ITAD BIR Ruling No. 044-17

December 5, 2017 ITAD BIR RULING NO. 044-17 Article 13 (Gains from the Alienation of Property) Philippine-Netherlands tax treaty SCCP Land, Inc. Penthouse, Shell House Building 156 Valero St., Salcedo Village 1227 Makati City Attention: AAA BBB Gentlemen : This refers to your tax treaty relief application filed on August 11, 2014 requesting confirmation that liquidating dividends paid by SCCP Land, Inc. ("SCCP") (formerly, The Shell Chemical Company (Philippines), Incorporated ) to Shell Petroleum N.V. ("Shell") are exempt from income tax pursuant to the Convention between the Kingdom of the Netherlands and the Republic of the Philippines for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippine-Netherlands tax treaty") . FACTS Shell is a corporation organized and existing under the laws of Netherlands and a resident thereof based on its Articles of Association and Certificate of Residence issued by the Tax Administration Office of Arnhem in the Netherlands. The primary purpose of Shell is to co-operate in the establishment of; participate in and manage and fund other companies or undertakings active in the field of; the search for, production, transportation and processing of petroleum, natural gas, and other minerals; manufacturing and working up of chemical products, trading in minerals and other products; performing work or having work performed in or on behalf of the production and distribution of electricity, sustainable energy; or in one or more other areas. It is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration of Company issued by the Securities and Exchange Commission. On the other hand, SCCP is a domestic corporation which carries on the business of a real property holding company, based on its amended Articles of Association, General Information Sheet as of May 14, 2010 and Audited Financial Statements ("AFS") as of December 31, 2013. HTcADC SCCP is 55% owned by the Shell Companies in the Philippines Multi-Employer Retirement and 40% owned by Shell of the Netherlands. The remaining 5% is owned by Filipino shareholders. SCCP 's corporate life expired in July 2010. Consequently, it ceased entering into new commercial contracts as of the effective date of the expiration. Its activities pertain mainly to maintenance of its investment properties as well as fulfilling its obligations under the lease agreements which are in effect at reporting date of its AFS as of December 31, 2013. Based on Corporate Secretary's Certificate, on July 24, 2014, the Board of Directors of SCCP approved a resolution authorizing the declaration of liquidating dividends in the amount of P_____ per share totaling P__________ in favor of the stockholders of the company as of July 21, 2010, in proportion to their respective shareholdings. As of that date, Shell holds 1,200,000 class B common shares of SCCP , each share with a par value of P_____ or total value of P__________. Shell is entitled to receive liquidating dividends amounting to P__________. As of December 31, 2013, SCCP has retained earnings amounting to P__________. RULING Income tax In reply, please be informed that for tax treaty characterization purposes, income from the surrender of shares in connection with the liquidation of a company or the reduction of its paid-up capital is regarded as dividends based on the following commentaries of the Organisation for Economic Co-operation and Development Model Tax Convention on Income and on Capital (July 15, 2014), thus: "31. If shares are alienated by a shareholder in connection with the liquidation of the issuing company or the redemption of shares or reduction of paid-up capital of that company, the difference between the proceeds obtained by the shareholder and the par value of the shares may be treated in the State of which the company is a resident as a distribution of accumulated profits and not as a capital gain. The Article does not prevent the State of residence of the company from taxing such distributions at the rates provided for in Article 10: such taxation is permitted because such difference is covered by the definition of the term 'dividends' contained in paragraph 3 of Article 10 and interpreted in paragraph 28 of the Commentary relating thereto, to the extent that the domestic law of that State treats that difference as income from shares. . ." (Page 252) (Emphasis ours) However, as pointed out in the commentaries, that characterization will apply only to the extent that the domestic law of the State treats the income as income from shares (i.e., dividends) . In the Philippines, the difference between the liquidation value or redemption value and the par value of the shares is not deemed as dividends but capital gains (or capital loss , as the case may be) subject to regular income tax rate, as provided under Section 8 of Revenue Regulations No. 6-2008, 1 thus: aScITE " SEC. 8. TAXATION OF SURRENDER OF SHARES BY THE INVESTOR UPON DISSOLUTION OF THE CORPORATION AND LIQUIDATION OF ASSETS AND LIABILITIES OF SAID CORPORATION . Upon surrender by the investor of the shares in exchange for cash and property distributed by the issuing corporation upon its dissolution and liquidation of all assets and liabilities, the investor shall recognize either capital gain or capital loss upon such surrender of shares computed by comparing the cash and fair market value of property received against the cost of the investment in shares. The difference between the sum of the cash and the fair market value of property received and the cost of the investment in shares shall represent the capital gain or capital loss from the investment, whichever is applicable. If the investor is an individual, the rule on holding period shall apply and the percentage of taxable capital gain or deductible capital loss shall depend on the number of months or years the shares are held by the investor. Section 39 of the Tax Code, as amended, shall herein apply in all possible situations. The capital gain or loss derived therefrom shall be subject to the regular income tax rates imposed under the Tax Code, as amended, on individual taxpayers or to the corporate income tax rate, in case of corporations." (Underscoring ours) The same conclusion is reached in Commissioner of Internal Revenue v. Goodyear Philippines, Inc. , G.R. No. 216130 dated August 3, 2016 ("Goodyear case") and Wise & Co., Inc., et al. v. Bibiano L. Meer, Collector of Internal Revenue , G.R. No. 48231 dated June 30, 1947 ("Wise case") . In the Goodyear case, the court ruled that the redemption price paid by a domestic corporation (Goodyear Philippines, Inc.) to its foreign parent (Goodyear Tire and Rubber Company Goodyear) is not ordinary dividends nor accumulated dividends in arrears, to wit: "In light of the foregoing, the Court therefore holds that the redemption price representing the amount of P97,732,314.00 received by GTRC could not be treated as accumulated dividends in arrears that could be subjected to 15% FWT . Verily, respondent's AFS covering the years 2003 to 2009 show that it did not have unrestricted retained earnings, and in fact, operated from a position of deficit. Thus, absent the availability of unrestricted retained earnings, the board of directors of respondents had no power to issue dividends . . . It is also worth mentioning that one of the primary features of an ordinary dividend is that the distribution should be in the nature of a recurring return on stock 46 which, however, does not obtain in this case . As aptly pointed out by the CTA En Banc, the amount of P97,732,314.00 received by GTRC did not represent a periodic distribution of dividend, but rather a payment by respondent for the redemption 47 of GTRC's 3,729,216 preferred shares. . . . All told, the amount of P97,732,314.00 received by GTRC from respondent for the redemption of its 3,729,216 preferred shares were not accumulated dividends in arrears . Contrary to petitioner's claims, it is therefore not subject to 15% FWT on dividends in accordance with Section 28 (B) (5) (b) of the Tax Code." (Emphasis ours) In the Wise case, the court ruled that liquidating dividends paid by a foreign subsidiary (Manila Wine Merchants, Ltd.) to its domestic parent (Wise and Company, Inc.) are not ordinary dividends even if they are called 'dividends,' thus: "More than with the distribution of June 8, 1937, is this true with those declared on July 22, 1937, and paid on August 4 and October 28, 1937, respectively (Stipulation of Facts, par. 5, Record on Appeal, p. 21). The distributions thus declared on July 22, 1937, and paid on August 4 and October 28, 1937, were from the surplus of the Hongkong Company resulting from the active conduct of its business and amounting to P74,182.12, which surplus was augmented to a total of P270,116.59 as a result of the sale of its business and assets to the Manila Company (ibid.) . In both Schedules B and B-1 of the Stipulation of Facts (Record on appeal, pp. 16-18), being minutes of directors' meetings of the Hongkong Co., where authorization and instruction were given to declare and pay in the form of 'dividends' to the shareholders the amounts in question, it was specifically provided that the surplus to be so distributed be that resulting after providing for return of capital and necessary or various expenses, as shown in the balance sheet prepared as of June 1, 1937, and in the reconstructed balance sheet of the same date presented by the company's auditors, it having been resolved in Schedule B-1 that 'any balance remaining to be distributed when final liquidator's account has been rendered and paid' (Record on Appeal, p. 18; emphasis supplied). It thus becomes more evident that those distributions were to be made in the course or as a result of the Hongkong Company's liquidation and that said liquidation was to be complete and final. And although the various resolutions above-mentioned speak of distributions of dividends when referring to those already alluded to, 'a distribution does not necessarily become a dividend by reason of the fact that it is called a dividend by the distributing corporation .' (Holmes Federal Taxes, 6th edition, 774.) The ordinary connotation of liquidating dividend involves the distribution of assets by a corporation to its stockholders upon dissolution. (Klein, Federal Income Taxation, 253-254.) xxx xxx xxx The amounts thus distributed among the plaintiffs were not in the nature of a recurring return on stock in fact, they surrendered and relinquished their stock in return for said distributions, thus ceasing to be stockholders of the Hongkong Company, which in turn ceased to exist in its own right as a going concern during its more or less brief administration of the business as trustee for the Manila Company, and finally disappeared even as such trustee ." (Emphasis ours) Not being dividends, gains from the alienation of shares of a company are taxed in accordance with paragraph 4, Article 13 of the Philippines-Netherlands tax treaty, to wit: HEITAD " Article 13 GAINS FROM THE ALIENATION OF PROPERTY 1. Gains from the alienation of immovable property, as defined in paragraph 2 of Article 6, may be taxed in the State in which such property is situated. 2. Gains from the alienation of movable property forming part of the business property of a permanent establishment which an enterprise of one of the States has in the other State, or of movable property pertaining to a fixed base available to a resident of one of the States in the other State for the purpose of performing professional services, including such gains from the alienation of such permanent establishment (alone or together with the whole enterprise) or of such a fixed base, may be taxed in the other State. 3. Notwithstanding the provisions of paragraph 2, gains derived by an enterprise of one of the States from the alienation of ships and aircraft operated in international traffic pertaining to the operation of such ships or aircraft, shall be taxable only in that State. 4. Gains from the alienation of any property, other than those mentioned in paragraphs 1, 2, and 3 shall be taxable only in the Contracting State of which the alienator is a resident." Under paragraph 4, gains from the alienation of property other than that referred to in paragraphs 1 (immovable property), 2 (movable property of a permanent establishment or fixed base) and 3 (ships and aircraft in international traffic) shall be taxable only in the contracting State of which the alienator is a resident. Accordingly, pursuant to paragraph 4, Article 13 of the Philippines-Netherlands tax treaty since Shell is a resident of the Netherlands, liquidating dividends derived by Shell from the dissolution of SCCP are exempt from income tax in the Philippines, imposed under Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("Tax Code") , as amended, which reads: " SEC. 28. Rates of Income Tax on Foreign Corporations. xxx xxx xxx (B) Tax on Nonresident Foreign Corporation. (1) In General . Except as otherwise provided in this Code, a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to thirty-five percent (35%) of the gross income received during each taxable year from all sources within the Philippines, such as interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains subject to tax under subparagraph 5(c) and (d) above: n Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." Improperly accumulated earnings tax Moreover, under Section 29 [(A), (B) and (C)] of the Tax Code, as implemented by Sections 2 and 7 of Revenue Regulations No. 2-2001, 2 an improperly accumulated earnings tax ("IAET") is imposed on the improperly accumulated taxable income of a domestic corporation in the Philippines, particularly, a holding company , thus: aDSIHc " SEC. 29. Imposition of Improperly Accumulated Earnings Tax. (A) In General . In addition to other taxes imposed by this Title, there is hereby imposed for each taxable year on the improperly accumulated taxable income of each corporation described in Subsection B hereof, an improperly accumulated earnings tax equal to ten percent (10%) of the improperly accumulated taxable income. (B) Tax on Corporations Subject to Improperly Accumulated Earnings Tax. (1) In General . The improperly accumulated earnings tax imposed in the preceding Section shall apply to every corporation formed or availed for the purpose of avoiding the income tax with respect to its shareholders or the shareholders of any other corporation, by permitting earnings and profits to accumulate instead of being divided or distributed. (C) Evidence of Purpose to Avoid Income Tax. (1) Prima Facie Evidence . the fact that any corporation is a mere holding company or investment company shall be prima facie evidence of a purpose to avoid the tax upon its shareholder or members ." (Emphasis ours) " SEC. 2. Concept of Improperly Accumulated Earnings Tax (IAET) . Pursuant to Section 29 of the Code, there is imposed for each taxable year, in addition to other taxes imposed under Title II of the Tax Code of 1997, a tax equal to 10% of the improperly accumulated taxable income of corporations formed or availed of for the purpose of avoiding the income tax with respect to its shareholders or the shareholders of any other corporation, by permitting the earnings and profits of the corporation to accumulate instead of dividing them among or distributing them to the shareholders. . . xxx xxx xxx SEC. 7. Determination of Purpose to Avoid Income Tax . The fact that a corporation is a mere holding company or investment company shall be prima facie evidence of a purpose to avoid the tax upon its shareholders or members . Likewise, the fact that the earnings or profits of a corporation are permitted to accumulate beyond the reasonable needs of the business shall be determinative of the purpose to avoid the tax upon its shareholders or members. In both instances, the corporation may, by clear preponderance of evidence in its favor, prove the contrary. For purposes of these Regulations, the term 'holding or investment company' shall refer to a corporation having practically no activities except holding property, and collecting the income therefrom or investing the same. The following are prima facie instances of accumulation ." (Emphasis ours) Pursuant to the above provisions, since SCCP is a real property holding company, it is subject to the IAET with respect to its retained earnings as of December 31, 2013 out of which liquidating dividends declared in 2014 might be paid. Documentary stamp tax Generally, Section 175 of the Tax Code imposes a documentary stamp tax ("DST") on the delivery and transfer of shares or certificates of stock, 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." However, Section 4 of Revenue Regulations No. 13-2004 3 clarifies that the DST is imposed only when there is actual or constructive transfer of beneficial ownership of shares from one person to another , thus: " SECTION 4. New Rate of DST on Sales, Agreements to Sell, Memoranda of Sales, and Subsequent Transfer of Shares of Stocks. xxx xxx xxx All transfer of shares of stock of a domestic corporation are subject to the DST upon execution of the deed transferring ownership or rights thereto, or upon delivery, assignment or indorsement of such shares in favor of another. No transfer of shares of stock shall be recorded unless DST thereon has been duly paid for in accordance with Section 201 of the Code. For a sale or exchange to be taxable, there must be an actual or constructive transfer of beneficial ownership of the shares of stock from one person to another. Such transfer may be manifested by the clear exercise of attributes of ownership over such stocks by the transferee, or by an actual entry of a change in the name appearing in the certificate of stock or in the Stock and Transfer Book of the issuing corporation or by any entry indicating transfer of beneficial ownership in any form of registry including those of a duly scripless registry, such as those maintained for or by the Philippine Stock Exchange. . ." In the case of the dissolution of SCCP (the issuer), it is clear that there is no actual or constructive transfer of beneficial ownership of shares from Shell (the stockholder) to another person. This is because in the dissolution, those shares will be surrendered to the issuer, who in turn will retire them, and those surrendered shares will not be converted to treasury shares for the purpose of reissuing them in the future. This being so, the surrender by Shell of its shares to SCCP is not subject to DST. ETHIDa 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. Consolidated Regulations Prescribing the Rules on the Taxation of Sale, Barter, Exchange or other Disposition of Shares of Stock Held as Capital Assets . 2. Entitled Implementing the Provision on Improperly Accumulated Earnings Tax under Section 29 of the Tax Code of 1997 . 3. Implementing the Provisions of Republic Act No. 9243, An Act Rationalizing the Provisions on the Documentary Stamp Tax of the National Internal Revenue Code of 1997, as Amended, and for Other Purposes . n Note from the Publisher: Copied verbatim from the official document.