ITAD Ruling No. 013-02

January 29, 2002 ITAD RULING NO. 013-02 RP-US Article 14 & Reservation Clause NIRC Sec. 28(B)(5)(c) & 176 BIR Ruling No. ITAD-40-01 Sycip Gorres Velayo & Co 6760 Ayala Avenue 1226 Makati City Attention: J.A. Osana Tax Division Gentlemen : This refers to your application for tax. treaty relief dated December 18, 2001 requesting confirmation of your opinion that the sale by BT Foreign Investment Corporation (BTFIC) to Deutsche Asia Pacific Holdings, Pte. Ltd. (DAPH) of its shares in BT Financial Services Corporation (BTFSC) is not subject to capital gains tax pursuant to the RP-US tax treaty. It is represented that BTFIC is a non-resident foreign corporation duly organized and existing in accordance with the laws of the State of Delaware with office address at 1001 Suite, 200 Centre Road, Wilmington, Delaware, USA; that BTFIC is not registered either as a corporation or as a partnership in the Philippines as per certification dated September 17, 2001 issued by the Securities and Exchange Commission; that BTFIC is the absolute owner of Two Million Nine Hundred fifty Six Thousand Six Hundred Ninety Five (2,956,695) shares and the beneficial owner of Five shares of stock with a par value of P10.00 each in BTFSC; that BTFSC is a domestic corporation duly organized and existing under the laws of the Philippines with office address at 26th Floor, Tower One, Ayala Triangle, Makati City; that DAPH is a corporation organized and existing under the laws of Singapore, with business address at 5 Temasek Boulevard, # 12-08 Suntec Tower five, Singapore 038985; that on September 13, 2001, by virtue of the Deed of Assignment by and between BTFIC and DAPH, BTFIC sold its 2,956,695 shares of stocks in BTFSC to DAPH; and that in consideration of the said transfer, DAPH paid the amount of Eighty Seven Million Three Hundred Eighty Two Thousand and Sixteen Pesos (P87,382,016.00). In reply, please be informed that Article 14 of the RP-US tax treaty provides as follows: 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 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 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." ECTAHc (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." Based on the aforequoted clause, 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 Audited Financial Statements as of and for the Eight Months Ended August 31, 2001 and the Supplementary Information and Comments on Audit Procedures Performed as of and for the Eight Months ended August 31, 2001 of BTFSC disclosed that none of its assets constitute immovable property. Thus, BTFSC's assets do not consist principally of real property interest located in the Philippines. Accordingly, this Office confirms your opinion as it hereby holds that any gain assumed to be realized by BTFIC from the transfer of its shares of stock in BTFSC to DAPH by virtue of their Deed of Assignment is not subject to Philippine income tax. (BIR Ruling No. ITAD-40-01 dated April 6, 2001) However, the said Deed of Assignment is subject to the documentary stamp tax (DST) imposed under Section 176 of the NIRC. This ruling is issued on the basis of the facts as represented. However, if upon investigation it shall be 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