ITAD Ruling No. 011-02

January 29, 2002 ITAD RULING NO. 011-02 Article 13, RP-Japan tax treaty BIR Ruling No. DA-ITAD-37-01 Sycip Salazar Hernandez & Gatmaitan Attorneys-At-Law Syciplaw-All Asia Capital Center 105 Paseo de Roxas, City of Makati 1226 Metro Manila Attention: Ernesto S. Taio, Jr. Francis Joseph H. Ampil Gentlemen : This refers to your application for relief from double taxation dated November 27, 2001, on behalf of your client, ADVANCED PERIPHERALS TECHNOLOGIES, INC. (APTi-Japan), requesting for a formal ruling that APTi-Japan is entitled to avail of tax treaty relief under the RP-Japan tax treaty covering the sale of its shareholdings in APTi Philippines, Inc. (APTi-Philippines). It is represented that APTi-Japan is a corporation duly organized and existing under and by virtue of the laws of Japan with office address at 1368 Futoo-Cho, Kohokuku, Yokohama-shi, Kanagawa-ken, Japan 222-0031; that it is not registered either as a corporation or as a partnership licensed to do business in the Philippines per certification dated September 3, 2001 issued by the Securities and Exchange Commission; that it is the registered owner of 300,600 shares of stock in APTi-Philippines, representing approximately 93.94% of the latter's entire outstanding capital stock; that APTi-Philippines is a corporation duly organized and existing under and by virtue of the laws of the Philippines with office address at 5/F, Citibank Frabelle Building, Madrigal Business Park, Alabang-Zapote Road, Muntinlupa City; that Advanced Technology and Systems Co. Ltd. (ATS) is a corporation duly organized and existing under and by virtue of the laws of Japan; that on October 1, 2001, APTi-Japan sold its 300,600 shares of stock in APTi-Philippines to ATS, that in consideration of the said sale, ATS shall pay in the amount of JP236,000,000; and that the properties of APTi-Philippines do not consist principally of immovable property. 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 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. AHcaDC "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. Based on the foregoing, the gains which will be realized by APTi-Japan from the transfer of its shares of stock to ATS shall be taxable 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 read 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 audited financial statements as of March 31, 2001 and unaudited financial statements as of September 30, 2001 of APTi-Philippines disclosed that the assets of APTi-Philippines do not consist principally of real property interest located in the Philippines. Accordingly, the sale by APTi-Japan of its shares of stock to ATS is exempt from capital gains tax imposed under Section 28(B)(5)(C) of the National Internal Revenue Code of 1997. (BIR Ruling No. DA-ITAD 37-01 dated March 22, 2001) However, the agreement pertaining to the transfer of shares shall be subject to the documentary stamp tax imposed under Section 176 of the National Internal Revenue Code of 1997. This ruling is issued on the basis of the foregoing facts as represented. However, if upon investigation it shall 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.) MILAGROS V. REGALADO Assistant Commissioner Legal Service