ITAD Ruling No. 008-01

February 12, 2001 ITAD RULING NO. 008-01 Art. 14 RP-US Tax Treaty Art. 13 RP-Netherlands Tax Treaty ITAD 111-00 ITAD 18-00 Romulo, Mabanta, Buenaventura Sayoc & De Los Angeles Attorneys at Law 30th Floor Citibank Tower, Citibank Plaza 8741 Paseo de Roxas, Makati City Attention: Atty . Priscilla B . Valer and Atty . Jeanne M . Macasaet Gentlemen : This refers to your letter dated September 19, 2000 requesting confirmation that the sale, assignment and transfer by Brightpoint International, Ltd . ( Brightpoint USA ) of its shares of stock in Brightpoint Philippines, Inc . ( Brightpoint Philippines ) to Brightpoint International Holdings B . V . ( Brightpoint IH Netherlands ), and the subsequent sale, assignment and transfer by Brightpoint IH Netherlands of the same shares of stock in Brightpoint Philippines to Brightpoint Holdings B . V . ( Brightpoint H Netherlands ), are both exempt from capital gains tax imposed under Section 28(B)(5)(c) of the National Internal Revenue Code of 1997 ( NIRC 1997 ) pursuant, respectively, to the Reservation Clause of Article 14 (Capital Gains) of the RP-United States Tax Treaty and to Article 13 (Gains from the Alienation of Property) of the RP-Netherlands Tax Treaty. It is represented that Brightpoint USA is a corporation organized and existing under the laws of the United States of America with principal office at 1013, Centre Road, City of Wilmington 19805, County of New Castle, State of Delaware, United States of America; that Brightpoint IH Netherlands and Brightpoint H Netherlands are corporations organized and existing under the laws of The Netherlands with same principal office at Aert Van Nesstraat 45, 3012 CA Rotterdam, The Netherlands; that Brightpoint Philippines is a corporation organized and existing under the laws of the Philippines with principal office at 1765 N. Garcia Street, San Miguel Village, Makati City, Philippines; that Brightpoint USA and Brightpoint IH Netherlands are not registered as a corporation or partnership licensed to do business in the Philippines as per certifications issued by the Securities and Exchange Commission respectively dated July 17, 2000 and July 10, 2000; that as of April 18, 1998, Brightpoint USA owns 52,742 shares of stock in Brightpoint Philippines with a par value of P100.00 per share; that on April 18, 1998, for value received, Brightpoint USA , sold, assigned and transferred its 52,742 shares of stock in Brightpoint Philippines to Brightpoint IH Netherlands ; that, also, on the same date, for value received, Brightpoint IH Netherlands subsequently sold, assigned and transferred its 52,742 shares of stock in Brightpoint Philippines to Brightpoint H Netherlands ; that on April 30, 1998, Brightpoint Philippines paid to the Bureau of Internal Revenue the corresponding documentary stamp taxes due on the two transfers amounting to P39,560.25 each transfer. CSIcTa Based on the foregoing, it is your opinion that the sale, assignment and transfer by Brightpoint USA of its shares of stock in Brightpoint Philippines to Brightpoint IH Netherlands , and the subsequent sale, assignment and transfer by Brightpoint IH Netherlands of the same shares of stock in Brightpoint Philippines to Brightpoint H Netherlands , are both exempt from capital gains tax imposed under Section 28(B)(5)(c) of the NIRC 1997 pursuant, respectively, to the Reservation clause of Article 14 (Capital Gains) of the RP-United States Tax Treaty and to Article 13 (Gains from the Alienation of Property) of the RP-Netherlands Tax Treaty. On the first transfer, please be informed that the Reservation Clause of paragraph 2, Article 14 (Capital Gains) of the RP-United States Tax Treaty provides: "Article 14 CAPITAL GAINS 1. Gains from the alienation of tangible personal (movable) property forming part of the business property of a permanent establishment which a resident of a Contracting State 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 taxed 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 only in the Contracting State of which the alienator is a resident." ( Reservation Clause ) ". . . notwithstanding the provisions of Article 14 relating to capital gains, both the United States and the Philippines may tax gain from the disposition of an interest in a corporation if its assets consist principally of a real property interest located in that 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." According to the aforequoted Clause, gains from the disposition of an interest in a domestic corporation may be taxed in the Philippines if the assets of that corporation consist principally of real property interests located in the Philippines. Section 2, Revenue Regulations No. 4-86 provides guidance on the meaning of "consisting principally of real property interest": "SEC. 2. Definitions . For purposes of these Regulations, the following terms and phrases shall be understood to mean a) 'Real Property Interest' interest on properties enumerated in Section 3 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; SEHDIC b) 'Principally', 'wholly or principally', 'directly principally' or 'attributable' more than 50% of the entire assets in terms of value; xxx xxx xxx" Based on its audited financial statement as of August 18, 1998, only 13.33 percent of Brightpoint Philippines ' total assets constitutes real property interests located in the Philippines. Hence, your opinion that the sale, assignment and transfer by Brightpoint USA of its shares of stock in Brightpoint Philippines to Brightpoint IH Netherlands are exempt from capital gains tax pursuant to the Reservation Clause of paragraph 2, Article 14 of the RP-United States Tax Treaty is hereby confirmed. (BIR Ruling No. ITAD 111-00 dated August 28, 2000) On the second transfer, please be informed that paragraph 4, Article 14 (Gains from the Alienation of Property) of the RP-Netherlands Tax Treaty provides: "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 a 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. xxx xxx xxx" According to paragraph 4 of the aforequoted Article, gains from the alienation of property. not in the categories of: (a) immovable (real) property; (b) movable (personal) property forming part of the business property of a permanent establishment of an enterprise, or of a fixed base used for performing professional services of an individual; and (c) ships and aircraft (and movable properties related thereto), arising in the Philippines shall be taxable only in the Netherlands. DCcHIS Hence, your opinion that the sale, assignment and transfer by Brightpoint IH Netherlands of its shares of stock in Brightpoint Philippines to Brightpoint H Netherlands are exempt from capital gains tax pursuant to paragraph 4, Article 13 of the RP-Netherlands Tax Treaty is hereby confirmed. (BIR Ruling No. ITAD 18-00 dated January 28, 2000) Although the two transfers are exempt from capital gains tax, they are, however, subject to documentary stamp tax (DST) imposed under Section 176, NIRC 1997 which shall be computed at P1.50 on each P200.00 (or fractional part thereof) of the par value of Brightpoint Philippines ' shares of stock. Finally, Section 201, NIRC 1997 provides that "[a]n instrument, document or paper which is required by law to be stamped and which has been signed, issued, accepted or transferred without being duly stamped, shall not be recorded . . ." Because the corresponding DSTs on the two transfers are paid, the Corporate Secretary of Brightpoint Philippines , upon a presentation to him of the Certificate Authorizing Registration, is authorized to record in Brightpoint Philippines ' Stock and Transfer Book: (1) the transfer of Brightpoint Philippines ' shares of stock from Brightpoint USA to Brightpoint IH Netherlands , cancel old stock certificates issued to Brightpoint USA , and issue new stock certificates in the name of Brightpoint IH Netherlands ; and (2) the subsequent transfer of Brightpoint Philippines ' shares of stock from Brightpoint IH Netherlands to Brightpoint H Netherlands , cancel old stock certificates issued to Brightpoint IH Netherlands , and issue new stock certificates in the name of Brightpoint H Netherlands . This ruling is issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are materially different, then this ruling shall be considered null and void. aEcADH Very truly yours, Commissioner of Internal Revenue By: (SGD.) LILIAN B. HEFTI Deputy Commissioner Legal & Inspection Group