Isla Lipana & Co.

May 25, 2021 ITAD BIR RULING NO. 016-21 Reservation Clause to Article 14 (Capital Gains), Philippines-United States of America 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 November 5, 2015 requesting confirmation that the capital gains derived by Cushman & Wakefield of Asia, Inc. ("Cushman US") from the transfer of its 9,995 common shares ("the subject shares") in Cushman & Wakefield Philippines, Inc. ("Cushman PH") to Cushman & Wakefield Netherlands HoldCo BV ("Cushman NL") are exempt from income tax pursuant to the 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 (RP-US tax treaty). ETHIDa FACTS Cushman US is a foreign corporation organized and existing under the laws of the United States based on its amended Certificate of Incorporation filed at the State of Delaware in the United States (US), and is a resident of that country based on its Certificate of Residence issued by the Internal Revenue Service of the United States. Cushman US's line of business includes investing in commodity contracts, tax liens, venture capital companies, or other miscellaneous investing. 1 Cushman NL is also a foreign corporation organized and existing under the laws of the Netherlands and is active in the financial holdings sector. 2 On the other hand, Cushman PH is a domestic corporation engaged in acquiring, preserving and coordinating information on the local and international property markets; developing potentials, opportunities, resources, businesses, industries and technical expertise in respect thereof; providing management, administrative, technical and research facilities for the supply, exchange and access technical services, ideas, research products, statistical business information related to property markets; and keeping, managing, maintaining, operating residential, commercial and industrial buildings, structures and sites, and companies and ventures engaged in property market business. Cushman PH is a wholly-owned subsidiary of Cushman US, and its ultimate parent is Exor Spa of Italy. On October 14, 2015, Cushman US and Cushman NL entered into a Deed of Absolute Sale of Shares whereby Cushman US transferred, conveyed and assigned to Cushman NL its 9,995 common shares in Cushman PH, for and in consideration of the amount of US$______________ (Php______________). 3 Cushman US acquired the subject shares for a total of Php______________, which is equal to the aggregate par value thereof. Prior to the date of sale, the real property interest (RPI), i.e. , real assets over total assets, of Cushman PH is 12.63%, while the fair market value (FMV) of the subject shares is Php______________. The computation of the RPI and FMV are presented below and the figures used are based on the Audited Financial Statements (AFS) as of December 31, 2014: Real properties Office equipment Php __________ Office furniture and fixtures __________ Leasehold improvements __________ Computer software __________ Total __________ Divide by: Total assets __________ RPI 12.63% Total equity Php __________ Divided by: Number of outstanding shares __________ FMV __________ Multiply by: Number of shares sold __________ FMV of shares sold 18,845,761.41 RULING A. Capital gains 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 not traded in the stock exchange in a domestic corporation are subject to capital gains 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 are exempt to the extent required by any treaty obligation binding upon the Philippine government, thus: TIADCc "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, Cushman US derived no capital gains from the disposition of its shares in Cushman PH since the cost of the said shares (Php__________) is greater than the consideration (Php__________). Even assuming that Cushman US derived capital gains from the subject transaction, still the said gains are not taxable in the Philippines for the reason cited below. Article 14 of the RP-US tax treaty states that gains derived by a US resident from the alienation of any property other than those enumerated in paragraph 1, like the shares in a domestic corporation in this case, shall be taxable only in the US, thus: "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 (Royalties). 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." However, pursuant to paragraph 1 of the Reservation Clause of the tax treaty, the Philippines may tax the capital gains derived by a US resident from the sale of its shares in a domestic corporation provided the assets of such corporation consist principally of immovable property situated in the Philippines, viz. : "(1) reservation that, notwithstanding the provisions of Article 14 relating to capital gains, both the United States and the Philippines may tax gain from the disposition of an interest in a corporation if its assets consist principally of a real property interest located in that 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; xxx xxx xxx" The term principally when applied to real property or real property interest (RPI) means more than fifty percent (50%) of the domestic corporation's entire assets in terms of value. 4 In this case, the RPI of Cushman PH based on its AFS as of December 31, 2014 is only 12.63%. Hence, any capital gains derived by Cushman US from the sale of its 9,995 common shares in Cushman PH to Cushman NL are exempt from income tax in the Philippines, pursuant to paragraph 2, Article 14 (Capital Gains), in relation to paragraph 1 of the Reservation Clause, of the RP-US 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, 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 case of The Philippine American Life and General Insurance Company vs. the Secretary of Finance and the Commissioner of Internal Revenue , 5 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) Donation made between business organizations is considered as donation made to a stranger and is, therefore, subject to donor's tax of 30%. 6 Accordingly, the sale of the subject shares in Cushman PH is subject to donor's tax of Php _______________, as computed below: Fair market value of shares sold Php___________ Less: Consideration ___________ Deemed gift ___________ Multiply by: Donor's tax rate 30% Donor's tax payable ___________ C. Documentary stamp tax Finally, under Section 175 of the Tax Code, the sale of the subject shares in Cushman 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: AIDSTE "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. https://www.bloomberg.com/profile/company/1357740D:US 2. https://www.oozo.nl/bedrijven/amsterdam/frankendael/julianapark/1230171/cushman-wakefield-netherlandsholdco-b-v 3. Bangko Sentral ng Pilipinas exchange rate on October 14, 2015: US$1.00 = Php46.0920. 4. 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). 5. G.R. No. 210987, November 24, 2014. 6. Section 10 (B) of Revenue Regulations No. 2-2003 (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).