Navarro Amper and Co.

June 26, 2020 ITAD BIR RULING NO. 055-20 Article 13 Philippines-Japan tax treaty, as amended Navarro Amper and Co. 19th Floor, Net Lima Plaza 5th Avenue corner 26th Street Bonifacio Global City 1634 Taguig City Attention: AAA _______________ Gentlemen : This refers to your tax treaty relief application filed on July 10, 2015 requesting confirmation that the transfer by 3D Auto Protech Co., Ltd. ("3D Auto Japan") of its shares of stock in 3D Auto Designs Philippines, Inc. ("3D Auto Philippines") to ARKK Corporation ("ARKK") is exempt from capital gains tax and from documentary stamp 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 FACTS 3D Auto Japan is a foreign corporation organized and existing under the laws of Japan and a resident thereof based on its Articles of Incorporation and Certificate of Residence issued by the Kawagoe Tax Office in Japan. It is engaged in the manufacture and processing of automotive and machine parts. 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. Based on its Income Tax Return for taxable year April 1, 2013 to March 31, 2014, 3D Auto Japan is a wholly-owned subsidiary of ARKK . ARKK is a foreign corporation organized and existing under the laws of Japan and a resident thereof based on its amended Articles of Incorporation and Certificate of Residence issued by the Higashi Tax Office in Japan. It is engaged in the manufacture and sale of industrial design models. It is also 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, 3D Auto Philippines is a domestic corporation engaged in the export of designs for automobile parts and accessories based on its Audited Financial Statements ("AFS") as of December 31, 2014. 3D Auto Philippines is a wholly-owned subsidiary of 3D Auto . Based on its General Information Sheet ("GIS") as of July 22, 2014 and Corporate Secretary's Certificate, 3D Auto Japan owns 4,995 common shares or 99.90% of the outstanding common shares of 3D Auto Philippines , each share with a par value of Php______. CAacTH On February 24, 2015, 3D Auto Japan and ARKK entered into an Absorption-Type Merger Agreement where they agreed to a merger with 3D Auto Japan as the extinct company and ARKK as the surviving company. ARKK will not pay any money to 3D Auto Japan , nor increase the amount of its capital and capital reserve in connection with the merger. The merger took effect on April 1, 2015. Under Section 2 (b) of Revenue Regulations No. 4-86, 2 capital gains derived by a resident of a Contracting State which has an existing tax treaty with the Philippines from the disposition of shares in a domestic corporation or interest in a domestic partnership are taxable in the Philippines if the assets of the corporation or partnership consist principally of real property (real property interest), i.e. , more than fifty percent (50%) of the entire assets, 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;" Based on the above-mentioned AFS, 3D Auto Philippines ' real property interest as of December 31, 2014 is 25.86%, as computed below: Real property interest = Real property (Php_______) Total assets (Php_________) = 25.86%. Real property consists of property and equipment (Php _______ ) and security deposits (Php _______ ). Moreover, based on the AFS, the fair market value of the 499,995 shares effectively transferred to ARKK pursuant to the merger is Php _______ , as computed below: Fair market value = Equity (Php_______) x percentage of ownership (99.90%) = Php_______. Finally, based on a certification issued by ARKK , the income subject of this ruling is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal. RULING A. Income 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") , capital gains derived by a foreign corporation not engaged in trade or business in the Philippines from the disposition of shares in a domestic corporation not through a stock exchange are subject to income tax at the rate of 5% to 10%, to wit: " 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 Tax Code, such gains are exempt to the extent required by any treaty obligation binding 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: CTIEac 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." Relative thereto, paragraph 4, Article 13 of the Philippines-Japan tax treaty provides relief as follows: " Article 13 xxx xxx xxx 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." Under Article 13, gains from the alienation of shares of a company or trust the property of which consists principally of immovable property situated in a Contracting State, may be taxed in that State. Based on the foregoing, since 3D Auto Philippines ' real property interest at the time of the transfer of its shares is not more than 50%, any gains derived by 3D Auto Japan from such transfer to ARKK are exempt from capital gains tax pursuant to paragraph 3, Article 13 of the Philippines-Japan tax treaty. B. Donor's tax Under Section 100 of the Tax Code, where property (other than real property) is transferred for less than adequate and full consideration in money or money's worth, the excess between the higher fair market value of the property and the lower consideration received by the transferor 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." The use of the term fair market value in the above-mentioned provision presupposes a transfer of property between a knowledgeable, willing, and unpressured buyer and a knowledgeable, willing, and unpressured seller in an open market, with the latter relinquishing its ownership over the property. Hence, if the consideration received or demanded by the seller is below the fair market value of the sold property, the deficit would be characterized a gift subject to donor's tax. However, in Republic of the Philippines vs. David Rey Guzman and the Register of Deeds of Bulacan, Meycauayan Branch, G.R. No. 132964, February 18, 2000 , the Supreme Court held that for a donation to be valid, the following three requisites are necessary: (1) reduction in the property of the donor, (2) increase in the property of the donee, and (3) intent on the part of the donor to do an act of liberality (donative intent). Applying this to the instant case, the transfer by 3D Auto Japan of its shares in 3D Auto Philippines to ARKK , where there was no consideration at all paid to 3D Auto Japan , is not subject to donor's tax as this was carried out for purely business reasons and not motivated by any donative intent on the part of 3D Auto Japan , as the latter is a wholly-owned subsidiary of ARKK . SaCIDT C. Documentary stamp tax You assert that the transfer of the subject shares is not subject to documentary stamp tax ("DST") pursuant to Section 199 (m) in relation to Section 40 (C) (2) of the Tax Code, viz. : " SEC. 199. Documents and Papers Not Subject to Stamp Tax. The provisions of Section 173 to the contrary notwithstanding, the following instruments, documents and papers shall be exempt from the documentary stamp tax: xxx xxx xxx (m) Transfer of property pursuant to Section 40 (C) (2) of the National Internal Revenue Code of 1997, as amended. " SEC. 40. Determination of Amount and Recognition of Gain or Loss. xxx xxx xxx (C) Exchange of Property. (1) General Rule. Except as herein provided, upon the sale or exchange or property, the entire amount of the gain or loss, as the case may be, shall be recognized. (2) Exception. No gain or loss shall be recognized if in pursuance of a plan of merger or consolidation (a) A corporation, which is a party to a merger or consolidation, exchanges property solely for stock in a corporation, which is a party to the merger or consolidation; or (b) A shareholder exchanges stock in a corporation, which is a party to the merger or consolidation, solely for the stock of another corporation also a party to the merger or consolidation; or (c) A security holder of a corporation, which is a party to the merger or consolidation, exchanges his securities in such corporation, solely for stock or securities in such corporation, a party to the merger or consolidation. No gain or loss shall also be recognized if property is transferred to a corporation by a person in exchange for stock or unit of participation in such a corporation of which as a result of such exchange said person, alone or together with others, not exceeding four (4) persons, gains control of said corporation: Provided, That stocks issued for services shall not be considered as issued in return for property. Tax-free exchange, however, under Section 40 (C) (2), which includes merger or consolidation, needs a BIR ruling/certification pursuant to Revenue Regulations No. 18-2001 3 for purposes of monitoring the tax-free properties in order that in cases of subsequent sale of said properties, they shall be taxed accordingly. This is obviously absent in this case. Moreover, the exemption from DST pursuant to Section 199 of the Tax Code, as introduced by Republic Act No. 10963 or the TRAIN Law which took effect on January 1, 2018, presupposes that the tax-free exchange in accordance with parameters set forth in Section 40 (C) (2) has indeed taken place. Hence, this Office hereby confirms and so holds that the transfer by 3D Auto Japan of its shares in 3D Auto Philippines to ARKK is subject to DST under Section 175 of the Tax Code, thus: cHECAS " 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. . . " 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. 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 Interest under the Philippine Tax Treaties. 3. Guidelines on the Monitoring of the Basis of Property Transferred and Shares Received, Pursuant to a Tax-Free Exchange of Property for Shares under Section 40 (C) (2) of the National Internal Revenue Code of 1997, Prescribing the Penalties for Failure to Comply with Such Guidelines, and Authorizing the Imposition of Fees for the Monitoring Thereof.