Romulo Mabanta Buenaventura

March 11, 2020 ITAD BIR RULING NO. 025-20 Article 13 Philippines-Japan tax treaty Romulo Mabanta Buenaventura Sayoc & De Los Angeles 21st Floor, Philamlife Tower 8767 Paseo de Roxas 1226 Makati City Attention: AAA _______________ Gentlemen : This refers to your tax treaty relief application dated January 10, 2018 requesting confirmation that the transfer by Mitsubishi Corporation ("Mitsubishi") of its shares in Imasen Philippine Manufacturing Corporation ("IPMC") to Imasen Electric Industrial Co., Ltd. ("IEIC") is 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") , as amended. FACTS Mitsubishi is a foreign corporation organized and existing under the laws of Japan and a resident thereof based on its amended Articles of Incorporation and Certificate of Residency issued by the Kujimachi Tax Office in Japan. The company is primarily engaged in operating diversified businesses including the purchase and sale, production, manufacturing and development of products/resources, as well as financial/logistic business, new business development, and providing various services, in a broad range of fields including energy, metals, machinery, chemicals, foodstuff, consumer goods, infrastructure and real property, either through Mitsubishi itself, or through other companies in which Mitsubishi holds shares or interests. On the other hand, IPMC is a domestic corporation engaged primarily in the design, development, assembly and manufacture of car components and accessories. Based on its amended General Information Sheet for 2016 and Corporate Secretary's Certificate, Mitsubishi holds 16,250 shares of IPMC , with a par value of P __________ each or total par value of P _______________ , which represent 10% ownership in IPMC . CAIHTE On December 11, 2017, Mitsubishi entered into a Deed of Sale of Shares of Stock whereby Mitsubishi sold its 16,250 shares in IPMC to IEIC for a consideration of _______________ Japanese Yen (JPY). Based on IPMC 's Audited Financial Statement ("AFS") as of December 31, 2017 and 2016, its real property interests as of these dates are 16.06% and 12.06% , respectively, to wit: December 31, 2017 December 31, 2016 A. Total Assets (as adjusted based on Appraisal Report) JPY __________ JPY __________ B. Real Property (as adjusted based on Appraisal Report) B.1 Building __________ __________ B.2 Leasehold Improvements __________ __________ B.3 Machinery, Tools, Fixtures and Equipment __________ __________ B.4 Office Furniture, Fixtures and Equipment __________ __________ B.5 Construction in progress __________ __________ B.6 Refundable Deposits __________ __________ B.7 Prepaid Rent __________ __________ Total __________ __________ C. Real Property Interest (B/A x 100) 16.06% 12.06% Adjusted Property and Equipment as per Appraisal Report: Per AFS in JPY Per Appraisal Report in PHP Per Appraisal Report in JPY (@2.2447) 1 Whichever is Higher Adjustment in Property and Equipment Building ________ ________ ________ ________ ________ Leasehold Improvements ________ ________ ________ ________ - Machinery ________ ________ ________ ________ ________ Office Furniture ________ - - ________ - CIP ________ - - ________ - Property and Equipment ________ ________ ________ Moreover, based on the AFS, the fair market value ("FMV") of the subject shares as of December 31, 2017, or less than a month after the transfer on December 11, 2017, is JPY ________________ , which is more than the consideration of JPY ________________ , to wit: Adjusted Total assets Total assets as per AFS 12/31/2017 JPY ___________ Adjustments in Property and Equipment ___________ JPY ___________ Total liabilities ___________ FMV (Adjusted Net Asset) ___________ Ratio of shares held by Mitsubishi 10.00% FMV of shares held by Mitsubishi JPY ___________ ============ Finally, the income subject of this ruling is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceeding, or judicial appeal. DETACa RULING A. Income tax In reply, please be informed that Sections 28 (B) (5) (c) and 32 (B) (5) of the National Internal Revenue Code of 1997 ("Tax Code") , as amended, provide: " 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%" " Sec. 32. Computation of 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." Based on the aforesaid provisions, capital gains derived by a nonresident foreign corporation from the sale of shares of stock not traded in a stock exchange shall, in general, be subject to income tax at the rate of 5% to 10%. Such income may, however, be exempt from tax to the extent required by any treaty obligation binding upon the Philippine government. Relative thereto, paragraph 4 Article 13 of the Philippines-Japan tax treaty provides that gains from the alienation of shares of a domestic corporation, the property of which consists principally of immovable property situated in the Philippines, may be taxed in the Philippines, 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 Section 2 (b) of Revenue Regulations ("RR") 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") 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 IPMC 's real property interest as of December 31, 2017 and 2016 are 16.06% and 12.06% , respectively, way below the threshold of 50% , its assets do not consist principally of immovable property. This being so, any gains derived by Mitsubishi from such sale are not subject to capital gains tax imposed under the Tax Code. aDSIHc B. Donor's Tax However, with respect to donor's tax , Section 100 3 of the Tax Code provides: " 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." With the issuance of Revenue Regulations No. 06-2013, the Bureau has tightened its rules in computing the FMV of shares not traded through a local stock exchange, and has thus adopted the "Adjusted Net Asset Method," viz. : " SECTION 2. Sale, Barter or Exchange of Shares of Stock Not Traded Through a Local Stock Exchange Pursuant to Secs. 24 (C), 25 (A)(3), 25 (B), 27 (D) (2), 28 (A) (7) (C), 28 (B) (5) (C) of The Tax Code, as Amended. Sec. 7 of RR No. 06-2008 is hereby amended to read as follows: "SEC. 7. Sale, Barter or Exchange of Shares of Stock Not Traded Through a Local Stock Exchange Pursuant to Secs. 24 (C), 25 (A)(3), 25 (B), 27 (D) (2), 28 (4) (7) (C), 28 (B) (5) (C) of The Tax Code, as Amended. xxx xxx xxx (c.2) Definition of "fair market value" of the Shares of Stock. For purposes of this Section, "fair market value" of the shares of stock sold shall be: (c.2.1) x x x (c.2.2) In the case of shares of stock not listed and traded in the local stock exchanges, the value of the shares of stock at the time of sale shall be the fair market value. In determining the value of the shares, the Adjusted Net Asset Method shall be used whereby all assets and liabilities are adjusted to fair market values. The net of adjusted asset minus the liability values is the indicated value of the equity. For purposes of this section, the appraised value of real property at the time of sale shall be the higher of (1) The fair market value as determined by the Commissioner, or (2) The fair market value as shown in the schedule of values fixed by the Provincial and City Assessors, or (3) The fair market value as determined by Independent Appraiser." (underlining ours) Using the prescribed method, the adjusted FMV of the subject shares is JPY_____________ as shown in the above computation. Since the FMV of the IPMC shares sold is greater than the selling price or consideration of JPY_____________, the excess of JPY_____________ shall be deemed a gift subject to the donor's tax . Under Section 100 of the Tax Code, where property (other than real property) is transferred for less than adequate and full consideration in money or money's worth, the excess between the higher FMV of the property and the lower consideration received by the transferor is deemed a gift subject to donor's tax. ETHIDa The use of the term fair market value in the above-mentioned provision presupposes a transfer of property between a knowledgeable, willing, and unpressured buyer and a knowledgeable, willing, and unpressured seller in an open market, with the latter relinquishing its ownership over the property. Hence, if the consideration received or demanded by the seller is below the FMV of the sold property, the deficit shall be deemed a gift subject to donor's tax. However, Section 100 does not apply to a business reorganization between or among related entities where, before and after the transfer of shares, the ultimate parent of these entities remains the beneficial owner of the shares. Note that the phrase "deemed a gift" implies that even if the above transaction is not in the nature of a donation, where the three elements of donation must be present ( i.e. , reduction in the property of the donor; increase in the property of the donee; and intention of the donor to do an act of liberality), 4 the resulting deficit in consideration is deemed a donation subject to donor's tax. In the case of the Philippine American Life and General Insurance Company vs. The Secretary of Finance and the Commissioner of Internal Revenue , G.R. No. 210987, dated November 24, 2014, the Court ruled in this wise: "The absence of donative intent, if that is 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's no actual donation, the difference in price is considered a donation by fiction of law." C. Documentary stamp tax Finally, under Section 175 of the Tax Code, the transfer of the said IPMC shares is subject to documentary stamp tax as follows: " 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. cSEDTC Very truly yours, (SGD.) CAESAR R. DULAY Commissioner of Internal Revenue Footnotes 1. Bangko Sentral ng Pilipinas Reference Exchange Rate Bulletin as of December 11, 2017. 2. Determination of Whether the Assets of a Corporation Consist Principally of Real Property Interest under the Philippine Tax Treaties . 3. As amended by Republic Act No. 10963 otherwise known as the Tax Reform for Acceleration and Inclusion (TRAIN Law). 4. Republic of the Philippines vs. David Rey Guzman and the Register of Deeds of Bulacan, Meycauayan Branch , G.R. No. 132964, February 18, 2000.