ITAD BIR Ruling No. 016-09

June 23, 2009 ITAD BIR RULING NO. 016-09 Articles 11 and 14, Philippines-United States of America tax treaty; Sec. 175 of the NIRC of 1997; BIR Ruling No. DA-ITAD 170-06; BIR Ruling No. 039-02 Manabat Delgado Amper & Co. 5th Floor Salamin Building 197 Salcedo St., Legaspi Village Makati City 1229 Philippines Attention: Domingo A. Lagundi, Jr. Senior Tax Manager Gentlemen : This refers to your letter dated June 17, 2007, on behalf of your client, BECTON DICKINSON PHILIPPINES, INC. (hereinafter, Becton Philippines ), requesting confirmation of your opinion that gains from the surrendered shares of stock in Becton Philippines by Becton Dickinson Infusion Therapy Systems, Inc. [formerly, Becton Dickinson Worldwide, Inc. (hereinafter, BDITSI)] are exempt from capital gains tax, under the Philippines-United States of America tax treaty (Philippines-United States), and that the issuance of the replacement stock certificates on the shares to be surrendered by BDITSI to Becton Philippines due to capital reduction will not be subject to the documentary stamp tax pursuant to the pertinent provisions of the National Internal Revenue Code of 1997 (Tax Code), as amended. Basic Facts It is represented that BDITSI is a non-resident foreign corporation, duly organized and existing under the laws of the State of Delaware, United States of America with office address at 9450 South State Street, Sandy, Utah 84070, United States of America, per certification issued by the Internal Revenue Service, signed by Andrew E. Zuckerman dated April 13, 2007; that it is not registered either as corporation or as partnership in the Philippines, per Certificate of Non-Registration of Corporation/Partnership issued by the Securities and Exchange Commission dated March 29, 2007; that Becton Philippines is a wholly owned subsidiary of BDITSI, and a corporation duly organized and existing under the laws of the Philippines with office address at 27th Floor, PB Com Tower, 6795 Ayala Avenue corner V.A. Rufino Street, 1226 Makati City and Becton Philippines is presently engaged in the distribution of a broad range of medical products and diagnostic items for use of healthcare professionals, medical research institutions and the general public. It is further represented that in its meeting on 22 February 2007 the Board of Directors of Becton Philippines resolved, subject to the further approval of the Corporation's stockholders, to decrease the authorized capital stock of Becton Philippines from Five Hundred Fifty Million Pesos (Php550,000,000.00) to Seventy Million Pesos (Php70,000,000.00) divided into Seven Hundred Thousand (700,000) shares with a par value of One Hundred Pesos (Php100.00) per share; that it was further resolved that the Seventh Article of the Articles of Incorporation of Becton Philippines be amended to read as follows: cHITCS "SEVENTH. That the capital stock of said Corporation is Php70,000,000.00 , and said capital stock is divided into 700,000 shares of the par value of Php100.00 each." that it was further resolved that the amount of Four Hundred Twenty Six Million Ninety Thousand Pesos (Php426,090,000.00) be paid to the stockholders by way of return of capital after the approval by the relevant regulatory authorities of the decrease in Becton Philippines authorize capital stock, and subject to the consent of the Corporation's creditors; that on 27 February 2007, the stockholders of Becton Philippines approved the foregoing resolutions of the Board; and that it was further resolved that the Articles of Incorporation be amended accordingly. It is also shown that the following are the stockholdings of BDITSI from Becton Dickinson before and after the redemption: Name of Issued and No. of Certificate No. of No. of Stockholders Cancelled Shares No. Issued Shares Shares Certificate Issued and after Issued Redeemed No. Cancelled Redemption after Redemption with a PV of P100.00 Becton Dickinson 9 1,544,000 21 * 699,993 844,007 Worldwide, Inc. Becton Dickinson 10 3,000,000 3,000,000 worldwide, Inc. Becton Dickinson 11 116,893 116,893 Worldwide, Inc. Totals 4,660,893 3,960,900 ======== ======== Gary M. de Fazio 14 1 22 1 Helen G. Cunniff 15 1 23 1 Richard A. Carbone 16 1 24 1 Emmanuel C. Paras 17 1 25 1 Llewellyn L. Llanillo 18 1 26 1 Vicente D. Gerochi IV 19 1 27 1 Rodelle B. Bolante 20 1 28 1 Totals 4,660,900 700,000 3,960,900 ======== ====== ======= * shares owned by Becton Dickinson Infusion Theraphy (formerly, Becton Dickinson Worldwide ) Ruling On Income Tax In reply, please be informed that Section 28 (B) of the National Internal Revenue Code of 1997, as amended by Republic Act No. 9337, provides as follows: "SEC. 28. Rates of Income Tax on Foreign Corporations. xxx xxx xxx (B) Tax on Nonresident Foreign Corporation. (1) In General. Except as otherwise provided in this Code, a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to thirty-five percent (35%) of the gross income received during each taxable year from all sources within the Philippines, such as interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains subject to tax under subparagraph (c): Provided, That effective January 1, 2009, the rate if income tax shall be thirty percent (30%). HAEIac 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: Not over P100,000 5% On any amount in excess of P100,000 10%" However, Section 32 (B) (5) of the same Code provides: "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 ( i.e. , TITLE II TAX ON INCOME): 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 particular case, the treaty being invoked is the Philippines-United States tax treaty, 1 specifically its Article 14, which provides as follows: "Article 14 CAPITAL GAINS 1. Gains from the alienation of tangible personal (movable) property forming part of the business property of a permanent establishment which a resident of a Contracting State has in the other Contracting State or of tangible personal (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 independent personal 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 derived by a resident of a Contracting State from the alienation of ships, aircraft or containers operated by such resident in international traffic shall be taxable only in that State, and gains described in Article 13 (Royalties) shall be taxable only in accordance with the provisions of Article 13. CEASaT 2. Gains from the alienation of any property other than those mentioned in paragraph 1 or in Article 7 (Income from Real Property) shall be taxable only in the Contracting State of which the alienator is a resident. Furthermore, the Reservation Clause of the same treaty provides, in part, as follows: "Notwithstanding the provisions of Article 14 of the Convention relating to the capital gains, both the Philippines and the United States may tax gains from the disposition of an interest in a corporation if its assets consist principally of real property interest located in the country. Likewise, both countries may tax gain from the disposition of an interest in a partnership, trust or estate to the extent the gain is attributable to a real property interest in one of the countries. The term 'real property interest' is to have the meaning it has under the law of the country in which the underlying real property is located." It is clear from the aforequoted provisions of the Philippines-United States tax treaty that any capital gains from the alienation of any property other than those mentioned in paragraph (1) of the Article 14 (Capital Gains) or in Article 7 (Income from Real Property) of the Philippines-United States tax treaty shall be taxable only in the State where the alienator is a resident. Considering that the surrender of shares of stock is not among those mentioned in paragraph (1) of Article 14 of the Philippines-United States tax treaty, any gain that may be derived by BDITSI from the surrender of its shares of stock to Becton Philippines shall not be subject to Philippine income tax under Section 28 (A) (7) (c) of the National Internal Revenue Code, but shall be subject to income tax only in the United States. However, under the Reservation Clause of the treaty, the Philippines may tax the gains derived from the disposition of interests in a corporation if its assets consist principally of real property interest located in the Philippines. "Principally" means more than 50% of the entire assets in terms of value. Our verification of the Audited Financial Statements of Becton Dickinson Philippines, Inc. for the fiscal year ended September 30, 2006 disclosed that its property located in the Philippines constitutes 4.83% of its total assets. This being the case, the assets of Becton Philippines do not consist principally of real property interest located in the Philippines up to date of subject transfer of shares. Accordingly, this Office is of the opinion and so holds that gains realized from the surrender of shares of stock by BDITSI to Becton Philippines that is, in general not subject to the capital gains tax imposed under Section 28 (B) (5) (c) of the National Internal Revenue Code (Tax Code) of 1997, based on Article 14 of the Philippines-United States of America tax treaty. However, in addition to the foregoing, this Office takes cognizance of the commentaries of the ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT (OECD) Committee on Fiscal Affairs on the Model Tax Convention Paragraphs 134, Commentary on Article 13 (Capital Gains), Model Tax Convention on Income and Capital, 15 July 2005, Condensed Version OECD 2005 which states that: SAcaDE "If shares are sold by a shareholder to the issuing company in connection with the liquidation of such company or the reduction of its paid-up capital, the difference between the selling price and the par value of the shares may be treated in the State of which the company is a resident as a distribution of accumulated profits and not as a capital gain. The Article does not prevent the State of residence of the company from taxing such distributions at the rates provided for in Article 10: such taxation is permitted because such difference is covered by the definition of the term "dividends" contained in paragraph 3 of Article 10 and interpreted in paragraph 28 of the Commentary relating thereto. . . . ." emphasis supplied It must be emphasized, however, that the amount to be taxed as dividends shall refer only to "the difference between the selling price and the par value of the shares", such difference being regarded as income, and the par value of the shares to be regarded as capital. This is in line with the principle that capital and income are different: capital is wealth or fund; whereas income is profit or gain or the flow of wealth. 2 Thus, a reimbursement of capital should not be taxed. The OECD Committee on Fiscal Affairs shares the same view, thus: "Normally, distributions by a company which have the effect of reducing the membership rights, for instance, payments constituting a reimbursement of capital in any form whatever, are not regarded as dividends. " 3 (Underscoring and emphasis supplied) Since what is involved in the instant case is a reduction of paid-up capital ( i.e., the redemption by BDITSI of the 3,960,900 shares of stock with a par value of P100.00 to the issuing company, Becton Philippines), the foregoing Commentaries should be applied herein. Thus, said Article 14 does not prevent the Philippines, the state of residence of the issuing company, Becton Philippines, from taxing such difference between the selling price and the par value of shares at the rates provided for in Article 11, as applicable. Thus, insofar as dividend tax rates under the Philippines-United States tax treaty is concerned, we look into the provisions of Article 11 of said treaty, which provides: "Article 11 DIVIDENDS 1. Dividends derived from sources within one of the Contracting States by a resident of the other Contracting State may be taxed by both Contracting States. IESTcD 2. The rate of tax imposed by one of the Contracting States on dividends derived from sources within that Contracting State by a resident of the other Contracting State shall not exceed a) 25 percent of the gross amount of the dividend; or b) When the recipient is a corporation, 20 percent of the gross amount of the dividend if during the part of the paying corporation's taxable year which precedes the date of payment of the dividend and during the whole of its prior taxable year (if any), at least 10 percent of the outstanding shares of the voting stock of the paying corporation was owned by the recipient corporation. xxx xxx xxx 5. The term "dividends" as used in this Convention means income from shares, mining shares, founders' shares or other rights, not being debt-claims, participating in profits, as well as income from other corporate rights assimilated to income from shares by the taxation law of the State of which the corporation making the distribution is a resident. Based on the above-cited provisions, 20% percent tax rate on dividends shall apply if the income recipient owns 10% of the outstanding shares of the voting stock of the paying corporation, during the part of the paying corporation's taxable year which precedes the date of payment of the dividend and during the whole of its prior taxable year. In all other cases, the 25% preferential tax rate shall apply. Such being the case, BDITSI, the income recipient of dividends 4 is taxable at the preferential tax rate of 20%, if there is a showing that it owns more than 10% of the outstanding shares of the voting stock of Becton Philippines, during the part of the latter's taxable year which precedes the date of payment/date of transaction and during the whole of its prior taxable year, pursuant to Article 11 (2) (b) of the Philippines-United States tax treaty. Thus, this Office hereby defers from making any pronouncement as to the preferential tax rate of 20% on the dividends, on the above instant case unless and until all conditions set forth under the Article 11 (2) (b) of the Philippines-United States tax treaty have been satisfied as well as other pertinent and relevant documents and information (in addition to what have been already submitted) have been evaluated by this Office, through the International Tax Affairs Division of this Bureau. IcESaA On Documentary Stamp Tax The surrender of the certificates of stock by the stockholders of Becton Philippines is a necessary consequence of the decrease in the capital stock of the said corporation. Thus, in order to reflect the corrected number of shares therein, it is required that the stockholders of record should surrender their old certificates of stock to the corporation, without any monetary consideration, but only for the purpose of replacing the old stock certificates into new ones. In other words, there is no effective transfer of beneficial ownership over the said shares. In so doing, the replacement of stock certificates is not subject to the documentary stamp tax prescribed in Section 175 of the National Internal Revenue Code, as amended. Consequently, shares to be surrendered by BDITSI to Becton Philippines for cancellation shall not be subject to the documentary stamp tax (DST) imposed on transfers of shares of stock under Section 175 of the National Internal Revenue Code, as amended, which provides: "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 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." It is clear that the above-cited provision imposes the DST on all sales or agreements to sell, or memoranda of sale, or deliveries, or transfer of shares whether entitling the holder in any manner to the benefit of the shares. No documentary stamp tax is due on the surrender and cancellation of shares as it does not constitute a sale, assignment or transfer of shares of stock because Becton Philippines is not taking title to the shares to be surrendered and the shares to be cancelled as a consequence of the reduction of capital. In effect, Becton Philippines does not realize any benefit, as owner or otherwise, from the receipt of the said shares. As such, Becton Philippines is not subject to DST on the issuance of the replacement stock certificates on the shares to be surrendered of BDITSI due to capital reduction since it is merely performing a ministerial function required under the law to carry out the reduction of the capital stock and it is not taking title to nor does it receive any value for the shares to be surrendered. The shares to be reduced does not represent value, since they are merely the documentary evidence of the capital stock to be reduced and will cease to exist after their cancellation or retirement. This ruling is issued on the basis of the facts as represented. If upon investigation it shall be disclosed that the facts are materially different, then this ruling shall be without force and effect insofar as the herein parties are concerned. HSTCcD Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Commissioner of Internal Revenue Footnotes 1. Convention between the Government of the Republic of the Philippines and the Government of the United States of America with Respect to Taxes on Income. 2. Commissioner of Internal Revenue vs. Court of Appeals, et al. , G.R. 108576, 20 January 1999. 3. Paragraph 28, Commentary on Article 10, OECD MODEL TAX CONVENTION (p. 152, OECD 2005). This commentary has been adhered to by the OECD since 1977 (Refer to MATERIALS on International and EC Tax Law , Volume I, Kees van Raad, Third Edition 2003, p. 169). 4. As discussed "difference between the redemption price and the par value of the shares redeemed (426,090,000.00 - 396,090,000.00), which amounts to Php30,000,000.00".