Castillo Laman Tan Pantaleon and San Jose Law Firm

February 21, 2018 ITAD BIR RULING NO. 018-18 Article 13 Philippines-Japan tax treaty, as amended Castillo Laman Tan Pantaleon and San Jose Law Firm The Valero Tower 122 Valero Street, Salcedo Village Makati City Attention: AAA BBB Gentlemen : This refers to your tax treaty relief application filed on July 4, 2011 requesting confirmation that gains derived by Rohm Fukuoka Company Ltd. ( "Rohm Fukuoka" ) from the transfer of its shares of stock in Rohm Electronics Philippines, Inc. ( "Rohm Philippines" ) to Rohm Apollo Company Ltd. ( "Rohm Apollo" ) are exempt from capital gains tax pursuant to the Convention between the Republic of the Philippines and Japan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Japan tax treaty") . 1 TaDCEc FACTS Rohm Fukuoka is a foreign corporation organized and existing under the laws of Japan and a resident thereof based on its amended Articles of Association and Certificate of Total Historical Records issued by the Fukuoka Legal Affairs Bureau and Certification issued by the Yukuhashi Taxation Office. Rohm Apollo is also a foreign corporation organized and existing under the laws of Japan and a resident thereof based on its Articles of Association and Certificates of Total Historical Records issued by the Fukuoka Legal Affairs Bureau and Residence Certificate issued by the Yame Taxation Office. On the other hand, Rohm Philippines is a domestic corporation organized and existing under the laws of the Philippines. It is engaged in the business of manufacturing, assembling, promoting, selling at wholesale, and exporting electrical and electronic products and components or parts, instruments, appliances and all kinds of products and merchandise, including but not limited to integrated circuits, semiconductors, liquid crystals, print heads, transistors, resistors, capacitors, sensors and computer chips. Based on Rohm Philippines ' General Information Sheet and Corporate Secretary's Certificate, Rohm Philippines has 12,215,637 outstanding and subscribed shares (11,829,433 common and 386,204 preferred), each with a par value of P_____ or a total of P__________. Rohm Fukuoka and Rohm Apollo own respectively 8,068,956 (P__________) and 1,301,949 (P__________) of those common shares accounting for 66.05% and 10.66% ownership in Rohm Philippines . On May 19, 2011, Rohm Fukuoka, Rohm Apollo and Rohm Apollo Device Company Ltd. ( "Rohm Apollo Device" ) (another Japanese company) entered into a Merger Agreement ( "Agreement") with Rohm Fukuoka and Rohm Apollo Device as the companies ceasing to exist and Rohm Apollo as the surviving company. As a result, Rohm Apollo will assume the contracts, assets and liabilities, and all incidental rights and obligations of Rohm Fukuoka and Rohm Apollo Device. Rohm Fukuoka' s 8,068,956 common shares in Rohm Philippines will be transferred to Rohm Apollo . However, Rohm Apollo will not compensate Rohm Fukuoka and Rohm Apollo Device for the assets transferred because they have the same ultimate parent company, that is, Rohm Company Ltd. ( "Rohm" ) of Japan. The merger took effect on June 30, 2011. Based on Rohm Philippines ' Audited Financial Statements as of March 31, 2011 and Interim Financial Statements as of June 30, 2011, the ratio of Rohm Philippines ' real property over its total assets is 31.80% and 31.96%, respectively. RULING A. Capital gains tax In the case at hand, since the transfer by Rohm Fukuoka of its shares in Rohm Philippines to Rohm Apollo is pursuant to a merger where no compensation will be paid by Rohm Apollo to Rohm Fukuoka or the latter's stockholders, this transaction will not result in any capital gains. However, assuming there is compensation, relief is provided under paragraph 4, Article 13 of the treaty, to wit: "4. Gains from the alienation of shares of a company, a partnership or a trust the property of which consists principally of immovable property situated in a Contracting State, may be taxed in that Contracting State." Under paragraph 4, gains from the alienation of shares of a domestic company, the property of which consists principally of immovable property situated in the Philippines, may be taxed in the Philippines. Under Section 2 (b) of Revenue Regulations No. 4-86, 2 the term consisting principally of real or immovable property means that the ratio of real or immovable property over the total assets ( "real property interest" or "RPI" ) of the corporation is more than 50 percent , to wit: " SECTION 2. Definitions. For purposes of these regulations, the following terms and phrases shall be understood to mean b) 'Principally,' 'wholly or principally,' 'directly principally' or 'attributable' more than fifty percent of the entire assets in terms of value" ; (Emphasis ours) As of March 31 and June 30, 2011, Rohm Philippines' RPI is 31.80% and 31.96%, respectively, which is not more than 50%. Hence, under paragraph 4, Article 13 of the Philippines-Japan treaty tax treaty, any resulting gains derived by Rohm Fukuoka are exempt from capital gains tax imposed under Section 28 (B) (5) (c) of the National Internal Revenue Code of 1997, as amended ( "Tax Code" ): " 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%" B. Donor's tax In the absence of compensation, the transfer of those shares constitutes donation subject to donor's tax of 30% under Sections 98 and 99 of the Tax Code: " SEC. 98. Imposition of Tax. (A) There shall be levied, assessed, collected and paid upon the transfer by any person, resident or nonresident, of the property by gift, a tax, computed as provided in Section 99. (B) The tax shall apply whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible. SEC. 99. Rates of Tax Payable by Donor. xxx xxx xxx (B) Tax Payable by Donor if Donee is a Stranger. When the donee or beneficiary is stranger, the tax payable by the donor shall be thirty percent (30%) of the net gifts. . ." The rate of 30% is clarified under Section 10 (B) of Revenue Regulations No. 2-2003, 3 to wit: "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. " (Emphasis ours) C. Documentary stamp tax Finally, under Section 175 of the Tax Code, the transfer of the said shares in Rohm Philippines is subject to documentary stamp tax as follows: cDEHIC " 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 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. Very truly yours, (SGD.) CAESAR R. DULAY Commissioner of Internal Revenue Footnotes 1. As amended by the Protocol Amending the Convention between the Republic of the Philippines and Japan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income effective January 1, 2009. 2. Determination of Whether the Assets of a Corporation Consist Principally of Real Property Interest under the Philippine Tax Treaties. 3. 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.