De Guzman, Rafal and Sansarona Law and Consultancy

October 18, 2018 ITAD BIR RULING NO. 088-18 Article 13 Philippines-Japan tax treaty, as amended De Guzman, Rafal and Sansarona Law and Consultancy Jipang Building Roxas Boulevard corner Sen. Gil Puyat Avenue 1302 Pasay City Attention: AAA _______________ Gentlemen : This refers to your tax treaty relief application filed on August 11, 2017 requesting confirmation that capital gains derived by Kyocera Crystal Device Corporation ("Kyocera Crystal") from the transfer of its shares of stock in Kyocera Crystal Device Philippines, Inc. ("Kyocera Crystal Philippines") (originally KSS Philippines, Inc. , then Kyocera Kinseki Philippines, Inc. ) to Kyocera Corporation ("Kyocera") are exempt from income 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") , as amended. IAcTaC FACTS Kyocera Crystal is a foreign corporation organized and existing under the laws of Japan and a resident thereof based on its amended Articles of Incorporation (AOI) and Certificate of Residence issued by the Murayama Tax Office in Japan. Kyocera Crystal is engaged in manufacturing and selling crystal oscillators, application devices associated with crystal oscillators, artificial crystals, artificial crystal-processed articles, chemical products, other electronic components, and general electric appliances. 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. Kyocera is also a foreign corporation organized and existing under the laws of Japan based on its AOI. Kyocera is engaged in manufacturing, selling and researching on fine ceramics and various kinds of products utilizing fine ceramics. On the other hand, Kyocera Crystal Philippines is a domestic corporation, based on its amended AOI, General Information Sheet (GIS) as of June 17, 2016, and Audited Financial Statements (AFS) as of March 31, 2017. Kyocera Crystal Philippines is a wholly-owned subsidiary of Kyocera Crystal , and both companies' ultimate parent is Kyocera . Based on the GIS and Corporate Secretary's Certificate, Kyocera Crystal owns 499,995 of all 500,000 outstanding and fully subscribed common shares of Kyocera Crystal Philippines accounting for 99.99% ownership in Kyocera Crystal Philippines . Each share has a par value of P______ or total value of P__________ held by Kyocera Crystal . On November 28, 2016, Kyocera Crystal and Kyocera entered into a merger, with the latter as the surviving entity. By virtue of said merger, all assets, liabilities, rights and obligations of Kyocera Crystal , including its 499,995 common shares in Kyocera Crystal Philippines , were transferred to and absorbed by Kyocera on April 1, 2017, the effectivity date of the merger. Likewise, Kyocera 's capital did not change and no compensation or consideration was given therefor. Based on Kyocera Crystal Philippines ' AFS as of March 31, 2017, its real property interest is 9.76%, as computed below: Real property interest = P__________ P__________ = 9.76% =========== As of that date, the amount of Kyocera Crystal Philippines ' property and equipment, consisting of building structures and improvements and furniture, fixtures and other equipment, is zero, after deducting from the cost of these assets their accumulated depreciation and impairment losses. Moreover, there is no best estimate as to the recoverability of these assets as the company's management is still under negotiations with potential buyers. Kyocera Crystal Philippines has remained dormant following the resolution of the company's Board of Directors to cease business operations effective September 30, 2015. Under Section 2 (b) of Revenue Regulations No. 4-86 (RR No. 4-86), 1 real property interest is the percentage of the taxpayer's real or immovable property over its total assets. The taxpayer's assets are considered to be principally of, wholly or principally of, directly principally of, or attributable to, real or immovable property if the taxpayer's real property interest is more than 50%, 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 AFS, as of March 31, 2017, the fair market value of the 499,995 transferred shares to Kyocera is P __________ , as computed below: Fair market value = Percentage of transferred shares (99.99%) x [Total assets (P__________) Total liabilities (P__________)] = P__________ ========== Based on another Corporate Secretary's Certificate issued by Kyocera Crystal Philippines , 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. IEDHAT RULING: A. Income tax In reply, please be informed that under Section 28 (B) (5) (c) of the National Internal Revenue Code of 1997 ("Tax Code") , as amended, capital gains derived by a nonresident foreign corporation from the disposition of shares in a domestic corporation not traded in a stock exchange are subject to capital gains 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: 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 that gains from the alienation of shares of a domestic company in the Philippines, the property of which consists principally of immovable property situated therein, may be taxed in the Philippines, thus: "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." Since Kyocera Crystal Philippines ' real property interest as of the effectivity of the merger on April 1, 2017 is 9.76% only and not more than 50%, it can be concluded that the company's assets do not consist principally of immovable property under Section 2 (b) of RR No. 4-86. This being the case, capital gains, if any, derived by Kyocera Crystal from the transfer of all its shares in Kyocera Crystal Philippines to Kyocera are exempt from income tax pursuant to the aforesaid tax treaty. B. Donor's tax Under Section 100 of the Tax Code, where property (other than real property) is transferred for less than an 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 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." As of the effectivity of the merger, the fair market value of Kyocera Crystal Philippines shares transferred by Kyocera Crystal to Kyocera is P __________ , and Kyocera Crystal (the transferor) did not receive any consideration for such shares from Kyocera (the transferee). However, the lack of consideration or the presence thereof but less than the shares' fair market value does not give rise to donor's tax because the transfer was a result of a merger. The use of the term fair market value in Section 100 presupposes a transfer of property between a knowledgeable, willing, and unpressured buyer and a knowledgeable, willing, and unpressured seller in an open market, by virtue of which the latter would relinquish his ownership over the property. Hence, if the consideration received or demanded by the seller is below the fair market value of the property sold, the deficit would be characterized as a gift subject to donor's tax under Section 100. ACETIa Under the subject merger, Kyocera will not grant any consideration to Kyocera Crystal because the former owns all shares of the latter, the transferor and absorbed entity. Thus, before and after the merger, Kyocera owns and will continue to own all assets of Kyocera Crystal including the latter's shares in Kyocera Crystal Philippines . Moreover, 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). In this case, the transfer by Kyocera Crystal of its assets to Kyocera was carried out for purely business reasons and not motivated by any donative intent on the part Kyocera Crystal . In light of recent developments introduced under Republic Act No. 10963 , otherwise known as the Tax Reform for Acceleration and Inclusion (hereinafter referred to as the TRAIN Law ), which took effect on January 1, 2018 , Section 100 was amended to exempt from the imposition of donor's tax the transfer of property for less than adequate and full consideration, where such transfer is a bona fide transfer, at arm's length, and free from any donative intent , 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: Provided, however, That a sale, exchange, or other transfer of property made in the ordinary course of business (a transaction which is a bona fide, at arm's length, and free from any donative intent), will be considered as made for an adequate and full consideration in money or money's worth ." (Underscoring supplied) C. Documentary stamp tax Finally, under Section 175 of the Tax Code, the transfer of shares in Kyocera Crystal Philippines is subject to documentary stamp tax equivalent to P0.75 on every P200.00, or fractional part thereof, of the par value of the shares, 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." Beginning January 1, 2018, the documentary stamp tax imposed on transfer of shares or certificate of stock shall now be P1.50 on every P200.00, or fractional part thereof, of the par value of the shares, pursuant to Section 52 of the TRAIN Law. Section 175 of the Tax Code now reads 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 One peso and fifty centavos (P1.50) 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. DIETcH Very truly yours, (SGD.) CAESAR R. DULAY 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.