ITAD BIR Ruling No. 120-15

April 30, 2015 ITAD BIR RULING NO. 120-15 Article 14 (Capital Gains) Philippines-United States tax treaty Quisumbing Torres Law Offices 12th Floor, Net One Centre 26th St. cor. 3rd Ave. Bonifacio Global City, Taguig Attention: Dennis G. Dimagiba Lorybeth Baldrias-Serrano Authorized Representatives Gentlemen : This refers to your tax treaty relief application filed on December 4, 2012 requesting confirmation that the sale by Wyeth LLC ( "Wyeth" ) of its shares of stock in Wyeth Phils., Inc. (" Wyeth Philippines ") to Nestle SA (" Nestle ") is exempt from capital gains tax pursuant to the Convention between the Government of the Republic of the Philippines and the Government of the United States of America with Respect to Taxes on Income (" Philippines-United States tax treaty ") . Facts Wyeth is a non-resident foreign corporation from the United States based on the consularized and notarized Certificate of Residence issued by the US Internal Revenue Service. The company Wyeth is organized and existing under the laws of the United States with office address at Five Giralda Farms, New Jersey 07940, USA based on a consularized and notarized Restated Certificate of Incorporation and related documents by the Secretary of State of Delaware, USA. Wyeth is not registered as a partnership or corporation in the Philippines based on a Certificate of Non-Registration of Company issued by the Securities and Exchange Commission. Wyeth-Philippines is a domestic corporation organized and existing under the laws of the Philippines with office address at 2236 Chino Roces Avenue, Makati City, Philippines. Wyeth owns One Million Five Hundred Seventy Four Thousand Four Hundred Fifty Three (1,574,453) Class A Shares with a par value of Php100.00 per share or a total par value of One Hundred Fifty Seven Million Four Hundred Forty Five Thousand Three Hundred Pesos (Php157,445,300.00) and Four Million Five Hundred Twenty Nine Thousand Seven Hundred Twenty Eight (4,529,728) Class B shares with a total par value of Four Hundred Fifty Two Million Nine Hundred Seventy Two Thousand Eight Hundred Pesos (Php452,972,800.00) and based on Certified True Copies of stock certificates issued by Wyeth-Philippines. On the other hand, Nestle is a non-resident foreign corporation organized and existing under the laws of Switzerland with office address at Avenue Nestle, 55, 1800 Vevey, Switzerland. On December 1, 2012, Wyeth entered into a Deed of Absolute of Sale with Nestle for the sale of the shares of stock in Wyeth Philippines for the sum of One Billion Forty Three Million US Dollars (US$1,043,000,000.00). The capital gains subject of this ruling are not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, judicial or administrative protest, collection proceedings or judicial appeal based on the notarized Sworn Statement of the Finance Director of Wyeth Philippines . Ruling A. Capital Gains Tax In reply, please be informed that Section 28 (B) (5) (c) of the National Internal Revenue Code of 1997 ("Tax Code"), as amended, capital gains derived by a foreign corporation are subject to income tax as follows: "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 On any amount in excess of P100,000 10 0%" However, under Section 32 (B) (5) of the Tax Code, such gains are exempt or partially exempt to the extent required by any treaty obligation on the Philippines, to wit: "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 the Philippines-United States tax treaty. Article 14 of the treaty provides as follows: "Article 14 Gains from the Alienation of Property 1. Gains from the alienation of tangible personal (movable) property forming part of the business property of a permanent establishment which is a resident of a Contracting States has in the other Contracting State or of tangible personal (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 independent personal services, including such gains from the alienation of such a permanent establishment (alone or together with the whole enterprise) or of such a fixed base, may be tax in the other State. However, gains derived by a resident of a Contracting State from the alienation of ships, aircraft or containers operated by such resident in international traffic shall be taxable only in that State, and gains described in Article 13 (Royalties) shall be taxable only in accordance with the provisions of Article 13. 2. Gains from the alienation of any property other than those mentioned in paragraph 1 or in Article 7 (Income from Real Property) shall be taxable in the Contracting State of which the alienator is a resident. However, the Reservation Clause of the treaty states in part: "Notwithstanding the provisions of Article 14 of the Convention relating to the capital gains, both the Philippines and the United States may tax gains from the disposition of an interest in a corporation if its assets consist principally or real property interest located in the country. Likewise, both countries may tax gain from the disposition of an interest in a partnership, trust or estate to the extent the gain is attributable to a real property interest in one of the countries. The term 'real property interest' is to have the meaning it has under the law of the country in which the underlying real property is located." Based on the above-quoted provisions, capital gains from sale of shares of stock not traded in the stock exchange by an entity domiciled in the United States are taxable at a rate of 5% if the amount does not exceed P100,000.00 and 10% on any amount in excess P100,000.00 but these capital gains may be exempt from the Philippine tax if the income earner is invoking the Philippines-United States tax treaty provided that its assets do not consist principally of real property interest located in the country. On the question of "principally constituting immovable property," Section 2 (b) of Revenue Regulations No. 4-86 1 provides that the term "principally" as generally used in Article 13 of tax treaties means that the ratio of such immovable property over the total assets of the domestic corporation in terms of value is more than fifty percent , 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) Evaluation of the Statement of Financial Statement Position for the taxable years 2011 and 2010, including the unaudited Statement of Financial Position for taxable year 2012 as of November 30, 2012 shows the following real property interest: 2012 2011 2010 Property, Plant and Equipment P7,426,317,000.00 P7,849,728,000.00 P7,701,862,000.00 Total Assets 14,374,876,000.00 18,796,728,000.00 16,508,835,000.00 Real Property Interest Ratio 51.67% 41.76% 46.65% In view of the foregoing and considering that real properties of Wyeth Philippines amounted to 51.67% of its total assets, the instant request for relief for double taxation of Wyeth for income derived from the sale of shares of stock in a domestic corporation to another foreign corporation, is hereby DENIED pursuant to the Philippines-United States tax treaty. Capital gains derived by Wyeth are subject to capital gains tax in accordance with Section 28 (b) (5) (c) of the Tax Code. B. Documentary Stamp Tax The transfer or sale of shares of Wyeth in Wyeth Philippines to Nestle is subject to documentary stamp tax ("DST") equivalent to P0.75 for every P200.00 (or a fraction 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.) KIM S. JACINTO-HENARES 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.