ITAD BIR Ruling No. 144-12

March 29, 2012 ITAD BIR RULING NO. 144-12 Article 13 Philippines-Netherlands tax treaty Manabat Sanagustin & Co. CPAs The KPMG Center, 9/F 6787 Ayala Avenue, Makati City Attention: Manuel P. Salvador III Principal Tax Gentlemen : This refers to the Tax Treaty Relief Application ("TTRA") filed on September 8, 2011 on behalf of NCR Cebu Development Center, Inc. ("NCR Cebu") requesting confirmation that the gain, if any, that may be realized from the buyback/transfer of shares by NCR Cebu from NCR Dutch Holdings B.V. ("NCR Dutch") is exempt from Philippine capital gains tax pursuant to the Convention between the Republic of the Philippines and the Kingdom of the Netherlands for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Netherlands tax treaty"). It is represented that NCR Dutch is a corporation duly organized and existing under the laws of the Netherlands with principal business address at Teleportboulevard 140, 1043 EJ Amsterdam, Netherlands per Declaration of Residence of the Tax and Customs Administration of the Netherlands; that it is not registered as a corporation or as a partnership in the Philippines based on the Certification of Non-Registration of Company dated August 12, 2011 issued by the Securities and Exchange Commission; and that NCR Cebu, on the other hand, is a domestic corporation duly organized and existing under Philippine laws with office address at 5th, 6th and 7th Floors, eBloc Asiatown I.T. Park, Apas, Lahug, Cebu City, Philippines. It is further represented that on various dates from 2003 up to 2010 NCR Dutch acquired 3,237,989,432 common shares with the par value of P1 per share from NCR Cebu as follows: SEIacA Date Mode of Acquisition Shares 19 December 2003 Original Issuance 10,999,992 Incorporation 15 November 2006 Stock Dividend Declaration 514,729,032 27 June 2008 Stock Dividend Declaration 969,672,705 1 October 2009 Declaration of Trust 1 1 October 2009 Declaration of Trust 1 1 October 2009 Declaration of Trust 1 3 April 2009 Stock Dividend Declaration 857,119,700 14 January 2010 Stock Dividend Declaration 885,468,000 that the said shares constitute 99.99 percent of the authorized capital stock of NCR Cebu; that on September 2, 2011, NCR Cebu entered into a Deed of Assignment with NCR Dutch wherein 892,379,293 common shares owned by NCR Dutch were assigned, transferred, and conveyed to NCR Cebu; that in consideration of the said transfer, NCR Cebu assigned in favor of NCR Dutch all its rights, title, and interest to the notes receivables executed by the latter in payment of the common shares it acquired. In reply, please be informed that capital gains derived by a non resident are subject to tax under Section 28 (B) (5) (c) of 1997 National Internal Revenue Code (Tax Code), as amended, 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. (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: IDESTH Not over P100,000 5% On any amount in excess of P100,000 10% However, such fees may be exempt from income tax or subject to a reduced rate to the extent required by any treaty obligation on the Philippines. Section 32 (B) (5) of the Code provides: "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." With respect to a treaty, you invoked the Philippines-Netherlands tax treaty, to wit: "Article 13 GAINS FROM THE ALIENATION OF PROPERTY (1) Gains from the alienation of immovable property, as defined in paragraph 2 of Article 6, may be taxed in the 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 one of the States has in the other State, or of movable property pertaining to a fixed base available to a resident of one of the States in the other 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. (3) Notwithstanding the provisions of paragraph 2, gains derived by an enterprise of one of the States 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. (4) Gains from the alienation of any property other than those mentioned in paragraphs 1, 2 and 3, shall be taxable only in the State of which the alienator is a resident. ..." It is clear from the aforequoted provisions that the capital gains from the alienation of any property other than those mentioned in paragraphs 1, 2 and 3 shall be taxable only in the State where the alienator is a resident. Considering that the above buyback/transfer of shares of stocks is not among those mentioned in said paragraphs 1, 2 and 3, the gains that may be derived by NCR Dutch from the transfer of its shares of stock to NCR Cebu shall not be subject to Philippine income tax under Section 28 (B) (5) (c) of the Tax Code but are subject to tax only in the Netherlands pursuant to paragraph 4, Article 13 of the Philippines-Netherlands tax treaty. Finally, the Deed of Assignment shall be subject to documentary stamp tax imposed under Section 176 of the Tax Code of 1997. CSHEca This ruling is issued on the basis of the foregoing facts as represented. If upon investigation it shall be disclosed that the facts are different, then this ruling shall be rendered null and void. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue