ITAD Ruling No. 006-02

January 23, 2002 ITAD RULING NO. 006-02 RP-Japan, Article 13 BIR Ruling No. ITAD-201-00 Sycip Gorges Velayo & Company 6760 Ayala Avenue 1226 Makati City Attention: Ma . Victoria A . Villaluz Tax Division Gentlemen : This refers to your application for relief from double taxation dated September 12, 2001 on behalf of your client, Seiko Epson Corporation (SEC), requesting confirmation of your opinion that the gains to be realized by SEC from the transfer of its shares of stocks in Epson Philippines Corporation (EPC to Epson Singapore Pte. Ltd (ESP) shall not be subject to Philippine income tax pursuant to the RP-Japan tax treaty. It is represented that SEC is a corporation duly organized and existing under the laws of Japan with principal address at 3-5 Owa 3 Chome, Suwashi, Nagano Ken 392-8502, Japan; that EPC is a corporation organized and existing under the laws of the Philippines with principal office at 36 A/B Floor, Rufino Pacific Tower, 6784 Ayala Avenue, Makati City: that SEC holds all of the issued and outstanding capital stock of EPC consisting of 28,553,542 shares of common stock with a par value of P1.00 or a total value of Php28,553,542; that ESP is a corporation duly organized and existing under the laws of Japan, with business address at No. 1 Temasek Avenue #36-00 Millenia Tower Singapore 039192; that SEC intends to sell/transfer all said shareholdings to ESP; that for and in consideration of the contemplated transfer of the foregoing premises, SEC agreed to pay EPC the total purchase price of EIGHTY TWO MILLION FIVE HUNDRED TWENTY TWO THOUSAND FOUR HUNDRED NINETY FOUR (Php82,522,494) Philippine Pesos, subject to the conditions set forth in the Deed of Transfer. In reply, please be informed that Article 13(4) and (5) of the RP-Japan tax treaty provides that: "Article 13 "Gains from the Alienation of Property "xxx xxx xxx "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. xxx xxx xxx" In the instant case, the gains which will be realized by SEC from the transfer of its shares of stock in EPC to ESP shall be taxable in Japan. However, under the aforequoted provision, the Philippines may tax the gains derived from the disposition of interest in a corporation if its entire assets consist principally of real property interest located in the Philippines. "Real Property Interest" means interest on properties enumerated in Section 3 of Revenue Regulations No. 4-86 which are not, however, exclusive of others that are similarly situated. As used in the treaties and in the Regulations, it shall be understood to include real properties as understood under Philippine Laws. Moreover, "Principally" means more than 50% of the entire assets in terms of value. (Sec.(a) and (b), Revenue Regulations No. 4-86). IHcTDA Verification of the August 31, 2001 Unaudited Financial Statements and March 31, 2001 Audited Financial Statements of EPC disclosed that its net property and equipment located in the Philippines are valued at P13.5M in March 2001 and P11.2M in August 31, 2001, representing less than fifty percent (50%) of its total assets of P210M for March and August 2001, thereby making the assets of EPC not consisted principally of real property interest located in the Philippines. Hence, the gain from sale of 28,553,542 shares of stock of SEC to ESP is not taxable in the Philippines. Accordingly, your opinion is hereby confirmed that the transfer by SEC of its shares of stock in EPC to ESP is exempt from capital gains tax imposed under Section 27(D)(2) of the Tax Code of 1997 pursuant to Article 13(4) and (5) of the RP-Japan Tax Treaty. However, the Deed of Transfer for the sale of Shares of Stocks shall be subject to the documentary stamp tax imposed under Section 176 of the Tax Code of 1997. (BIR Ruling No. ITAD-201-00) Furthermore, a certificate of authority to register the said transaction in the books of EPC must be secured. Thus, SEC is required to file a Capital Gains Tax Return (BIR Form No. 1707) accompanied by copies of the Deed of Assignment and this ruling with Revenue District Office No. 39 South, Quezon City (RDO 39), for the issuance of a Certificate Authorizing Registration (CAR) of the subject shares of stock of EPC in favor of ESP. In addition, Section 176 of the National Internal Revenue Code (Tax Code) of 1997 provides, viz : "Sec. 176. Stamp Tax on Sales, Agreements to Sell, Memoranda of Sales, Deliveries or Transfer of Due-bills, Certificates of Obligation, or Shares or Certificates of Stock . On all sales or agreements to sell, or memoranda of sales, or deliveries, or transfer of due-bills, certificates of obligation, or shares or certificates of obligation, or 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 due-bills, certificates of obligation or stock, or to secure the future payment of money, or for the future transfer of any due-bill, certificate of obligation or stock, there shall be collected a documentary stamp tax of One peso and fifty centavos (P1.50) on each Two hundred pesos (P200), or fractional part thereof; of the par value of such due-bill, certificate of obligation or stock: Provided, That only one tax shall be collected on each sale or transfer of stock or securities from one person to another, regardless of whether or not a certificate of stock or obligation is issued, indorsed, or delivered in pursuance of such sale or transfer: . . ." The same Tax Code provides that the corresponding documentary stamp taxes shall be levied, collected and paid, for and in respect of the transactions so had or accomplished, by the person mating, signing, issuing, accepting, or transferring the document, instrument or paper wherever the same is made, signed, issued, accepted or transferred when the obligation or right arises from Philippines sources or the property is situated in the Philippines. Thus, the burden of paying the documentary stamp tax is placed upon the parties to the contract and leaves the tax to be paid indifferently by either party, and accordingly, the party assuming payment of said tax under the contract becomes directly liable therefor. But if for one reason or another, the said tax is not paid, either party to the contract may be made liable to the tax. Upon presentment of proof of payment of documentary stamp thereon, the corporate secretary of EPC shall be authorized to register in its Stock and Transfer Book the transfer of the shares from EPC to ESP and to cancel and issue new certificates in the name of ESP. This ruling is issued on the basis of the foregoing representations. However, if upon investigation it will be disclosed or discovered that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service