ITAD BIR Ruling No. 105-12

February 24, 2012 ITAD BIR RULING NO. 105-12 Article VI (Status, Immunities and Privileges), Articles of Agreement of the International Finance Corporation; BIR Ruling No. 234-82 P.F. Tatunay and Co. Certified Public Accountants 3B-20, Francesca Tower Condominium Scout Borromeo corner EDSA South Triangle, Quezon City Attention: Prudencio F. Tatunay Managing Partner Gentlemen : This refers to your letter dated December 15, 2009 requesting confirmation that the sale by the International Finance Corporation ("IFC") of its shares of stock in Pilipinas Shell Petroleum Corporation ("Pilipinas Shell") to the Insular Life Assurance Company, Ltd. ("Insular Life") is exempt from applicable taxes pursuant to the Articles of Agreement of IFC . Facts It is represented that IFC is an institution established by foreign governments and whose Articles of Agreement took effect on October 1, 1955; that the purpose of IFC is to further economic development by encouraging the growth of productive private enterprise in member countries, particularly in the less developed areas, thus supplementing the activities of the International Bank for Reconstruction and Development; that in carrying out this purpose, IFC shall (i) in association with private investors, assist in financing the establishment, improvement and expansion of productive private enterprises which would contribute to the development of its member countries by making investments, without guarantee of repayment by the member government concerned, in cases where sufficient private capital is not available on reasonable terms; (ii) seek to bring together investment opportunities, domestic and foreign private capital, and experienced management; and (iii) seek to stimulate, and to help create conditions conducive to, the flow of private capital, domestic and foreign, into productive investment in member countries; that IFC is located at 2121 Pennsylvania Avenue, N.W. Washington, D.C., United States of America; and that, on the other hand, the Philippines is an original member of the IFC with an initial contribution of US$166,000.00 equivalent to 166 shares, and to which it appropriated funds for this purpose under Republic Act No. 1604 1 and Republic Act No. 1926 2 and * aESIHT It is further represented that on December 15, 2009, IFC and Insular Life entered into a Deed of Absolute Sale where IFC , in consideration of the amount of P385,755,969.00, sold to Insular Life, 10,425,837 of its 13,134,157 common shares of stock in Pilipinas Shell Petroleum Corporation ("Pilipinas Shell") under Certificate of Stock No. 853 issued on January 2, 2001; that each share has a par value of P1.00 or a total of P13,134,157.00; and that Insular Life is located at Insular Life Corporate Centre, Insular Life Drive, Filinvest Corporate City, Alabang, Muntinlupa, Philippines. Ruling In reply, please be informed that, as a general rule, capital gains derived from the sale of shares of stock not traded in the stock exchange are subject to income tax under Section 28 (B) (5) (c) of the National Internal Revenue Code of 1997 ("Tax Code"), as amended, to wit: "SEC. 28. Rates of Income Tax on Foreign Corporations. . . . (B) Tax on Nonresident Foreign Corporation. . . . (5) Tax on Certain Incomes Received by Nonresident Foreign Corporations. . . . (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: AScHCD Not over P100,000 5% On any amount in excess of P100,000 10%" Likewise, the sale of shares of stock is subject to documentary stamp tax under Section 175 of the Tax Code, viz.: "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." STDEcA However, under Section 9, Article VI of the Articles of Agreement of IFC , it provides that the IFC , its assets, property, income and its operations and transactions authorized by the Agreement shall be immune from all taxation and from all customs duties, and that the IFC shall be immune from the liability to collect or pay any tax or duty, thus: "Article VI STATUS, IMMUNITIES AND PRIVILEGES xxx xxx xxx Section 9. Immunities from Taxation. (a) The Corporation, its assets, property, income and its operations and transactions authorized by this Agreement, shall be immune from all taxation and from all customs duties. The Corporation shall also be immune from liability for the collection or payment of any tax or duty." Accordingly, pursuant to Section 9 (a) of the Articles of Agreement, income in the form of capital gains derived by IFC from the sale of its 10,425,837 shares in Pilipinas Shell to Insular Life is exempt from income tax imposed under Section 28 (B) (5) (c) of the Tax Code. Moreover, since the subject shares in Pilipinas Shell constitute an asset or property of IFC , the sale or transfer of these shares to Insular Life made through a Deed of Absolute Sale is exempt from documentary stamp tax imposed under Section 175 of the Tax Code. However, under Section 173 of the Tax Code, since IFC is exempt, Insular Life (the buyer or transferee), on the other hand, shall be liable to the payment of the documentary stamp tax on the transaction, thus: "SEC. 173. Stamp Taxes Upon Documents, Loan Agreements, Instruments and Papers. Upon documents, instruments, loan agreements and papers, and upon acceptances, assignments, sales and transfers of the obligation, right or property incident thereto, there shall be levied, collected and paid for, and in respect of the transaction so had or accomplished, the corresponding documentary stamp taxes prescribed in the following Sections of this Title, by the person making, signing, issuing, accepting, or transferring the same wherever the document is made, signed, issued, accepted or transferred when the obligation or right arises from Philippine sources or the property is situated in the Philippines, and the same time such act is done or transaction had: Provided, That whenever one party to the taxable document enjoys exemption from the tax herein imposed, the other party who is not exempt shall be the one directly liable for the tax." (Emphasis added) (BIR Ruling No. 234-82 dated August 11, 1982) DTcHaA 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.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Entitled An Act Authorizing Philippine Membership in the Proposed International Finance Corporation and Authorizing the Appropriation of Funds Therefor approved on August 23, 1956. Section 2 thereof provides: "Section 2. There is hereby authorized to be appropriated the sum of three hundred thirty-two thousand (P332,000.00) pesos to pay for the subscription of the Government of the Republic of the Philippines to the capital stock of the proposed International Finance Corporation." 2. Entitled An Act Appropriating the Sum of Three Hundred Thirty-Two Thousand Pesos to Pay for the Subscription of the Government of the Republic of the Philippines to the Capital Stock of the International Finance Corporation, approved on June 22, 1957. Section 1 thereof provides: "Section 1. There is hereby appropriated, out of any funds in the National Treasury not otherwise appropriated, the sum of three hundred thirty-two thousand pesos to pay for the subscription of the Government of the Republic of the Philippines to the capital stock of the International Finance Corporation as authorized under Republic Act Numbered Sixteen hundred and four."