ITAD BIR Ruling No. 030-12

February 1, 2012 ITAD BIR RULING NO. 030-12 Article 13, Philippines-Japan tax treaty, as amended Sycip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Attention: Luis Jose P. Ferrer Partner, Tax Advisory and Advocacy Group Gentlemen : This refers to your application for tax treaty relief dated April 29, 2011 requesting confirmation that gains derived by Toshiba Storage Device Corporation ("Toshiba Storage") from the sale of its shares in Toshiba Storage Device (Philippines),Inc. ("Toshiba Storage Philippines") (formerly Fujitsu Computer Products Corporation of the Philippines ) to Toshiba Corporation ("Toshiba") are exempt from income 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 ATHCDa Facts It is represented that Toshiba Storage is a corporation organized and existing under the laws of Japan and is a resident thereof based on its Articles of Incorporation and on the Certificate of Status of Taxable Person issued by the Shiba Taxation Office in Japan on April 15, 2011; that Toshiba Storage is located at 1-1, Shibaura 1-chome, Minato-ku, Tokyo, Japan; that Toshiba Storage 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 on May 20, 2010; and that, on the other hand, Toshiba Storage Philippines is a domestic corporation located at Special Export Processing Zone 2, Carmelray Industrial Park 1, Canlubang, Calamba City, Laguna, Philippines. It is further represented that on January 19, 2010, Toshiba Storage and Fujitsu Ltd. ("Fujitsu") entered into a Share Transfer Agreement where Fujitsu ,in consideration of the amount of US$130,349,000.00, sold to Toshiba Storage its 383,261,721 shares of stock in Toshiba Storage Philippines and 5 shares held by nominees of Fujitsu Hiroshi Nakamura, Tomoji Sato, Tsuyoshi Furukawa, Hiromu Kawakami and Masaaki Suzuki; that each share has a par value of P10.00 or a total of P3,832,617,260.00; that Fujitsu is a corporation organized and existing the laws of Japan and located also at 1-1, Kamikodanaka 4-chome, Nakahara-ku, Kawasaki, Japan; and that on April 1, 2011, Toshiba Storage and Toshiba entered into a Share Transfer Agreement where Toshiba Storage, in consideration of the amount of US$135,885,345.00, then sold to Toshiba its 383,261,721 shares of stock in Toshiba Storage Philippines and 5 shares held by nominees of Toshiba Storage Isao Morita, Kenji Masumoto, Yoshiyuki Yano, Hiroyuki Kuno and Masaaki Suzuki. It is further represented based on the Interim Balance Sheet of Toshiba Storage Philippines as of March 31, 2011 that the ratio of immovable property (property, plant and equipment) of Toshiba Storage Philippines over its total assets as of that date is 27.18 percent, to wit: Immovable property Ratio = Total assets US$57,364,756.98 US$211,078,699.17 27.18 percent It is finally represented that the capital gains subject of this ruling are not under investigation, on-going audit, administrative protest, claim for refund or issuance of tax credit certificate, collection proceedings, or judicial appeal, based on the Certification issued by the Vice President for Finance of Toshiba Storage Philippines on April 19, 2011. A. On 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 Toshiba Storage are subject to income tax as follows: "SEC. 28. Rates of Income Tax on Foreign Corporations. xxx xxx xxx (B) Tax on Nonresident Foreign Corporation. xxx xxx xxx (5) Tax on Certain Incomes Received by Nonresident Foreign Corporations. xxx xxx xxx (c) Capital Gains from Sale of Shares of stock no 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 Code, such gains may be exempt from income tax or subject to a reduced rate to the extent required by any treaty obligation on the Philippines, thus: ESHAcI "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." For this purpose, you invoke the Philippines-Japan tax treaty. Article 13 thereof provides: "Article 13 1. Gains derived by a resident of a Contracting State from the alienation of immovable property as defined in paragraph 2 of Article 6 and situated in the other Contracting State may be taxed in that other Contracting State. 2. Gains from the alienation of any property, other than immovable property, forming part of the business property of a permanent establishment which an enterprise of a Contracting State has in the other Contracting State or of any property, other than immovable property, pertaining to a fixed base available to a resident of a Contracting State in the other Contracting State for the purpose of performing independent personal services, including such gains from the alienation of such a permanent establishment (alone or together with the whole enterprise) or of such a fixed base, may be taxed in that other Contracting State. 3. Gains derived by a resident of a Contracting State from the alienation of ships or aircraft operated in international traffic and any property, other than immovable property, pertaining to the operation of such ships or aircraft shall be taxable only in that Contracting State. 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. 5. Gains from the alienation of any property other than those referred to in paragraphs 1, 2, 3 and 4 shall be taxable only in the Contracting State of which the alienator is a resident." Under paragraphs 1, 2 and 4 of Article 13, gains derived by a resident of Japan from the alienation of the following properties situated in the Philippines may be taxed in the Philippines: a) Immovable or real property; b) Movable or personal property forming part of the business property of a permanent establishment which an enterprise of Japan has in the Philippines, or pertaining to a fixed base available to a resident of Japan in the Philippines for the purpose of performing independent personal services, including the alienation of the whole permanent establishment (alone or together with the whole enterprise) or the whole fixed base; and c) Shares of stock of a company, partnership, or trust the property of which consists principally of immovable property situated in the Philippines. On the other hand, under paragraphs 3 and 5 of the same article, gains derived by a resident of Japan from the alienation of ships or aircraft situated in the Philippines and operated in international traffic and any movable or personal property pertaining thereto, and of any property not dealt with in items (a),(b) and (c) above, are exempt from tax. Relative thereto, Section 2 (b) of Revenue Regulations No. 4-86 2 defines "principally" to be that the ratio of immovable property of Toshiba Storage Philippines over its total assets is more than 50 percent, thus: ''Section 2. Definitions. For purposes of these regulations, the following terms and phrases shall be understood to mean xxx xxx xxx b) 'Principally','wholly or principally','directly principally' or 'attributable' more than fifty percent of the entire assets in terms of value;" Accordingly, since the ratio of immovable property of Toshiba Storage Philippines over its total assets one day before the sale of its shares on April 1, 2011 is merely 27.18 percent, capital gains derived by Toshiba Storage from the sale of these shares to Toshiba amounting to US$5,536,345.00 (gross selling price of US$135,885,345.00 less acquisition cost of US$130,349,000.00) 3 are exempt from income tax, pursuant to paragraph 5, Article 13 of the Philippines-Japan tax treaty. SHAcID B. On documentary stamp tax Finally, pursuant to Section 175 of the Tax Code, the sale of shares of Toshiba Storage Philippines is subject to documentary stamp tax equivalent to P0.75 for every P200.00 (or a fraction thereof) of the par value of the shares, thus: "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.) KIM S. JACINTO-HENARES 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 under the Philippine Tax Treaties. 3. Pursuant to Section 7 (c.3.1) of Revenue Regulations No. 6-2008 (Consolidated Regulations Prescribing the Rules on the Taxation of Sale, Barter, Exchange or Other Disposition of Shares of Stock Held as Capital Assets), which provides: "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.3.1) Basis for Determining Gain or Loss from Sale or Disposition of Shares of Stock. Gain or loss from the sale, barter or exchange of property, for a valuable consideration, shall be determined by deducting from the amount of consideration contracted to be paid, the vendor/transferor's basis for the property sold or disposed plus expenses of sale/disposition, if any."