ITAD Ruling No. 012-00

2000 ITAD RULING NO. 012-00 RP-US Article 14 UN-074-2-22-95 Sycip Gorres Velayo & Co. 6760 Ayala Avenue, 1226 Makati City Attention: C . P . Noel Tax Division Gentlemen : This refers to your letter dated December 8, 1999 requesting confirmation of your opinion that gains that may be realized by your client, Goodyear Tire and Rubber Company (Goodyear), from the proposed transfer of its shares of stock in Philippine Rubber Project Corporation (PRPC) are not subject to Philippine income tax pursuant to Article 14(2) in relation to Article I of the Reservation Clause of the RP-US Tax Treaty. It is represented that Goodyear is a non-resident foreign corporation duly organized and existing under the laws of Ohio in the United States; that PRPC is a domestic corporation organized and existing under Philippine laws with the following capital structure: Name of Stockholder Nationality No. of Shares Goodyear Tire and Rubber Co. American 90,000 S.D. McDonald American 4 Lim Wee How Malaysian 11,244 James R. Bugansky American 11,244 German Lichauco Filipino 4 Jonathan Dean American 4 TOTAL 112,500 That the individual shareholders are holding the shares in-trust for Goodyear, that your client, Goodyear transferred their total shareholding to Philippine Rubber Producers Cooperative, a cooperative duly registered with the Cooperative Development Authority; that based on the balance sheets of PRPC dated November 25, 1999, its real properties in the Philippines amount to P615,656.10 as against its total assets of P44,107,648.00 which shows that the real property is less than 50% of the carrying value of the total assets. In reply, please be informed that Article 14 of the RP-US Tax Treaty, states: "ARTICLE 14 "(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. LexLib "(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. On the other hand, the Reservation Clause of the RP-US Tax Treaty, in pertinent part, provides: "Article I (1) 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 consists principally of 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 that 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. Note that under the Reservation Clause, the Philippines may tax the gains derived from the disposition of interests in a corporation if its assets consist principally of real property interest located in the Philippines. "Principally" means more than 50% of the entire assets in terms of value (Sec. 2, Revenue Regulations No. 4-86). The value of the real property interest of the Corporation located in the Philippines as appearing in its balance sheets as of November 25, 1999 is less than 50% of the value of its total assets. Such being the case, the gains which will be realized by Goodyear from the sale of its shares of stock in the PRPC to Philippine Rubber Producers Cooperative shall be taxable only in the United States pursuant to the aforequoted provision of the RP-US Tax Treaty. Said gain will not be subject to Philippine income tax. cdlex However, the said transfer of shares of stock shall be subject to the documentary stamp tax imposed under Sec. 176 of the Tax Code of 1997. This ruling is being issued on the basis of the foregoing facts as represented and will be considered null and void if upon investigation it will be disclosed that the facts are different. Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal and Enforcement Group