ITAD Ruling No. 009-01

February 12, 2001 ITAD RULING NO. 009-01 RP-Japan Article 13 Sec. 176 24-99 Abello Concepcion Regala & Cruz ACCRA Building, 122 Gamboa Street, Legaspi Village, 0770 Makati City Attention: Atty . Maria Teresa Sianghio-Baac Gentlemen : This refers to your letter dated July 17, 2000 requesting confirmation of your opinion that the gains derived by your clients, JAIC P1B Investment Fund, JAIC P2A Investment Fund and JAIC P2B Investment Fund (the SELLERS), from the sale of their respective shares in Macondray & Company, Inc. (Macondray) to MCI, Inc. (MCI), are exempt from capital gains tax pursuant to the RP-Japan Tax Treaty. It is represented that the SELLERS are partnerships duly recognized and existing under the laws of Japan with principal address at 2-4 Kojimachi Tsuruyahachiman Building, 4 Kojimachi, 2-Chome, Chiyoda-ku, Tokyo, Japan; that all are not registered as a corporation/partnership licensed to do business in the Philippines as per certifications dated August 2, 2000 issued by the Securities and Exchange Commission; that Macondray is a corporation duly organized and existing under the laws of the Philippines; that MCI is a corporation duly organized under the laws of British Virgin Islands; that the SELLERS are stockholders of record of Macondray; that on March 28, 2000, by virtue of the Deed of Absolute Sale of Shares of Stock executed by the SELLERS and MCI, the SELLERS sold, ceded, transferred and conveyed to MCI the aforementioned shares in Macondray for an aggregate amount of Twenty Three Million Eight Hundred Thirty Five Thousand Four Hundred Seventy Two and 28/100 Pesos (P23,835,472.28), broken down as follows: No. of Shares Amount Shareholdings Percentage JAIC P1B Investment Fund 735,322 P10,717,612.28 0.14% JAIC P2A Investment Fund 450,000 P6,558,930.00 0.09% JAIC P2B Investment Fund 450,000 P6,558,930.00 0.09% In reply, please be informed that Article 13 of the RP-Japan Tax Treaty, 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 other 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 such a fixed base, may be taxed in that other Contracting State. SIaHDA "(3) Gains derived by a resident of a Contracting State from the alienation of ships and 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 . (emphasis supplied) "(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 ." (emphasis supplied) Based on the above-quoted provisions, gains which will be realized by the SELLERS from the sale of their shares of stock in Macondray to MCI shall be taxable only in Japan. However, under paragraph 4 of 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. 2(a) and (b), Revenue Regulations No. 4-86). Verification of the 1999 Audited Financial Statements of Macondray disclosed that its real property interest located in the Philippines is only 0.06% of its total assets, thereby making the assets of the same not principally consisted of real property interest located in the Philippines. Accordingly, your opinion that the gains derived by JAIC P1B Investment Fund, JAIC P2A Investment Fund and JAIC P2B Investment Fund (the SELLERS) from the sale of their respective shares in Macondray & Company, Inc. (Macondray) to MCI, Inc. (MCI) are not subject to capital gains tax is hereby confirmed. (BIR Ruling No. ITAD 24-99 dated September 10, 2000) However, the Deed of Absolute Sale of Shares of Stock shall be subject to the documentary stamp tax imposed under Section 176 of the Tax Code of 1997. This ruling is issued on the basis of the facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) LILIAN B. HEFTI Deputy Commissioner Legal and Inspection Group