Angara Abello Concepcion

March 9, 2018 ITAD BIR RULING NO. 033-18 Article XIII (Gains from the Alienation of Property) Philippines- Canada tax treaty Angara Abello Concepcion Regala and Cruz Law Offices 22nd Floor, ACCRALAW Tower 2nd Avenue corner 30th Street Crescent Park West Bonifacio Global City 0399 Taguig City Attention: AAA BBB CCC Gentlemen : This refers to your tax treaty relief application filed on January 5, 2015 requesting confirmation that capital gains derived by CAE International Holdings Ltd. (" CAE International ") from the sale of its shares of stock in Philippine Academy for Aviation, Training, Inc. (" Aviation Academy ") to Asian Aviation Centre of Excellence Sdn. Bhd. (" Asian Aviation ") 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 "). cSEDTC FACTS CAE International is a foreign corporation organized and existing under the laws of Canada and a resident thereof based on its Certificate of Incorporation and Certificate of Residence issued by the Canada Revenue Agency. CAE International operates as a simulator manufacturer and builds global flight training network. It is not registered as a corporation or partnership in the Philippines based on Certification of Non-Registration issued by the Securities and Exchange Commission. Asian Aviation is a foreign corporation organized and existing under the laws of Malaysia. It is a leading training centre in Asia by being completely integrated, and offering various types of training for airline and aviation professionals. On the other hand, Aviation Academy is a domestic corporation organized and existing under the laws of the Philippines. It provides pilot training and technical vocational training, such as cabin crew training, training for aviation management services and training for guest services. Based on Aviation Academy 's Audited Financial Statements (" AFS ") as of December 31, 2014 and 2013 and General Information Sheet in 2014 and Corporate Secretary's Certificate, CAE International holds 45,000,000 Class A and 45,000,000 Class B common shares of Aviation Academy , each with a par value of P_____ and P_____, respectively, or total par value of P__________. CAE International owns 50% of the capital stock of Aviation Academy , which has a subscribed and paid-up capital of P__________, including five Class A common shares held by five nominee individuals with total par value of P_____. On December 31 and 29, 2014, CAE International and Asian Aviation entered into two Deeds of Assignment of Shares of Stock where CAE International transferred to Asian Aviation all its common shares in Aviation Academy and two nominee shares for consideration of P __________ . The transactions resulted in presumed net capital gains of P__________ in favor of CAE International . Based on its AFS, the ratio of real property over total assets of Aviation Academy is 76% in 2014 and 82% in 2013, to wit: December 31, 2014 December 31, 2013 Total assets P__________ P__________ Real property - Property and equipment (net of depreciation) to include flight simulators; airbus procedures trainer; furniture and office equipment; and computer equipment __________ __________ - Office rental deposit __________ __________ - Various lease (as other current asset) 1 __________ __________ - Software installed into computer equipment (net of amortization) (as intangible asset) __________ __________ Total __________ __________ Ratio of real property over total assets 76% 82% Finally, as of December 31, 2014, Aviation Academy has net assets (assets minus liabilities) amounting to P __________ . The fair market value (equivalent to net assets) of the common shares transferred by CAE International to Asian Aviation , constituting 50% of the capital stock of Aviation Academy , is equivalent to 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: " 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: SDAaTC 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 the Philippines. In this connection, Section 2 (b) of Revenue Regulations No. 4-86 (" RR 4-86 ") 2 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 Aviation Academy on the date of the transfer of its shares on December 31, 2014 is 76% , which is more than 50%, Aviation Academy 's assets 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 CAE International from the transfer of its shares in Aviation Academy to Asian Aviation are subject to capital gains tax imposed under Section 28 (B) (5) (c) of the Tax Code. Donor's tax As mentioned above, the transferred shares of Aviation Academy have a fair market value (" 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 , 3 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 , 4 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 Aviation Academy 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. acEHCD Very truly yours, (SGD.) CAESAR R. DULAY Commissioner of Internal Revenue Footnotes 1. Aviation Academy 's other current assets is P __________ in 2014 and P __________ in 2013 to cover various leases and private health care. Since the AFS does not provide a breakdown, it is assumed that half of those assets is for various leases and the other half for private health care. The AFS does not provide a breakdown for various leases and for private health care; hence, the above amounts are the maximum amount. 2. Determination of Whether the Assets of a Corporation Consist Principally of Real Property Interest under the Philippine Tax Treaties. 3. Consolidated Regulations Prescribing the Rules on the Taxation of Sale, Barter, Exchange or Other Disposition of Shares of Stock Held as Capital Assets. 4. 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.