ITAD BIR Ruling No. 122-16

June 29, 2016 ITAD BIR RULING NO. 122-16 Article 13, Philippines-Japan tax treaty, as amended SCS Global Business Solutions, Inc. 14th Floor, 6788 Ayala Avenue Oledan Square, Makati City Attention: Mr. Tatsuya Koide Gentlemen : This refers to your tax treaty relief application filed on June 26, 2013 requesting confirmation that the transfer by Hitachi Cable Ltd. ("Hitachi Cable") of its shares of stock in PHCP, Inc. ("PHCP") to Hitachi Metals, Ltd. ("Hitachi Metals") as a result of an absorption-type merger are exempt from capital gains 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 as amended by a Protocol 1 ("Philippines-Japan tax treaty, as amended") . Facts Hitachi Cable is a foreign corporation and a resident of Japan based on its Articles of Incorporation and Certificate of Residence issued by the Asakusa Tax Office in Japan on May 24, 2013. Hitachi Cable is located at 1-22-16, Asakusabashi, Taito-ku, Tokyo, Japan. 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 on May 28, 2013. On the other hand, PHPC is a domestic corporation located at FCIE, Barangay Langkaan, Dasmarias, Cavite, Philippines. Based on the Secretary's Certificate issued by PHCP on June 20, 2013, Hitachi Cable owns 99,996 common shares of PHCP, each share with a par value of P1,000.00, and represented by the following stock certificates: Stock Certificate Number of Shares Value of Shares (in Pesos) Number 64 99,995 99,995,000.00 69 1 1,000.00 Total 99,996 99,996,000.00 ====== =========== On February 13, 2013, Hitachi Cable and Hitachi Metals, Ltd. ("Hitachi Metals") entered into an Absorption-Type Merger Agreement where Hitachi Cable merged with Hitachi Metals. Hitachi Metals is a foreign corporation in Japan located at 2-1, Shibaura 1-chome, Minato-ku, Tokyo, Japan. Under the merger, Hitachi Metals , the surviving company, shall exchange 0.17 share of its common stock for one share of Hitachi Cable's shareholders immediately before the merger takes effect. Likewise, the merger will not increase the capital stock or legal capital surplus of Hitachi Metals . The merger took effect on July 1, 2013 . Based on the same Secretary's Certificate issued by PHCP, the merger will effectively transfer to Hitachi Metals all the 99,996 shares of Hitachi Cable thereby making Hitachi Metals the only majority shareholder in PHCP representing 99.99 percent of the latter's outstanding common shares. Based on the submitted Interim Financial Statement and Comparative Schedule of Property, Plant and Equipment of PHCP as of June 30, 2013 , the value of PHCP's property plant and equipment in relation to its total assets is P1,418,164.39 and P255,283,020.95, respectively, representing 0.56 percent . Ruling 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 5% On any amount in excess of P100,000 10%" 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." Relative thereto, Article 13 of the Philippines-Japan tax treaty, as amended provides as follows: "Article 13 1. Gains derived by a resident of a Contracting State from the alienation of immovable property as defined in paragraph 2 of Article 6 and situated in the other Contracting State may be taxed in that other Contracting State. 2. Gains from the alienation of any property, other than immovable 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 any property, other than immovable 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 taxed in that other Contracting State. 3. Gains derived by a resident of a Contracting State from the alienation of ships or aircraft operated in international traffic and any property, other than immovable property, pertaining to the operation of such ships or aircraft shall be taxable only in that Contracting State. 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. 5. Gains from the alienation of any property other than those referred to in paragraphs 1, 2, 3 and 4 shall be taxable only in the Contracting State of which the alienator is a resident." Under paragraph 4 of Article 13, gains derived by a resident of Japan from the alienation of shares of a company, a partnership or a trust, may be taxed in the Philippines if the property of such company, partnership, or trust, consists principally of immovable property situated in the Philippines. Otherwise, under paragraph 5 of the same article, such gains shall be taxable only in Japan where the alienator is a resident. On the question of "principally constituting immovable property," Section 2 (b) of Revenue Regulations No. 4-86 2 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) Accordingly, since the ratio of PHCP's immovable property over its total assets as of June 30, 2013 , is merely 0.56 percent (P1,418,164.39 divided by P255,283,020.95), which is not more than fifty percent, PHCP's assets as of that date do not constitute principally of immovable property. Therefore, any capital gains derived by Hitachi Cable from the merger shall be exempt from income tax in the Philippines pursuant to paragraphs 4 and 5, Article 13 of the Philippines-Japan tax treaty, as amended. However, the transfer by Hitachi Cable of its 99,996 common shares in PHCP to Hitachi Metals as a result of the merger 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 (P99,996,000.00), 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. Protocol Amending 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 effective January 1, 2009 . 2. Determination of Whether the Assets of a Corporation Consist Principally of Real Property Interest under the Philippine Tax Treaties .