ITAD BIR Ruling No. 102-11

April 4, 2011 ITAD BIR RULING NO. 102-11 Article 13, Philippines-Singapore tax treaty Romulo Mabanta Buenaventura Sayoc & De Los Angeles Attorneys at Law 30th Floor, Citibank Tower 8741 Paseo de Roxas, Makati City 1260 Attention: Jayson L. Fernandez Ronald D. Policarpio Gentlemen : This refers to your letter dated March 24, 2009, which was filed on behalf of your client, LAWL PTE., LTD. formerly LYONNAISE ASIA WATER (HOLDINGS) PTE., LTD. (LAWL), requesting confirmation of your opinion that the sale by LAWL of its shares of stock in Maynilad Water Services, Inc. (Maynilad) to Metro Pacific Investment Corporation (MPIC), is exempt from the capital gains tax imposed under Section 28 (B) (c) (5) of the National Internal Revenue Code of 1997, 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"). IcCDAS Facts It is represented that LAWL is a corporation duly organized and existing under the laws of Singapore with principal office address at One Marina Boulevard No. 28-00 Singapore evidenced by the authenticated Memorandum and Articles of Association of LAWL, certified by Nathaniel G. Imperial, Consul of the Embassy of the Philippines in Singapore dated January 18, 2009; that LAWL 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 February 5, 2009; that Maynilad is a domestic corporation duly organized and existing under and by virtue of the laws of the Republic of the Philippines with office address at MWSS Compound, Katipunan Rd., Balara, Quezon City, Philippines; that Maynilad is primarily incorporated in the Philippines to bid for the operation of the privatized system of waterworks and sewerage services of the Metropolitan Waterworks and Sewerage System (MWSS) for Metropolitan Manila; that on February 21, 1997, Maynilad entered into a Concession Agreement with the MWSS, whereby the latter granted Maynilad, the sole right to manage, operate, repair, decommission and refurbish all fixed and movable assets required to provide water and sewerage services in the West Area for 25 years commencing on August 1, 1997; and that based on the notarized certification issued by the corporate secretary of Maynilad, the following are the Class B common shares with a par value of P1,000.00 per share held by LAWL the total of which represents 5.88% of the total issued and outstanding capital stock of Maynilad. Number of Shares Date of Acquisition 3,000,000 2/25/1998 6,280,000 11/24/2000 1,200,000 5/11/2001 225,520,000 1/26/2007 that the Securities and Exchange Commission approved the increase in par value of shares of stock of MPIC from One Peso (P1.00) per share to One Thousand (P1,000.00) per share; thus, the number of shares in the name of LAWL was reduced from an aggregate of Two Hundred Thirty Six Million (236,000,000) common class "B" shares with a par value of One Peso (P1.00) per share to Two Hundred Thirty Six Thousand (236,000) common class "B" shares with a par value of One Thousand Pesos (P1,000.00) per share. It is further represented that, a Deed of Absolute Sale was executed on February 9, 2009 by and between LAWL and MPIC, whereby LAWL unconditionally, irrevocably and absolutely sold, transferred and conveyed to MPIC the Two Hundred Thirty-Six Thousand (236,000) Class B Common shares with a par value of P1,000 per share, for and in consideration of the purchase price of Two Billion Twenty-Nine Million Two Hundred Twelve Thousand and Nine Hundred Sixty Pesos (P2,029,212,960.00) or equivalent to Eight Thousand Five Hundred Ninety-Eight and 36/100 pesos (P8,598.36) per share. It is finally represented that the transfer of shares of stock by LAWL subject of the request for ruling are not under investigation, on-going audit, administrative protest, claims for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal, per Certificate issued by Maynilad. Ruling In reply, please be informed that Section 28 (B) (5) (c) of the National Internal Revenue Code (Tax Code) of 1997, as amended by Republic Act No. 9337, provides as follows: "SEC. 28. Rates of Income Tax on Foreign Corporations. xxx xxx xxx (B) Tax on Nonresident Foreign Corporation. xxx xxx xxx (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, Section 32 (B) (5) of the same Code provides as follows: "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 ( i.e. , TITLE II TAX ON INCOME): AEScHa 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." In this particular case, the treaty being invoked is the Article 13 of the Philippines-Singapore tax treaty, which provides as follows: "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. However, gains derived by an enterprise of a Contracting State from the alienation of ships and aircraft operated in international traffic and movable property pertaining to the operation of such ships or aircraft, shall be taxable only in that State. 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 State of which the alienator is a resident." The gains which will be realized by LAWL from the sale of its shares of stock in Maynilad shall be taxable only in Singapore. However, under paragraph 3 of the aforequoted provision, the Philippines may tax the gains to be derived from the disposition of interest in a corporation if its entire assets consist principally of real property interest located in the Philippines. RR No. 4-86 1 is the governing revenue issuance implementing the provision on "real property interest" under Philippine tax treaties. The pertinent provisions thereof are as follows: "SECTION 2. Definitions. For purposes of these regulations, the following terms and phrases shall be understood to mean "a) 'Real property interest' interests on properties enumerated in Section 3 which are not, however, exclusive of others that are similarly situated. As used in the treaties in these regulations, it shall be understood to include real Properties as understood under Philippines laws; (Emphasis supplied) "b) 'Principally', 'wholly or principally', 'directly principally' or 'attributable' more than fifty percent of the entire assets in terms of value; "c) 'Sale' includes disposition or any other means by which the ownership of a share or of an interest in a corporation, partnership, estate or trust is transferred/conveyed for valuable consideration; and DcIHSa "d) 'Corporation' includes partnership, estate or trust. "SECTION 3. Properties. The following are real property interest and/or real properties: xxx xxx xxx" "10. Contracts for public works , and servitudes and other real rights over immovable property including real estate mortgages, possessory retentions, antichresis, usufructs and lessee of property; xxx xxx xxx" Verification of the Audited Financial Statements for 2008 and 2007, and the Interim Financial Statement as of the date of sale (February 9, 2009) disclosed the following real property interest located in the Philippines: Particulars February 9, 2009 December 31, 2008 December 31, 2007 Non Current Assets: Service concession assets 22,488,563,357.89 22,236,673.00 17,144,831.00 Property and Equipment 230,037,146.35 330,268.00 201,157.00 Total 22,718,600,504.24 22,566,941.00 17,345,988.00 Total Assets 34,392,256,665.02 34,751,692.00 24,457,717.00 Percentage of Real Property Interest 66% 65% 71% Based on the above schedule of non-current assets of Maynilad, the greater part of the total assets consists of the Concession Assets account. More importantly, said concession assets and property and equipment are more than 50% of its total assets, thereby rendering the assets of Maynilad consisting principally of immovable or real property situated in the Philippines. Apart from RR No. 4-86, Article 415 paragraph (10) of the New Civil Code of the Philippines provides that contracts for public works and servitudes and other real rights over immovable property are considered immovable. A plain reading of Article 415 of the New Civil Code of the Philippines shows that the contract itself is made immovable. The Concession Agreement executed by MWSS and Maynilad, for the sole right of Maynilad to manage, operate, repair, decommission and refurbish all fixed and movable assets required to provide water and sewerage services in the West Area in Metro Manila, is clearly a contract for public works and, as such is classified as an immovable property. "While the piece of paper on which the contract for public works has been written is necessarily personal property, the contract itself, or rather the right to the contract, is real property." (Paras citing Manresa, Civil Code of the Philippines Annotated II 1994 Ed., p. 26) . Accordingly, your application for tax treaty relief is hereby DENIED for lack of legal basis. The capital gains derived by LAWL on the sale of its shares of stock in Maynilad to MPIC shall be taxed in accordance with Section 28 (B) (5) (c) of the Tax Code of 1997, in relation to Article 13 (3) of the Philippines-Singapore tax treaty. Lastly, the transfer or sales of shares of LAWL to MPIC is subject to DST pursuant to Section 175 of the Tax Code of 1997, as amended by Republic Act No. 9243 (An Act Rationalizing the Provisions on the Documentary Stamp Tax of the National Internal Revenue Code of 1997, as Amended and for Other Purposes). "Section 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." ASIETa Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Revenue Regulations No. 4-86 dated April 2, 1986 "Determination of whether the assets of a corporation consist principally of real property interest under the Philippine tax treaties".