 2012 ITAD BIR RULING NO. 011-12 Makati Property Ventures, Inc. Unit D, 19th Floor, Tower One Ayala Triangle, Ayala Avenue Makati City Attention: Ronald F. Cuadro Chief Finance Officer Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on February 15, 2007 requesting confirmation that gain derived by Ocmador Philippines B.V. (formerly Rodamco Philippines BV ) ("Ocmador") from the redemption of its preferred shares of stock in Makati Property Ventures, Inc. ("Makati Property") is exempt from income tax pursuant to the Convention between the Kingdom of the Netherlands and the Republic of the Philippines for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income. ACcaET Ocmador is a foreign corporation organized and existing under the laws of the Netherlands and is a resident thereof based on its Articles of Association, as amended, on the extract from the trade register issued by the Chamber of Commerce and Industries of the Netherlands, and on the Declaration of Residence issued by the Tax Administration of Amsterdam, the Netherlands, on November 8, 2006. Ocmador is located at Weena 327-329, Rotterdam, the Netherlands. Ocmador is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration issued by the Securities and Exchange Commission on October 17, 2006. On the other hand, Makati Property is a domestic corporation located at Unit D, 19th Floor, Tower One, Ayala Triangle, Ayala Avenue, Makati City, Philippines. On December 27, 2002, the Board of Directors of Makati Property approved a resolution authorizing Ocmador to redeem its 3,000,000 preferred shares in Makati Property at a premium of 5 percent, each share with a par value of P100.00 or a total of P300,000,000.00. The shares will be redeemed as follows: Date Number of Value Consideration Net Capital Gain Redeemed Shares (in Pesos) (in Pesos) (Premium) (in Pesos) December 27, 2002 400,000 40,000,000.00 42,000,000.00 2,000,000.00 June 29, 2005 200,000 20,000,000.00 21,000,000.00 1,000,000.00 December 22, 2005 200,000 20,000,000.00 21,000,000.00 1,000,000.00 March 6, 2007 2,200,000 220,000,000.00 231,000,000.00 11,000,000.00 Total 3,000,000 300,000,000.00 315,000,000.00 15,000,000.00 ======== ============ ============ =========== Relative thereto, please be informed that under Section III (2) of Revenue Memorandum Order No. 1-00 (Procedures for Processing Tax Treaty Relief Application) ("RMO 1-2000") ,any availment of tax treaty relief (exemption from income tax or reduction of tax) shall be preceded by an application filed at the International Tax Affairs Division ("ITAD") of this Bureau at least 15 days before the intended transaction or payment of income, thus: "III. Policies: In order to achieve the above-mentioned objectives, the following policies shall be observed: xxx xxx xxx 2. Any availment of the tax treaty relief shall be preceded by an application by filing BIR Form No. 0901 (Application for Relief from Double Taxation) with ITAD at least 15 days before the transaction i.e., payment of dividends, royalties, etc.,accompanied by supporting documents justifying the relief. ..'' (Emphasis ours) This condition was emphasized by the Court of Tax Appeals in Mirant (Philippines) Operations Corporation vs. Commissioner of Internal Revenue (C.T.A. Case No. 6382 dated June 7, 2005) where it ruled: " However, it must be remembered that a foreign corporation wishing to avail of the benefits of the tax treaty should invoke the provisions of the tax treaty and prove that indeed the provisions of the tax treaty applies to it, before the benefits may be extended to such corporation. In other words, a resident or non-resident foreign corporation shall be taxed according to the provisions of the National Internal Revenue Code, unless it is shown that the treaty provisions apply to the said corporation, and that, in cases the same are applicable, the option to avail of the tax benefits under the tax treaty has been successfully invoked. aATHIE Under Revenue Memorandum Order 01-2000 of the Bureau of Internal Revenue, it is provided that the availment of a tax treaty provision must be preceded by an application for a tax treaty relief with its International Tax Affairs Division (ITAD). This is to prevent any erroneous interpretation and/or application of the treaty provisions with which the Philippines is a signatory to. The implementation of the said Revenue Memorandum Order is in harmony with the objectives of the contracting state to ensure that the granting of the benefits under the tax treaties are enjoyed by the persons or corporations duly entitled to the same. The Court notes that nowhere in the records of the case was it shown that petitioner indeed took the liberty of properly observing the provisions of the said order. Petitioner quotes various BIR, as well as ITAD, Rulings issued to several foreign corporations seeking for a tax relief from the office of the respondent. However, not any one of these rulings pertains to the petitioner. It must be stressed that BIR rulings are issued based on the facts and circumstances surrounding particular issue/issues in question and are resolved on a case-to-case basis. It would be thus erroneous to invoke the ruling of the respondent in specific cases, which have no bearing to the case of petitioner.'' (Emphasis ours) This decision was also upheld by the Supreme Court in a Resolution (G.R. No. 168531) dated February 18, 2008. AEDCHc Furthermore, the necessary requirement laid down in RMO 1-2000 is reiterated in subsequent rulings of the Court of Tax Appeals: Deutsche Bank AG Manila Branch vs. Commissioner of Internal Revenue (C.T.A. Case No. EB 456 dated May 29, 2009), CBK Power Company Ltd. vs. Commissioner of Internal Revenue (C.T.A. Case Nos. 6699, 6884 and 7166 dated March 29, 2010) and Manila North Tollways Corporation vs. Commissioner of Internal Revenue (C.T.A. Case No. 7864 dated April 12, 2011). In view of the foregoing, since the consideration for the redemption of the subject preferred shares in Makati Property was paid to Ocmador on December 27, 2002, June 29 and December 22, 2005, and March 6, 2007, but the subject TTRA was filed on February 15, 2007, this Office hereby DENIES those payments made to Ocmador on December 27, 2002, June 29 and December 22, 2005 for having been filed beyond the fifteen-day period prescribed in the RMO. Consequently, the net capital gain (premium) of P4,000,000.00 derived by Ocmador therefrom shall be subject to income tax at the rate provided under Section 28 (B) (5) (c) of the National Internal Revenue Code of 1997 ("Tax Code") ,as amended, to wit: "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: cTADCH Not over P100,000 5% On any amount in excess of P100,000 10%." On the other hand, the net capital gain (premium) of P11,000,000.00 derived by Ocmador from the redemption of the remaining 2,200,000 preferred shares in Makati Property on March 6, 2007 shall be exempt from income tax under paragraph 4, Article 13 of the Philippines-Netherlands tax treaty, to wit: "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 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 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 Contracting State of which the alienator is a resident. '' (Emphasis Ours) The gain in question is exempt since the property being alienated that give rise to the income does not pertain to immovable or real property (paragraph 1) ,movable property forming part of the assets of a permanent establishment (paragraph 2) ,or ships or aircraft (paragraph 3) . Finally, pursuant to Section 175 of the Tax Code, the redemption of the preferred shares in Makati Property is subject to documentary stamp tax equivalent to P0.75 for every P200.00 (or a fraction thereof) of the par value of the shares, thus: ''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. IcEaST Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue