The Manufacturers Life Insurance Company Philippines, Inc.

March 9, 2018 ITAD BIR RULING NO. 032-18 Article XIII (Gains from the Alienation of Property) Philippines- Canada tax treaty The Manufacturers Life Insurance Company Philippines, Inc. LKG Tower 6801 Ayala Avenue 1226 Makati City Attention: AAA __________ Gentlemen : This refers to your tax treaty relief application filed on July 27, 2012 requesting confirmation that capital gains derived by The Manufacturers Life Insurance Company (" Manulife Canada ") from the transfer of its shares of stock in The Manufacturers Life Insurance Company Philippines Inc . (" Manulife Philippines ") to Manulife Century Holdings (Netherlands) B.V. (" Manulife Netherlands ") 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 "). HEITAD FACTS Manulife Canada is a foreign corporation organized and existing under the laws of Canada and a resident thereof based on its Certificate of Residency issued by the Canada Revenue Agency and the Letters Patent of Amalgamation issued by the Minister of Finance of Canada under the Insurance Companies Act. Manulife Canada operates as a life insurance company in Asia, Canada, the United States, and internationally. It offers financial protection and wealth management products and services to personal and business clients; and asset management services to institutional customers. The company provides various individual life insurance, and individual and group long-term care insurance. It also offers wealth management products, such as pension contracts, and mutual fund products and services; retirement products to group benefit plans; and annuity contracts with non-guaranteed, partially guaranteed, and fully guaranteed investment options through general and separate account products, as well as various banking products, such as deposit and credit products to Canadian customers. 1 Manulife Netherlands is a foreign corporation organized and existing under the laws of the Netherlands. It operates as a subsidiary of Manulife Century Investments (Netherlands) B.V. 2 Manulife Philippines is a domestic corporation organized and existing under the laws of the Philippines. Based on its General Information Sheet in 2012 and Audited Financial Statements (" AFS ") as of December 31, 2011, Manulife Philippines is engaged in insurance business in the Philippines including life insurance, accident and selling other insurance products. On July 2, 2012, Manulife Canada and Manulife Netherlands entered into five Deeds of Issuance where Manulife Canada transferred to Manulife Netherlands its 930,000 Class B common shares in Manulife Philippines (including nine shares held by nine nominee individuals), each share with a par value of P__________ or total par value of P__________. In consideration, Manulife Netherlands will issue 17,950,948 new shares to Manulife Canada , each share with a par value of _____ euro or total par value of __________ (P__________). 3 These transactions resulted in presumed net capital gains of P__________ in favor of Manulife Canada . Based on its AFS, the ratio of real property over total assets of Manulife Philippines is 0.3849% in 2011 and 0.3574% in 2010, to wit: December 31, 2011 December 31, 2010 Total assets P __________ P __________ Real property - Property and equipment (net of depreciation) to include electronic data processing equipment; leasehold improvement; and furniture and fixtures __________ __________ - Prepayments __________ __________ Total __________ __________ Ratio of real property over total assets 0.3849% 0.3574% Finally, as of December 31, 2011, Manulife Philippines has total equity of P__________ and total outstanding shares of 4,250,000. The fair market value (" FMV ") for each share is P__________; hence, the FMV of the 930,000 shares transferred to Manulife Netherlands is P__________. RULING Capital gains tax In reply, please be informed that under Section 28 (B) (5) (c) of the National Internal Revenue Code of 1997, as amended (" Tax Code "), net capital gains derived by a foreign corporation not engaged in trade or business in the Philippines from the disposition of unlisted shares of a domestic corporation are subject to capital gains tax at the rate of 5% or 10%: " 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 Code, such gains are exempt to the extent required by any treaty obligation upon the Philippine government, thus: ATICcS " 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 paragraph 3, Article XIII (Gains from the Alienation of Property) of the Philippines-Canada tax treaty, which reads: "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 Article XIII, gains from the alienation of shares of a domestic corporation may be taxed in the Philippines if the assets of the corporation consist principally of real property situated in the Philippines. In this connection, Section 2 (b) of Revenue Regulations No. 4-86 (" RR 4-86 ") 4 defines the term "principally" as more than 50% of the entire assets of the corporation in terms of value, thus: " 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 the ratio of real property over total assets of Manulife Philippines as of December 31, 2011, prior to the transfer of those company's shares on July 2, 2012, is 0.3849% only , and less than 50%, Manulife Philippines assets do not consist principally of real property under Section 2 (b) of RR 4-86. Therefore, pursuant to paragraph 3, Article XIII of the Philippines-Canada tax treaty, net capital gains derived by Manulife Canada from the transfer of its shares in Manulife Philippines to Manulife Netherlands are exempt from capital gains tax imposed under Section 28 (B) (5) (c) of the Tax Code. Donor's tax As mentioned above, the transferred shares of Manulife Philippines have an FMV of P__________, which is higher than the consideration of P__________ received for those shares. Under Section 100 of the Tax Code, as implemented by Section 7 (c.1.4) of Revenue Regulations No. 6-2008 , 5 the excess between the higher FMV and the lower consideration is deemed a gift subject to donor's tax , thus: " 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." (Emphasis ours) Under Section 10 (B) of Revenue Regulations No. 2-2003 , 6 the applicable rate on donation made between business organizations is 30%, where such transaction is considered donation made to a stranger, thus: " 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." Documentary stamp tax Finally, under Section 175 of the Tax Code, the transfer of the said Manulife Philippines shares is subject to documentary stamp tax equivalent to P0.75 on each P200.00, or fractional part thereof, of the par value of the shares, to wit: " 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. TIADCc Very truly yours, (SGD.) CAESAR R. DULAY Commissioner of Internal Revenue Footnotes 1. https://www.bloomberg.com/research/stocks/private/snapshot.asp?privcapId=4163321 . 2. https://www.bloomberg.com/research/stocks/private/snapshot.asp?privcapId=111947104 . 3. BSP exchange rate as of July 2, 2012: 1 euro = P53.4538. 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. 6. 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.