Isla Lipana & Co.

October 22, 2018 ITAD BIR RULING NO. 094-18 Article 14 (Capital Gains) Philippines- India tax treaty Isla Lipana & Co. 29th Floor, Philamlife Tower 8767 Paseo de Roxas 1226 Makati City Attention: AAA ________________ BBB ________________ Gentlemen : This refers to your tax treaty relief application filed on May 2, 2014 requesting confirmation that capital gains derived by Aditya Birla Minacs Worldwide Ltd. ("Aditya India") from the sale of its shares of stock in Aditya Birla Minacs Philippines, Inc. ("Aditya Philippines") to Maple Bid Company Ltd. ("Maple UK") are exempt from capital gains tax pursuant to the Convention between the Philippines and India for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-India tax treaty") . ScaCEH FACTS Aditya India is a foreign corporation organized and existing under the laws of India and a resident thereof based on its Memorandum and Articles of Association and Certificate of Residence issued by the Office of the Commissioner of Income Tax of India. The main objects of Aditya India are to carry on and undertake the business of setting up and operating centers for sales and customer interaction services and business process outsourcing services including centers for sending, receiving and replying to email and call centers, both inbound and outbound. It is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration issued by the Securities and Exchange Commission. Maple UK is a foreign corporation organized and existing under the laws of the United Kingdom. Maple UK 's activities are those carried out by holding companies. 1 On the other hand, Aditya Philippines is a domestic corporation organized and existing under the laws of the Philippines. Its primary purpose is to carry on and undertake the business of setting up and operating a center for sales and customer interaction services and business process outsourcing services; providing system integration and software development services which are ancillary thereto. Based on Aditya Philippines ' Audited Financial Statements as of March 31, 2014 and 2013 and General Information Sheet in 2013 and Corporate Secretary's Certificate, Aditya India holds 969,232 common shares of Aditya Philippines , with a par value of P ________ each, or total par value of P __________ . Aditya India owns 100% of the issued capital stock of Aditya Philippines , which has a subscribed and paid-up capital of P __________ , including five common shares held by five nominee individuals with total par value of P ________ . On May 9, 2014, Aditya India and Maple UK entered into a Deed of Assignment of where Aditya India transferred to Maple UK all its common shares in Aditya Philippines and five nominee shares for consideration of __________ Indian rupees (P __________ ). The ratio of real property over total assets of Aditya Philippines is 73.48% in 2014 and 73.99% in 2013, to wit: March 31, 2014 March 31, 2013 Total assets P __________ P __________ Real property a) Computer equipment __________ __________ b) Furniture and fixtures __________ __________ c) Office and communication equipment __________ __________ d) Leasehold improvements __________ __________ e) Fully depreciated property and equipment still used in operations __________ __________ f) Deposits and advance rental __________ __________ Total __________ __________ Ratio of Real Property over Total Assets 73.48% 73.99% RULING Capital gains 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 from the disposition of shares of stock not traded in a stock exchange are subject to capital gains tax at the rate of 5% or 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 Code, such gains are exempt to the extent required by any treaty obligation 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." For this purpose, you invoke paragraph 4, Article 14 (Capital Gains) of the Philippines-India tax treaty, which reads: DTEScI "4. 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 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." Under Article 14, 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. In this connection, Section 2 (b) of Revenue Regulations No. 4-86 ("RR 4-86") 2 defines the term "principally" as more than 50% of the entire assets of the domestic corporation in the Philippines in terms of value, thus: " 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 the ratio of real property over total assets of Aditya Philippines as of March 31, 2014 is 73.48% , which is more than 50%, Aditya Philippines ' assets consist principally of real property under Section 2 (b) of RR 4-86. Therefore, pursuant to paragraph 4, Article 14 of the Philippines-India tax treaty, capital gains derived by Aditya India from the transfer of its shares in Aditya Philippines to Maple UK are subject to capital gains tax imposed under Section 28 (B) (5) (c) of the Tax Code. Documentary stamp tax Finally, under Section 175 of the Tax Code, the transfer of the said Aditya Philippines shares is subject to documentary stamp tax equivalent to P0.75 on each 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." 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. https://beta.companieshouse.gov.uk/company/10754743. 2. Determination of Whether the Assets of a Corporation Consist Principally of Real Property Interest under the Philippine Tax Treaties.