Isla Lipana and Co.

February 28, 2018 ITAD BIR RULING NO. 021-18 Article XIII (Gains from the Alienation of Property) Philippines- Canada tax treaty Isla Lipana and Co. 29th Floor, Philamlife Tower 8767 Paseo de Roxas Makati City Attention: AAA ________________ Gentlemen : This refers to your tax treaty relief application filed on December 14, 2012 requesting confirmation that any capital gains derived by a) Transcom International Solutions, Inc. ("Transcom International") (formerly Nucomm Global Solutions, Inc. ) from the transfer of its shares of stock in Transcom Worldwide Philippines, Inc. ( "Transcom Philippines" ) to Transcom Worldwide (North America), Inc. ( "New Transcom North America" ); and b) New Transcom North America from the transfer of the same shares to Transcom Worldwide (Philippines) Holding, Inc. ( "Transcom Philippines Holding" ). ScaCEH are exempt from capital gains tax pursuant to the Convention between the Philippines and Canada for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Canada tax treaty") . FACTS Transcom International is a foreign corporation organized and existing under the laws of Canada based on its Articles of Incorporation. It is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration of Company issued by the Securities and Exchange Commission ( "SEC" ). New Transcom North America is also a foreign corporation organized and existing under the laws of Canada and a resident thereof based on its Articles of Incorporation and Certification of Residency issued by Canada Revenue Agency. It is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration of Company issued by SEC. On the other hand, Transcom Philippines is a domestic corporation organized and existing under the laws of the Philippines. Its primary purpose is to engage in and carry on the business of operating one or more customer contact centers providing outsourced customer support services. These services include customer acquisition, customer care, technical support and related services through phone, web, e-mail or fax. It also provides operational and information technology professional services for both outsourced and in-house contact centers focused on delivering productivity improvements and cost efficiencies. Transcom Philippines is a wholly-owned subsidiary of Transcom International where it owns 399,993 of the 400,000 common shares (99.99%) of Transcom Philippines , each share with par value of P_____ or a total of P ___________ . The other seven shares are held by Filipino and foreign nominees. First transfer: Amalgamation Agreement On November 30, 2012, Transcom International and two other corporations in Canada, Transcom Worldwide (Canada), Inc. ( "Transcom Canada" ) and Transcom Worldwide (North America), Inc. ( "Old Transcom North America" ), entered into an Amalgamation Agreement where the three corporations (collectively, the amalgamating corporations ) will cease to exist to form a new corporation (the amalgamated corporation ). The amalgamated corporation will be called also as Transcom Worldwide (North America), Inc. , which is the New Transcom North America referred to above. New Transcom North America possesses all property, rights, privileges and franchises and is subject to all liabilities, including civil, criminal, and quasi-criminal, and all contracts, disabilities and debts of each of the amalgamating corporations. The articles of amalgamation are deemed to be the articles of incorporation of the amalgamated corporation and the certificate of amalgamation is deemed to be the certificate of incorporation of that corporation. The Ministry of Government Services of Ontario, Canada approved the articles of amalgamation through the issuance of a certificate on December 1, 2012. The amalgamating corporations are directly and indirectly owned by Transcom Worldwide S.A. of Luxembourg ( "Transcom Luxembourg" ): Transcom International is a wholly-owned subsidiary of Transcom North America; Old Transcom North America of Transcom Canada ; and Transcom Canada of Transcom Luxembourg . Similarly, with the cessation of existence of the amalgamating corporations, the newly formed amalgamated corporation becomes a wholly-owned subsidiary of Transcom Luxembourg and the shares in Transcom Philippines previously held by Transcom International are transferred to the amalgamated corporation. The amalgamated corporation is capitalized as follows: a) On a one-to-one ratio, all 31,472 issued and outstanding shares of Transcom Canada are converted into 31,472 shares of the amalgamated corporation; b) All outstanding shares of Old Transcom North America are cancelled without any repayment of capital in respect thereof; and c) All outstanding shares of Transcom International are cancelled without any repayment of capital in respect thereof. TIEHDC Second transfer: Share Purchase Agreement On December 18, 2012, New Transcom North America (the amalgamated corporation) entered into a Share Purchase Agreement with Transcom Worldwide (Philippines) Holding, Inc. ( "Transcom Philippines Holding" ), a domestic corporation, where New Transcom North America transferred all the 400,000 common shares in Transcom Philippines to Transcom Philippines Holding for consideration of $ ___________ (P ___________ ; 1:41.04). 1 Based on Transcom Philippines' Audited Financial Statements as of December 31, 2011 and Interim Financial Statements as of November 30, 2012, the ratio of real property over its total assets is 9.87% and 7.34%, respectively. The fair market value ( "FMV" ) of each Transcom Philippines share as of December 31, 2011 is P_____. In the first transfer, the FMV of 399,993 shares transferred from Transcom International to New Transcom North America amounted to P ___________ ; in the second transfer, the FMV of 400,000 shares transferred from New Transcom North America to Transcom Philippines Holding amounted to P ___________ . RULING A. Income tax In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997, as amended ( "Tax Code" ), capital gains from the disposition of unlisted shares of a domestic corporation and derived by a foreign corporation are subject to income tax at the rate of 5 or 10 percent, 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 if required under any treaty obligation on the Philippines, thus: HCSAIa " 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." Relative thereto, paragraph 3, Article XIII (Gains from the Alienation of Property) of the Philippines-Canada tax treaty provides: "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." Under paragraph 3, 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. Relative thereto, 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) Accordingly, since Transcom Philippines' RPI as of December 31, 2011 and November 30, 2012 is merely 9.87% and 7.34%, respectively, which is not more than 50%, any capital gains derived from the transfer of all shares in Transcom Philippines , first, from Transcom International to New Transcom North America , and second, from New Transcom North America to Transcom Philippines Holding , are exempt from income tax pursuant to paragraph 3, Article XIII of the Philippines-Canada tax treaty. B. Documentary stamp tax Finally, the first and second transfers of shares in Transcom Philippines as described above are subject to documentary stamp tax under Section 175 of the Tax Code below: ACcaET "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. See http://www.bsp.gov.ph/dbank_reports/ExchangeRates_2.asp. 2. Determination of Whether the Assets of a Corporation Consist Principally of Real Property Interest under the Philippine Tax Treaties .