Follosco Morallos & Herce

April 3, 2018 ITAD BIR RULING NO. 058-18 Article 13, Philippine-Singapore tax treaty; Section 28 (B) (1) in relation to Section 32 (B) (5) of the Tax Code of 1997, as amended Follosco Morallos & Herce 25th Floor, 88 Corporate Center 141 cor. Valero and Sedeno Sts. Salcedo Village, Makati City Attention: AAA Gentlemen : This refers to tax treaty relief application dated April 19, 2010, on behalf of your client PROVIDENT SECURITIES PRIVATE LTD. (" Provident "), requesting confirmation of your opinion that the following transactions are exempt from Philippine income tax pursuant to Article 13 of the Convention between the Republic of the Philippines and the Republic of Singapore for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (" Philippines-Singapore tax treaty "): cSTHAC 1. The surrender of common shares in OCBC Securities Philippines Inc. (" OSPI ") in exchange for property as a result of the latter's liquidation; and 2. The assignment of Provident of its right to receive the property of OSPI as liquidating dividend to BBB. On February 16, 2012 the BIR issued ITAD Ruling No. 080-12 denying the relief for double taxation pursuant to RMO 1-2000. However, an appeal was made to the Department of Finance (" DOF "), which the latter resolved on May 7, 2014, in the light of the Supreme Court (SC) Decision in the case of Deustche Bank AG Manila Branch vs. Commissioner of Internal Revenue . 1 The Supreme Court pronounced that additional requirements should not negate the availment of relief provided under international agreements. Consequently, the DOF remanded the case to the BIR for appropriate action. Hence, this resolution. FACTS It is represented that Provident is a foreign corporation organized and existing under the laws of Singapore based on the Certificate of Residence for the Purpose of claiming benefit under the Philippines-Singapore tax treaty issued by the Inland Revenue Authority of Singapore dated September 14, 2009; that Provident is not registered either as a corporation or a partnership in the Philippines, as evidenced by a certification issued by the Securities and Exchange Commission (SEC) dated September 10, 200; n that Provident is the beneficial owner of Three Hundred Thousand (300,000) shares, representing 100% of total outstanding capital stock of OSPI , with par value of __________ (Php_____) per share; the five individual shareholders holding one (1) share each being nominees of Provident ; that OSPI was duly organized under the laws of the Republic of the Philippines; that OSPI suspended its operation effective September 30, 2000 and has not operated since, and as shown by the last Audited Financial Statement as of December 31, 2000 filed by OSPI with the SEC; that OSPI had authorized and outstanding capital stock of Php__________ divided into 1,200,000 common shares at Php_____ par value; that on May 13, 2002, the SEC approved the reduction of the authorized capital stock of OSPI by Php__________ (from Php__________ to Php__________), thereafter, OSPI was able to obtain BIR Ruling DA-356-03 dated October 10, 2003 from the Bureau of Internal Revenue ("BIR") regarding the tax implications of the capital reduction; that on March 21, 2005, the Board of Directors of OSPI approved the dissolution of OSPI by shortening its corporate existence to end on March 31, 2005; that SEC approved the said dissolution on July 2, 2009 by its issuance of Certificate of Filing of Amended Articles of Incorporation; that pursuant thereto and after satisfaction of any valid claim of creditors, the Board of Directors of OSPI approved the distribution of remaining net assets to its shareholder, Provident , on December 2, 2009; that the remaining net asset that will be distributed to Provident is OSPI's Trading Rights in the Philippine Stock Exchange ("PSE"); that the membership rules of the PSE, however, require that the transferee of the Trading Rights be a qualified transferee; that one of the qualifications is that the transferee, if a company, is a domestic corporation, which Provident is not, thus, considering such restriction in the PSE membership rules, Provident executed a Deed of Assignment of Right to Receive Trading Rights as Liquidating Dividend in favor of BBB , a Filipino and resident of the Philippines; that in consideration of the said assignment of Provident's right to receive the Trading Rights in the Philippine Stock Exchange (" PSE ") as liquidating dividend from OSPI , BBB will pay to Provident the sum of __________ Pesos (Php__________). It is finally represented that the issue/s or transaction subject of the above request for ruling is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or a judicial appeal of the taxpayer/s involved per certification issued by the Corporate Secretary of OSPI dated April 13, 2010. RULING In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 (" Tax Code "), as amended, provides that gain/income by Provident , a foreign corporation not engaged in trade or business in the Philippines, are subject to income tax at the rate of 35 percent before January 1, 2009, and 30 percent beginning January 1, 2009, and thereafter, thus: "Section 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 interest, 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 subparagraphs 5(c): Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." However, Section 32 (B) (5) of the Code provides that such income may be exempt from income tax or subject to a reduced rate to the extent required by any treaty obligation on the Philippines, thus: " Section 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" A. On the surrender of common shares in exchange for property as a result of the latter's liquidation Thus, you invoke the provisions of the Philippines-Singapore tax treaty, specifically Article 13 which provides, viz. : AcSCaI "Article 13 GAINS FROM THE ALIENATION OF PROPERTY 1. Gains from the alienation of immovable property may be taxed in the Contracting 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 a Contracting State has in the other Contracting State or of movable property pertaining to a fixed base available to a resident of a Contracting State in the other Contracting 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. x x x. 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. 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 States of which the alienator is a resident." In addition, the ordinary connotation of liquidating dividend involves the distribution of assets by a corporation to its stockholder upon dissolution (Klein, Federal Income Taxation, 253-254 cited in the case of Wise & Co., Inc. et al. vs. Meer, et al., G.R. No. 48231, June 30, 1947) . When a corporation is dissolved and in the process of complete liquidation and its shareholders surrendered their stock to it and it paid sums of money to them in exchange, a transaction took place, which is no different in its essence from a sale of the same stock to a third party who paid therefor. (Read the case of Wise & Co., Inc., et al. vs. Meer, et al., supra) . In addition, the annotations on the Corporation Code of the Philippines by Paras et al., define "liquidating dividends" as follows: "These are dividends that are declared when a corporation liquidates by redeeming its outstanding stock for cash or by distributing its assets to stockholders in exchange for their stock. Such distribution is also known as distribution in liquidation. For tax purposes, liquidating dividends are treated, in effect, as sales of stock; hence any gain or loss to the stockholder is treated as capital gain or loss." It is clear from the aforequoted provisions that the distribution of the remaining net asset by OSPI to its stockholder Provident in exchange for the latter's stock known as liquidating dividends is treated as sales of stock for tax purposes, hence any gain or loss to the stockholder is treated as capital gains or loss; that any capital gains which may be realized by Provident from the alienation of any property other than those mentioned in paragraphs 1, 2, and 3 of Article 13 of the Philippines-Singapore tax treaty shall be taxable only in Singapore. However, under paragraph 3 of the same provision of the Philippines-Singapore tax treaty, the Philippines may tax the gains to be derived from the disposition of interest in a corporation if its assets consist principally of real property interest located in the Philippines. "Principally" means more than 50% of the entire assets in terms of value (Sec. 2, Revenue Regulations No. 4-86). Verification of OSPI's Audited Financial Statements disclosed that it does not have real properties located in the Philippines, thereby making the assets of OSPI not principally consisting of immovable property located in the Philippines. Hence, Article 13 (3) of the Philippines-Singapore tax treaty will not apply. Consequently, the gains, if any, shall be taxable only in Singapore since, pursuant to paragraph 4 of the said Article, "gains from the alienation of any property, other than those mentioned in paragraphs 1, 2, and 3 of Article 13 of the Philippines-Singapore tax treaty shall be taxable only in the Contracting State of which the alienator is a resident." SCEHaD Accordingly, this Office is of the opinion and so holds that any gain that may be realized by Provident as a result of distributing its liquidating dividends to its stockholders by OSPI is not subject to the capital gains tax imposed under Section 28 (B) (5) (c) of the Tax Code of 1997, and pursuant to Article 13 of the Philippines-Singapore tax treaty. B. On the assignment of Provident of its right to receive the property of OSPI as liquidating dividend to BBB As for the subsequent assignment of Provident of its Trading Rights in the PSE, as liquidating dividend from OSPI to BBB amounting to __________ Pesos (Php__________), Article 21 of the Philippine-Singapore tax treaty in providing for taxation of Income not expressly mentioned under the Convention finds application. Article 21 states: "Article 21 INCOME NOT EXPRESSLY MENTIONED Items of income not expressly mentioned in the foregoing Articles of this Convention and arising in a Contracting State may be taxed in that State." Based on the foregoing, the income from the assignment by Provident to BBB of its right to receive the Trading Rights in the PSE as liquidating dividends from OSPI, falls under Article 21 of the same treaty, subject to the regular income tax rate pursuant to Section 28 (B) (1) of the Tax Code. This ruling is issued on the basis of the facts as represented and is limited only as to the distribution of liquidating dividends by OSPI to Provident. This does not cover however the previous transfer of shares undertaken by the OSPI as mentioned in the representation. If upon investigation it shall be disclosed that the 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. G.R. No. 188550 dated 19 August 2013. n Note from the Publisher: Copied verbatim from the official document.