ITAD BIR Ruling No. 015-11

January 20, 2011 ITAD BIR RULING NO. 015-11 Philippines-Malaysia tax treaty; Section 35 (a) [now Section 40 (a)] of the Tax Code of 1997 Texchem-Pack (Philippines), Inc. #7 Mountain Drive, Brgy. La Mesa LISP II, Calamba, Laguna Philippines Attention: Mr. Albert S. Tanlimco President Gentlemen : This refers to your letter dated July 7, 2008, on behalf of TEXCHEM RESOURCES BERHAD (for brevity, TRB), requesting for a ruling on the exemption from the payment of the capital gains tax of TRB on the sale/assignment of all its shares of stocks in TEXCHEM-PACK (PHILIPPINES), Inc. (for brevity, TPPI) to AMTES Corporation , pursuant to Article 13 of the Philippines-Malaysia tax treaty. 1 EHaASD Facts It is represented that TRB is a corporation, carrying business with registered address at Level 16, Menara P.S.C.I, 39, Jalan Sultan Ahmad Shah, 10050 Pulua Pinang; that it is a registered company under tax reference number C 0869155-10 and is a resident in Malaysia in accordance with the provision of Section 8 of the Malaysian Income Tax 1967 for the period 1 January 2003 to 31 December 2003, as evidenced by the Certificate of Residence Status dated 07 January 2008, issued by Sow Teik Jeam, Unit P.01.4, Penang Branch, Ketua Pengarah Hasil Dalam Negeri, for Director General of Inland Revenue, Inland Revenue Board of Malaysia; that TRB is not registered either as a corporation or a partnership in the Philippines, as evidenced by a certification issued by the Securities and Exchange Commission (SEC) dated 2 September 2005; that TPPI is a corporation duly organized and existing under the laws of the Philippines with business address at 7-D Mountain Drive Barangay La Mesa, Light Industry and Science Park of the Philippines II, Calamba, Laguna, Philippines. It is further represented that TRB is the registered owner of the 62,170 shares in TPPI with a par value of P1,000.00/share covered by Stock Certificate No. 018 representing 99.99% of the entire outstanding capital stock of TPPI; that a Deed of Sale of Corporate Stocks dated 27 December 2002 was duly executed by and between TRB and AMTES Corporation; that AMTES Corporation is a corporation organized and existing under the laws of the Philippines with office address at 455 Juan Luna St., Binondo, Manila; that on August 16, 2002, TRB and AMTES entered into an Agreement for the sale and purchase of 62,170 shares of stock of TPPI with a par value of P1,000.00 equivalent to P62,170,000.00; that the total consideration for the said sale amounted to P37,226,302.77; and that the issue or transaction subject of the above application involving TRB is not subject of an investigation, on-going audit, administrative protest, claim for refund or issuance of tax credit certificate, collection proceedings, or a judicial appeal. In reply, please be informed that Article 13 of the Philippines-Malaysia tax treaty, which provides: 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 Contracting 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 a Contracting State has in the other Contracting State or of movable property pertaining to a fixed base available to a resident of a Contracting State in the other Contracting 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. However, gains from the alienation of ships or aircraft operated by an enterprise of a Contracting State in international traffic and movable property pertaining to the operation of such ships or aircraft shall be taxable only in the State of which the enterprise is a resident. 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. 4. Gains from the alienation of any property or assets, other than those mentioned in paragraphs 1, 2 and 3 of this Article shall be taxable only in the Contracting State of which the alienator is a resident. Based on the aforequoted provisions, gains which may be derived by a resident of Malaysia from its transfer of shares of stock in a Philippine corporation is generally taxable in Malaysia. However, paragraph 3 of Article 13 above grants to the Philippines the right to tax gains derived from the disposition of interest in a corporation if its assets consist principally of real property interests located in the Philippines. DEIHSa In this light, since the subject transaction as represented will apparently result to a loss, no pronouncement with regard to the tax treaty relief under Article 13 of the Philippines-Malaysia tax treaty shall be made herein, since there is no gain to speak of. 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. Further, for the purpose of giving due course to the said sale of shares of stock, a copy of this ruling and a copy of the docket thereof will be furnished to the Revenue District Office which has jurisdiction over TPPI. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. 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.