R.G. Manabat & Co.

April 27, 2018 ITAD BIR RULING NO. 070-18 Article 13 Philippines-Japan tax treaty, as amended R.G. Manabat & Co. 9th Floor, The KPMG Center 6787 Ayala Avenue Makati City Attention: AAA __________ Gentlemen : This refers to your tax treaty relief application filed on December 4, 2014 requesting confirmation that capital gains derived by Nitto Denko Corporation (" Nitto Japan ") from the transfer of its shares of stock in Nitto Denko Philippines Corporation (" Nitto Philippines ") to Nitto Denko Singapore Pte. Ltd. (" Nitto Singapore ") are exempt from capital gains 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 Nitto Japan 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 Ibaraki Tax Office in Japan. Nitto Japan is engaged in the manufacture, processing, and selling electrical insulating materials and materials for electrical machinery and devices, and synthetic resins and other industrial materials. 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. HTcADC Nitto Singapore is a foreign corporation organized and existing under the laws of Singapore based on its Audited Financial Statements as of March 31, 2014. Nitto Singapore is engaged in the trading of electrical, electronic, anti-corrosion, surface protection, bonding and jointing, packaging and other industrial materials. Based on Nitto Singapore 's Certification of Stockholding or Ownership Information, the company is a wholly-owned subsidiary of Nitto Japan since its incorporation in Singapore on January 7, 1980. On the other hand, Nitto Philippines is a domestic corporation organized and existing under the laws of the Philippines. It is engaged in the manufacture, production, importation, exportation and sale of different tapes and adhesive products for various uses, optical related products, electronic materials, parts and components for electronic and semiconductor devices and other commodities, and in providing storage, warehousing and logistics services. Nitto Philippines is a wholly-owned subsidiary of Nitto Japan . Based on Nitto Philippines ' 2014 General Information Sheet and Secretary's Certificate, it has 1,000,000 outstanding and subscribed common shares, each share with a par value of P_____. Nitto Japan holds 999,995 (P__________) of those shares accounting for 99.99% ownership in Nitto Philippines . The remaining five shares are held by Japanese and Filipino nominees. On November 14, 2014, Nitto Japan and Nitto Singapore entered into a Deed of Transfer of Shares of Stock (" Deed ") where Nitto Japan transferred all its 999,995 common shares in Nitto Philippines to Nitto Singapore . In consideration, Nitto Singapore will issue 2,512,987 additional ordinary shares (stock dividends) to Nitto Japan at an issue price of _____ Singapore dollar or a total of __________ Singapore dollars (P__________). 2 Based on Nitto Philippines ' Audited Financial Statements as of March 31, 2014 and Interim Financial Statements as of November 30, 2014, the ratio of the company's real property over its total assets is 5.21% and 5.40%, respectively. As of March 31, 2014, Nitto Philippines has a fair market value (" FMV ") (total assets minus total liabilities) of US$__________ (P__________) where the above 999,995 shares have an FMV of P__________. RULING A. Income tax In reply, please be informed that under Section 28 (B) (1) 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 are subject to capital gains tax at the rate of 5 or 10 percent, 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 if required under any treaty obligation on 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: 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: "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 paragraph 4, gains from the alienation of shares of a domestic corporation may be taxed in the Philippines if the corporation's property consists principally of immovable property situated in the Philippines. Relative thereto, under Section 2 (b) of Revenue Regulations No. 4-86, 3 the term consisting principally of real or immovable property means that the ratio of real or immovable property over the total assets (" real property interest " or " RPI ") of the corporation is more than 50 percent , to wit: aScITE " 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 Nitto Philippines ' RPI as of March 31, 2014 and November 30, 2014 is 5.21% and 5.40%, respectively, which is not more than 50%, such gains derived by Nitto Japan from the transfer of all its shares in Nitto Philippines to Nitto Singapore are exempt from capital gain tax pursuant to paragraph 4, Article 13 of the Philippines-Japan tax treaty. B. Donor's tax As mentioned, the FMV of the transferred Nitto Philippines shares is greater than the consideration received for those shares. The excess between the higher FMV and the lower consideration is a deemed gift subject to donor's tax under Section 100 of the Tax Code, as implemented by Section 7 (c.1.4) of Revenue Regulations No. 6-2008, 4 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 C od e, as amended." As to the rate of donor's tax, under Section 10 (B) of Revenue Regulations No. 2-2003, 5 donation made between business organizations is considered donation made to a stranger subject to donor's tax of 30%, to wit: " 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." C. Documentary stamp tax Finally, under Section 175 of the Tax Code, the transfer of the said Nitto Philippines shares is subject to documentary stamp tax as follows: " 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. HEITAD 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. BSP exchange rate as of November 14, 2014: 1 Singapore dollar = P34.7556. 3. Determination of Whether the Assets of a Corporation Consist Principally of Real Property Interest under the Philippine Tax Treaties. 4. Consolidated Regulations Prescribing the Rules on the Taxation of Sale, Barter, Exchange or Other Disposition of Shares of Stock Held as Capital Assets. 5. 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.