Picazo Buyco Tan Fider & Santos Law Office

May 25, 2021 ITAD BIR RULING NO. 017-21 Article 13 (Gains from the Alienation of Property) Philippines-Singapore Tax Treaty Picazo Buyco Tan Fider & Santos Law Office Penthouse, Liberty Center 104 H.V. dela Costa Street 1227 Salcedo Village Makati City Attention: AAA _______________ Gentlemen : This refers to your tax treaty relief application, which was filed on February 1, 2019, requesting confirmation that capital gains derived by Osa Industries Pte. Ltd. (Osa SG) from the sale of its shares in Osa Industries Philippines, Inc. (Osa PH) to Servflo Pte. Ltd. (Servflo SG) 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). AaCTcI FACTS Osa SG is a foreign corporation organized and existing under the laws of Singapore and a resident thereof based on its Memorandum and Articles of Incorporation, its Business Profile issued by the Accounting and Corporate Regulatory of Singapore, and its Certificate of Residence issued by the Inland Revenue Authority of Singapore. It is engaged in the wholesale, trading and distribution of various types of industrial and consumer products, such as, but not limited to, engineering plastics, industrial pumps and compressors, spare parts for industrial equipment and motor vehicles, and manufacture, import, export, trading and distribution of articles, products and merchandise of all kinds whether finished, semi-finished, or in raw state. It is not registered as a corporation or partnership in the Philippines based on the Certificate of Non-Registration of Company issued by the Securities and Exchange Commission. Servflo SG is also a foreign corporation organized and existing under the laws of Singapore, and is involved in the wholesale of industrial, construction and related machinery and equipment, and in the manufacture and repair of pumps, compressors, taps and valves, among others. On the other hand, Osa PH is a domestic corporation engaged in buying, selling, importing, exporting, trading, distributing on a wholesale basis, and dealing in machineries, equipment, spare parts, supplies, materials, goods and other items. Based on Osa PH's Audited Financial Statements (AFS) as of December 31, 2018, General Information Sheet as of December 28, 2018, and Corporate Secretary's Certificate dated January 13, 2019, OSA SG holds 31,672.80 common shares or 80% of the outstanding shares of Osa PH, each share with a par value of Php_____ or a total par value of Php__________. On January 4, 2019, OSA SG and Servflo SG entered into a Deed of Absolute Sale of Shares whereby the former sold to the latter its 31,672.80 common shares in Osa PH for US$__________ or Php_______________. 1 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, the gains are exempt to the extent required by any treaty obligation binding upon the Philippine government, thus: "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." 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: "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 OSA PH for the years 2017 and 2018 reveal that the real property components of its property, plant and equipment (PPE) comprise less than 50% of its assets, computed as follows: acEHCD December 31, 2018 December 31, 2017 Real properties: Furniture and fixtures Php _______ Php _______ Office equipment _______ _______ Tools and instruments _______ _______ Machineries and equipment _______ _______ Leasehold improvement _______ _______ Personal protective equipment _______ _______ Subtotal _______ _______ Total assets _______ _______ Real property interest (% of Subtotal to Total Assets) 12.36% 25.37% Accordingly, the capital gains derived by Osa SG from the sale of its shares in Osa PH to Servflo SG 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, as amended by the Republic Act No. 10963, otherwise known as the Tax Reform for Acceleration and Inclusion (TRAIN) Law, 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 fair market value (FMV) of the property exceeded the value of the consideration shall be deemed a gift subject to donor's tax, except if the transaction is made in the ordinary course of business ( i.e. , bona fide , at arm's length, and free from any donative intent), 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. Provided, however , That a sale, exchange, or other transfer of property made in the ordinary course of business (a transaction which is a bona fide , at arm's length, free from any donative intent), will be considered as made for an adequate and full consideration in money or money's worth." Based on Osa PH's AFS as of December 31, 2018, the FMV of the shares sold by Osa SG is Php______________, which resulted in a deemed gift of Php______________, as computed below: Stockholders' equity Php ______________ Divide by: Outstanding shares _______ FMV per share _______ Multiply by: Shares sold _______ FMV of shares sold ______________ Less: Consideration ______________ Deemed gift ______________ Considering that Osa SG failed to establish that the transfer of its shares in Osa PH to Servflo was made in the ordinary course of business, i.e. , the transaction is bona fide , at arm's length, free from any donative intent, the excess of the FMV of the shares over the consideration is, therefore, deemed a gift subject to donor's tax at the rate of 6% under Section 99 of the Tax Code, thus: "SEC. 99. Rates of Tax Payable by Donor . (A) In General. The tax for each calendar year shall be six percent (6%) computed on the basis of the total gifts in excess of Two hundred fifty thousand pesos (P250,000) exempt gift made during the calendar year." Documentary stamp tax Finally, under Section 175 of the Tax Code, as amended by the TRAIN Law, the transfer of shares in Osa PH is subject to documentary stamp tax of Php1.50 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 sale, 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 One peso and fifty centavos (P1.50) on each Two hundred pesos (P200) or fractional part thereof, of the par value of such due-bill, certificate of obligation or 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 documentary stamp tax herein prescribed shall be equivalent to fifty percent (50%) of the documentary stamp tax paid upon the original issue of said stock." EcTCAD 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 rate on January 4, 2019: US$1.00 = Php52.6250. 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).