Isla Lipana & Co.

May 19, 2021 ITAD BIR RULING NO. 014-21 Article 13 (Gains from the Alienation of Property) Philippines-Singapore Tax Treaty Isla Lipana & Co. 29th Floor, Philamlife Tower 8767 Paseo de Roxas 1226 Makati City Attention: AAA _______________ Gentlemen : This refers to your tax treaty relief application that was filed on June 3, 2016 requesting confirmation that capital gains derived by Samsung SDS Asia Pacific Pte. Ltd. (Samsung SG) from the sale of its shares of stock in Samsung SDS Global ASL SCL Philippines Co., Ltd., Inc. (Samsung PH) to Samsung SDS Co. Ltd. (Samsung KR) 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). DETACa FACTS Samsung SG is a foreign corporation organized and existing under the laws of Singapore based on its Memorandum of Association, and a resident of Singapore based on its Certificate of Residence issued by the Inland Revenue Authority of Singapore. It was established to carry on the business of sale, marketing, supporting, research, distributing, developing, manufacturing of software programs and systems, and to act as software specialists, data processing experts, consultants and advisors, providing support, technical, maintenance, servicing, implementation, reengineering of applications, systems and communication software in various industry sectors and other ancillary services in all types of computer software programs, 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. Similarly, Samsung KR is a foreign corporation organized and existing under the laws of Korea. On the other hand, Samsung PH is a domestic corporation engaged in the business of warehousing, storing, logistics and forwarding of goods, wares, merchandise, and other commercial commodity, or things of value by operating as an international air and ocean freight and freight forwarding provider. Samsung PH is a wholly-owned subsidiary of Samsung SG, and their ultimate parent is Samsung KR. On May 11, 2016, Samsung SG and Samsung KR entered into a Deed of Assignment of Shares of Stock and Share Purchase Agreement whereby the former sold to the latter its 20,999,995 common shares in Samsung PH (the subject shares) for _____________ Singaporean Dollars (Php_____________). 1 Samsung SG acquired the subject shares for a total of Php_____________, which is equal to the aggregate par value thereof. RULING 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 listed and traded in a stock exchange are subject to income tax at the rate of 5% to 10%: " 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 are exempt to the extent required by any treaty obligation binding upon the Philippine government, thus: HEITAD " 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." In this case, Samsung SG derived no capital gains from the disposition of its shares in Samsung PH since the cost of the said shares (Php_____________) is greater than the consideration (Php_____________). Even assuming that Samsung SG derived capital gains from the subject transaction, still the said gains are not taxable in the Philippines for the reasons cited below. 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." The assets of a Philippine corporation consist principally of immovable or real property if its real property interest (RPI) is more than 50% of the entire assets in terms of value. 2 The Audited Financial Statements (AFS) of Samsung PH for the year 2015 reveals that the real property components of its property, plant and equipment (PPE) comprise less than 50% of its assets, computed as follows: December 31, 2015 Real properties: Office equipment Php __________ Leasehold improvement __________ Furniture and fixtures __________ Computer software __________ Subtotal __________ Total assets __________ Real property interest (% of Subtotal to Total Assets) 8.57% Accordingly, the capital gains derived by Samsung SG from the sale of its shares in Samsung PH to Samsung KR are exempt from income tax pursuant to paragraph 3, Article 13 of the Philippines-Singapore Tax Treaty. 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, then the amount by which the FMV of the property exceeded the value of the consideration shall be deemed a gift subject to donor's tax, to wit: "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." In The Philippine American Life and General Insurance Company vs. The Secretary of Finance and the Commissioner of Internal Revenue , 3 the Supreme Court upheld the imposition of this tax even in the absence of donative intent on the part of the seller of the shares, to wit: "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. " (Emphasis ours) Based on Samsung PH's AFS for the year 2015, the FMV of the subject shares is Php__________, as computed below: aDSIHc Total equity Php __________ Divide by: total number of shares __________ Fair market value per share __________ Multiply: total number of shares sold __________ FMV of the shares sold Php __________ ============== Under Section 10 (B) of Revenue Regulations No. 2-2003, 4 donation made between business organizations is considered as donation made to a stranger and is, therefore, subject to donor's tax of 30%: " 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." Accordingly, the excess of the FMV of the subject shares over the consideration is deemed a gift subject to donor's tax as follows: FMV of the shares sold Php __________ Less: Consideration __________ Deemed gift __________ Multiply by: Donor's tax rate 30% Donor's tax payable __________ ============= Documentary stamp tax Finally, the sale of the subject shares in Samsung PH is subject to documentary stamp tax of Php0.75 on each 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." This ruling is issued on the basis of the facts as represented. However, if it will be disclosed upon investigation 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. Bangko Sentral ng Pilipinas exchange rate: Php1.00 = 34.2982 Singaporean Dollars. 2. Section 2 (b) of Revenue Regulations No. 4-86 (Determination of Whether the Assets of a Corporation Consist Principally of Real Property Interest under the Philippine Tax Treaties). 3. G.R. No. 210987, November 24, 2014. 4. 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.