ITAD Ruling No. 024-99

September 10, 1999 ITAD RULING NO. 024-99 RP-Japan Article 13 007-96 Poblador Bautista & Reyes Law Offices 5th Floor SEDCCO 1 Building 120 Rada corner Legaspi Streets Legaspi Village, Makati City Attention: Atty . Mario Luza Bautista and Atty . Susan Bustos-Jacinto Gentlemen : This refers to your letter dated April 5, 1999 requesting confirmation of your opinion to the effect that the transfer by YKK Corporation (YKK Japan) to YKK Holding Asia Pte. Ltd. (YKK Singapore) of its shares in YKK Zipper Phils. (YKK Philippines) is not subject to capital gains tax pursuant to the RP-Japan Tax Treaty. LibLex It is represented that YKK Japan is a non-resident foreign corporation duly organized and existing under the laws of Japan; that it is not registered either as a corporation/partnership in the Philippines as per certification dated March 22, 1999 issued by the Securities and Exchange Commission; that YKK Philippines is a corporation duly organized and existing under the laws of the Philippines; that YKK Singapore is a non-resident foreign corporation organized and existing under the laws of Singapore; that YKK Japan is the stockholder of record of fifty per cent (50%) of the outstanding capital stock of YKK Philippines equivalent to Thirty Two Million (32,000,000) shares of stock, with a par value of One Peso (1.00) per share, or an aggregate par value of Thirty Two Million Pesos (P32,000,000.00); that on October 30, 1998, by virtue of the Share Transfer Agreement by and among YKK Japan, YKK Singapore and Messrs. Tadahiro Yoshida, Kazuhiko Kokubun and Hiroshi Sekiji (the three individuals being the nominees of YKK Japan in YKK Philippines), YKK Japan transferred and assigned to YKK Singapore its shares in YKK Philippines as payment for its subscription to One Million Three Hundred Thousand (1,300,000) shares of stock of YKK Singapore for the total subscription of One Million Three Hundred Thousand Dollars, Singapore currency (S$ 1,300,000.00). 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. prcd "(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. "(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 . prcd "(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." the gains which will be realized by YKK Japan from the transfer of its shares of stock in YKK Philippines to YKK (Singapore) shall be taxable only in Japan. However, under the aforequoted provision of paragraph 4 supra, 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 1997 and 1998 Audited Financial Statements of YKK Philippines disclosed that its real property interest is less than 50% of its entire assets. llcd Accordingly, your opinion that the transfer by YKK Japan of its shares in YKK Philippines to YKK Singapore is not subject to Philippine income tax is hereby confirmed. However, the Share Transfer Agreement shall be subject to the documentary stamp tax imposed under Section 176 of the Tax Code of 1997. (BIR Ruling No. 007-96 Dated January 18, 1996) This ruling is being 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.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal and Enforcement Group SUMMARY OF REAL PROPERTY INTEREST 1998 1997 Machinery and equipment P282,215,683 P252,953,513 Buildings 57,141,886 41,540,154 [Transportation equipment] 12,439,927 11,014,791 [Office furniture and fixtures] 21,272,417 14,446,086 Leasehold improvements 3,203,088 3,203,088 Factory tools and equipment 5,625,105 4,711,837 Communication equipment 1,714,825 1,189,668 383,612,931 329,059,137 Less-accumulated depreciation 256,483,298 224,262,121 127,129,633 104,797,016 Construction in progress 67,743,744 67,597,566 P194,873,377 P172,394,582 ========== ========== Total Assets P555,009,779 P518,865,197 ========== ========== RATIO OF RPE TO TA 35 % 33 % NOTE: Transportation equipment and Office furniture and fixtures are not real properties as defined under Revenue Regulations No. 4-86. Both are included in the summary because they are consolidated in the accumulated depreciation and there is no way of determining the specific depreciation cost because of the inviolability of an itemized depreciation schedule.