Navarro Amper and Co.

March 8, 2018 ITAD BIR RULING NO. 028-18 Article 13 Philippines-Japan tax treaty, as amended Navarro Amper and Co. 19th Floor, Net Lima Plaza 5th Avenue corner 26th Street Bonifacio Global City Taguig City Attention: AAA ________________ BBB ________________ Gentlemen : This refers to your tax treaty relief application filed on July 4, 2014 requesting confirmation that capital gains derived by Nippon Express Company Ltd. (" Nippon Japan ") from the transfer of its shares of stock in Nippon Express Philippines Corporation (" Nippon Philippines ") and NEP Logistics, Inc. (" NEP Logistics ") to Nippon Express (South Asia & Oceania) Pte. Ltd. (" Nippon Singapore ") 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 HTcADC FACTS Nippon Japan 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 Status of Taxable Person issued by the Shiba Tax Office in Japan. Nippon Japan is engaged in rail freight forwarding, truck transportation, truck freight forwarding, marine transportation, and coastal shipping, among others. Based on the Certificate of Cancellation of License of a Foreign Corporation issued by the Securities and Exchange Commission, Nippon Japan 's license to transact business in the Philippines has been cancelled by the commission on February 16, 2001. Nippon Singapore is a foreign corporation organized and existing under the laws of Singapore. On the other hand, Nippon Philippines is a domestic corporation organized and existing under the laws of the Philippines. Based on its General Information Sheet (" GIS ") and Audited Financial Statements (" AFS ") as of December 31, 2013, Nippon Philippines is engaged in forwarding for combined transportation by air, sea or land from one point of receipt to a point of destination, and in operating container depot, warehousing, storage, hauling and packing facilities, among others. NEP Logistics is also a domestic corporation organized and existing under the laws of the Philippines. Based on its GIS and AFS as of December 31, 2013, NEP Logistics is engaged in warehousing, including establishment of a warehouse facility for the storage, deposit, safekeeping of goods. Nippon Philippines and NEP Logistics are wholly-owned subsidiaries of Nippon Japan where the latter holds 246,556 common shares (95.08%) of Nippon Philippines and 81,495 common shares (99.99%) of NEP Logistics . Each Nippon Philippines share has a par value of P_____ or a total of P__________. Each NEP Logistics share has a par value of P_____ or a total of P__________. As of December 31, 2013, the ratio of the companies' real property over their total assets is 5.06% for Nippon Philippines and 26.70% for NEP Logistics . The fair market value (" FMV ") (total assets minus total liabilities) of Nippon Philippines shares amounts to P ___________ , or P ___________ for those shares held by Nippon Japan . The FMV of Nippon Philippines shares amounts to P ___________ , or P ___________ for those shares held by Nippon Japan . On July 24, 2014, Nippon Japan and Nippon Singapore entered into two Deeds of Assignment of Shares of Stock where Nippon Japan transferred to Nippon Singapore all its 246,556 common shares in Nippon Philippines and 81,495 common shares in NEP Logistics . In consideration, Nippon Singapore will issue shares to Nippon Japan at a deemed consideration of ___________ (P ___________ ) 2 for the Nippon Philippines shares and ___________ (P ___________ ) 3 for the NEP Logistics shares. 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 derived by a foreign corporation not engaged in trade or business in the Philippines from the disposition of shares in a domestic corporation are subject to capital gains 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: " 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 4, Article 13 of the Philippines-Japan tax treaty provides: "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. Relative thereto, under Section 2 (b) of Revenue Regulations No. 4-86, 4 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: aScITE " 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 Nippon Philippines' and NEP Logistics' RPI is 5.06% and 26.70%, respectively, and not more than 50%, any gains derived by Nippon Japan from the transfer of its shares in those domestic corporations to Nippon Singapore are exempt from capital gains tax pursuant to paragraph 4, Article 13 of the Philippines-Japan tax treaty. B. Donor's tax As described above, the FMV of the shares of Nippon Philippines (P ___________ ) and NEP Logistics (P ___________ ) is greater than the consideration received by Nippon Japan for these shares (P ___________ and P ___________ , respectively). This being the case, these transfers are subject to donor's tax under Section 100 of the Tax Code and Section 7 (c.1.4) of Revenue Regulations No. 6-2008, 5 which provide: " 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." " 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(A)(7)(c), 28(B)(5)(c) OF THE TAX CODE, AS AMENDED. xxx xxx xxx ( c) Determination of Amount and Recognition of Gain or Loss. (c.1) Determination of Selling Price. In determining the selling price, the following rules shall apply: xxx xxx xxx (c.1.4) In case the fair market value of the shares of stock sold, bartered, or exchanged is greater than the amount of money and/or fair market value of the property received, the excess of the fair market value of the shares of stock sold, bartered or exchanged over the amount of money and the fair market value of the property, if any, received as consideration shall be deemed a gift subject to the donor's tax under Sec. 100 of the Tax Code, as amended." Note that Section 100 and Section 7(c.1.4) treat as deemed gift (and not as actual donation) the difference between the higher FMV of the shares transferred and the lower consideration for such shares. The elements of donation are reiterated by the Supreme Court in Republic of the Philippines vs. David Rey Guzman and the Register of Deeds of Bulacan, Meycauayan Branch, G.R. No. 132964, February 18, 2000, as follows: (1) reduction in the patrimony or property of the donor, (2) increase in the patrimony or property of the donee, and (3) intent on the part of the donor to do an act of liberality or generosity. Under Section 100, the fact that consideration is involved negates already the third element of donation, which is, liberality or generosity on the donor's part. Nonetheless, Section 100 applies to transfer of shares for less than adequate and full consideration regardless of the purpose underlying the transfer. DETACa C. Documentary stamp tax Finally, under Section 175 of the Tax Code, the transfer of the Nippon Philippines and NEP Logistics under the two Deeds of Assignment 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. 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. Bangko Sentral ng Pilipinas exchange rate on July 14, 2014: 1 = P0.4266. See http://www.bsp.gov.ph/dbank_reports/ExchangeRates_2 asp. 3. Ibid. 4. Determination of Whether the Assets of a Corporation Consist Principally of Real Property Interest under the Philippine Tax Treaties . 5. Consolidated Regulations Prescribing the Rules on the Taxation of Sale, Barter, Exchange or Other Disposition of Shares of Stock Held as Capital Assets .