ITAD Ruling No. 019-03

January 30, 2003 ITAD RULING NO. 019-03 Article 13, RP-Singapore tax treaty Section 176, NIRC BIRRuling No. DA ITAD-127-01 Picazo Buyco Tan Fider & Santos 104 H.V. dela Costa St., Salcedo Village Makati City Attention: Ms. Gemma M. Santos Gentlemen : This refers to your application for relief from double taxation dated September 27, 2002, on behalf of your client, Kim Eng Ong Asia Holdings Ltd. (Kim Eng Ong), requesting confirmation of your opinion that the gains to be realized by Kim Eng Ong from the proposed sale of its shares of stock in ATR-Kim Eng Capital Partners Inc. (ATR-Kim Eng) to Philtread Holdings Corp. (Philtread) are exempt from capital gains tax in the Philippines imposed under Section 28(B)(5)(c) of the Tax Code of 1997 pursuant to Article 13 of the RP-Singapore tax treaty. It is represented that Kim Eng Ong is a non-resident foreign corporation duly organized and existing under the laws of Singapore with principal office address at #9 Temasek Boulevard, #39-00 Suntec Tower, Singapore; that it is not registered either as a corporation or as a partnership and has not been licensed to do business in the Philippines per Certificate of Non-registration dated September 11, 2002 issued by the Securities and Exchange Commission; that ATR-Kim Eng is a corporation duly organized and existing under the laws of the Philippines with principal address at 17th Floor, Tower One & Exchange Plaza, Ayala Triangle, Ayala Avenue, Makati City; that Philtread Holdings Corp. is a domestic corporation duly organized and existing under the laws of the Philippines with office address at Suite 5N Vernida 1 Condominium 120 Amorsolo St., Legaspi Village, Makati City; that Kim Eng Ong is a registered stockholder of record and owns three million two hundred seventy thousand (3,270,000) shares of stock, inclusive of the 3 qualifying shares in the names of its nominee directors, representing Forty-Three and 02/100 per cent (43.02%) of the issued and outstanding capital stock of ATR-Kim Eng with a par value of One Hundred Pesos (Php100.00) per share; that Kim Eng Ong intends to transfer its shareholdings in ATR-Kim Eng in favor of Philtread Holdings Corp. for and in consideration of the amount of Four Hundred Seventy Six Million Two Hundred Eighty Three Thousand One Hundred Ninety Three Pesos (P476,283,193.00); that as shown in its audited financial statements as of March 2002, ATR-Kim Eng has the following real properties in the Philippines: Condominium units and improvements P77,291,707 Transportation equipment 20,526,650 Furniture and fixtures 8,881,770 P106,700,127 Less: Accumulated depreciation and amortization (30,017,287) TOTAL P76,682,840 =========== and that the real properties in the amount of P76,682,840 as against its total assets of P1,294,141,482 represent 5% of the total assets of ATR-Kim Eng which is less than 50% of the carrying value of its total assets. In reply, please be informed that Article 13 of the RP-Singapore tax treaty provides, viz : "Article 13 GAINS FROM THE ALIENATION OF PROPERTY 1. Gains from the alienation of immovable property may be taxed in the Contracting 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 a Contracting State has in the other Contracting State or of 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 professional services, including such gains from the alienation of such 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 an enterprise of a Contracting State 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. 3. Gains from the alienation of shares of a company, the property of which consists principally of immovable property situated in a Contracting State, may be taxed in that State. Gains from the alienation of an interest in a partnership or a trust, the property of which consists principally of immovable property situated in a Contracting State, may be taxed in that State. ADaECI 4. Gains from the alienation of any property, other than those mentioned in paragraphs 1, 2, and 3 shall be taxable only in the Contracting State of which the alienator is a resident." The gains which will be realized by Kim Eng Ong from the proposed sale of its shares of stock in ATR-Kim Eng to Philtread shall be taxable only in Singapore. However, under paragraph 3 of the aforequoted provision, the Philippines may tax the gains to be derived from the disposition of interest in a corporation if its assets consists 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 March 2002 Audited Financial Statements of ATR-Kim Eng disclosed that its real property interest located in the Philippines is only 5% of its total assets, thereby making the assets of ATR-Kim Eng not principally consisted of real property interest located in the Philippines. Consequently, the gains, if any, shall be taxable only in Singapore since, pursuant to paragraph 4 of the said Article, "any capital gains which may be derived by Kim Eng Ong from the alienation of any property, other than those mentioned in paragraphs 1, 2, and 3 of Article 13 of the RP-Singapore tax treaty shall be taxable only in the Contracting State of which the alienator is a resident." Accordingly, your opinion that the proposed sale by Kim Eng Ong to Philtread of its shares of stock in ATR-Kim Eng is not subject to capital gains tax is hereby confirmed (ITAD Ruling No. 127-01 dated December 19, 2001). aTCADc However, once the proposed sale is consummated and the Deed of Absolute Sale of the subject shares of stock is executed by Kim Eng Ong and Philtread, the Deed shall be subject to the documentary stamp tax imposed under Section 176 of the National Internal Revenue Code of 1997. This ruling shall be without force and effect unless and until an actual agreement of contract, which stipulations are found to be consistent with the representations made herein, has been entered into by the parties involved. Thus, upon reaching a binding agreement or contract between and among the parties in this case, the instrument must be presented to the International Tax Affairs Division of this Bureau within 15 days from its due execution for verification whether the representations made herein upon which this ruling is based are consonant with the actual facts of the transaction. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service