ITAD BIR Ruling No. 047-10

October 5, 2010 ITAD BIR RULING NO. 047-10 Article 13, Philippines-Australia Tax Treaty; BIR Ruling No. 118-89; BIR Ruling No. 089-97; BIR Ruling No. DA 348-99 Manabat Sanagustin & Co. Certified Public Accountants 9/F KPMG Center, Ayala Avenue Makati City 1226 Metro Manila Attention: Herminigildo G. Murakami Principal, Tax & Corporate Services Roberto L. Tan Principal, Tax & Corporate Services Gentlemen : This refers to your application for tax treaty relief dated August 28, 2009, requesting on behalf of DP World Holdings (Australia) Limited ("DP World") , confirmation of your opinion that its capital gains from the sale of shares of stock of Pecard Group Holdings, Inc. ("Pecard") to Palafox FPJ, Inc. ("Palafox") are exempt from capital gains tax under Article 13 of the Philippines-Australia tax treaty. SIcTAC It is represented that DP World is a nonresident foreign corporation, organized and existing under the laws of New South Wales, Australia, with principal office at Level 11, 160 Sussex Street, Sydney NSW 2000, Australia; that DP World is a corporation considered to be a resident of Australia for income tax purposes within the meaning of the Australia-Philippines convention, as evidenced by the Certificate of Residency issued by the Australian Taxation Office, signed by the Senior ATO Officer, and with Certification Stamp of the Australian Government, Australian Taxation Office Delegate of the Deputy Commissioner, Raelene Vivian, dated December 19, 2008; that it is not registered either as corporation or as partnership in the Philippines, per Certificate of Non-Registration of Corporation/Partnership issued by the Securities and Exchange Commission ("SEC") dated December 18, 2008; that Pecard is a domestic corporation duly organized and existing under the laws of the Republic of the Philippines, with principal office at 6th Floor Don Pablo Building, 114 Amorsolo Street, Makati City; and that Palafox is a domestic corporation duly organized and existing under the laws of the Republic of the Philippines, with principal office at 11th Floor, 6782, Ayala Avenue, Makati City. It is further represented that the details of the capital stock of Pecard as of December 31, 2008 are as follows: Common shares: Class A Php1.00 par value Authorized 12,000,000 Issued 6,000,000 Class B Php1.00 per value Authorized 8,000,000 Issued 4,000,000 Preferred shares: Class A Php10.00 par value Authorized 680,000 Issued 679,350 Class B Php1,000.00 par value Authorized and Issued 452,860 On August 18, 2009, DP World and Palafox executed a Deed of Absolute Sale, whereby the former assigned, sold and transferred to the latter, 2,400,000 Class B Common shares of Pecard, for and in consideration of Two Million Eight Hundred Ninety Six Thousand Six Hundred Thirty Pesos (Php2,896,630.00). In reply, please be informed that Section 28 (B) (5) of the National Internal Revenue Code ("Tax Code") of 1997, as amended, applies in general. It provides: "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 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, Section 32 (B) (5) of the Tax Code of 1997, as amended provides: DIEcHa "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. xxx xxx xxx" In this particular case, the treaty being invoked is the Philippines-Australia tax treaty, specifically its Article 13, which provides as follows: "ARTICLE 13 ALIENATION OF PROPERTY (1) Income from the alienation of real property may be taxed in the Contracting State in which that property is situated. (2) For the purposes of this Article (a) the term 'real property' shall have the meaning which it has under the laws in force in the Contracting State in which the property in question is situated and shall include (i) a lease of land or any other direct interest in or over land; (ii) rights to exploit, or to explore for, natural resources; and (iii) shares or comparable interests in a company, the assets of which consist wholly or principally of direct interests in or over land in one of the Contracting States or of rights to exploit, or to explore for, natural resources in one of the Contracting States; HScCEa (b) real property shall be deemed to be situated (i) Where it consists of direct interests in or over land in the Contracting State in which the land is situated; (ii) where it consists of rights to exploit, or to explore for, natural resources in the Contracting State in which the natural resources are situated or the exploration may take place; and (iii) where it consists of shares or comparable interests in a company, the assets of which consist wholly or principally of direct interests in or over land in one of the Contracting States or of rights to exploit, or to explore for, natural resources in one of the Contracting States in the Contracting State in which the assets or the principal assets of the company are situated. (3) Subject to the provisions of paragraph (1), income from the alienation of capital assets of an enterprise of one of the Contracting States or available to a resident of one of the Contracting States for the purpose of performing professional services or other independent activities shall be taxable only in that Contracting State, but, where those assets form part of the business property of a permanent establishment or fixed base situated in the other Contracting State, such income may be taxed in that other State. xxx xxx xxx" Based on the Philippines-Australia tax treaty as aforequoted, income from the alienation of real property may be taxed in the Philippines if such real property is considered situated in the Philippines. "Real property" shall have the meaning which it has under the laws in force in the Philippines in which the property in question is situated and shall include: (i) a lease of land or any other direct interest in or over land; (ii) rights to exploit, or to explore for, natural resources; and, (iii) shares or comparable interests in a company, the assets of which consist wholly or principally of direct interests in or over land in one of the Contracting States or of rights to exploit, or to explore for, natural resources in one of the Contracting States, in the Contracting State in which the assets or the principal assets of the company are situated. Under the same treaty, such real property which consists of shares in a Philippine Corporation, the assets of which consist principally of direct interests in or over land in the Philippines or of rights to exploit, or to explore for, natural resources in the Philippines, is deemed to be situated in the Philippines. For this purpose, assets are considered as principal assets and are determined as such based on Revenue Regulations No. 4-86 1 which provides that "principally" means more than 50% of the entire assets of the company in terms of value. TDcHCa Verification of the Financial Statement of Pecard as of the date of the Deed of Absolute Sale (August 18, 2009) showed that Pecard has no real property interest located in the Philippines in relation to its total assets. Thus, this Office is of the opinion that the capital gains derived by DP World from the sale of shares of stock of Pecard are exempt from capital gains tax in the Philippines pursuant to Article 13 (3) of the RP-Australia Tax Treaty. (BIR Ruling No. 118-89 dated June 5, 1989; BIR Ruling No. 089-97 dated August 5, 1997; and BIR Ruling No. DA 348-99 dated June 15, 1999) 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. Determination of whether the assets of a corporation consist principally of real property interest under the Philippine tax treaties.