ITAD Ruling No. 027-02

March 8, 2002 ITAD RULING NO. 027-02 RP-US-Article 14 & Reservation Clause NIRC-Sec. 176 BIR Ruling No. ITAD-100-01 Quisumbing Torres 11th Floor, Pacific Star Bldg. Makati Avenue cor Sen. Gil Puyat Ave. Makati City 1200 Attention: Ms. Natividad B. Kwan Ms. Anna Marie M. Sencio Gentlemen : This refers to your letter dated November 14, 2001 on behalf of your client, ASSOCIATES CORPORATION OF NORTH AMERICA ("ACONA"), requesting confirmation that the gains it derived from the transfer of its shares in Associates Finance, Inc. ("AFI") are exempt from capital gains tax pursuant to Article 14 (Capital Gains) of the RP-US tax treaty pursuant to its Reservation Clause. It is represented that ACONA is a non-resident foreign corporation duly organized and existing under the laws of the State of Delaware, U.S.A.; that it is not registered either as a corporation or as a partnership licensed to do business in the Philippines per Certificate of Non-registration issued by the Securities and Exchange Commission (SEC) dated October 25, 2001; that AFI, on the other hand, is a corporation duly organized and existing under the laws of the Philippines; that AFI was incorporated on July 27, 2000 with an authorized capital stock of Eighty Million Pesos (Php80,000,000) divided into: (a) 3,500 common voting shares consisting of (i) 1,400 Class "A" common voting shares with a par value of P100 per share, and (ii) 2,100 Class "B" common voting shares with a par value of P100 per share; and (b) 796,500 Class "C" preferred non-voting shares, all shares with a par value of P100 per share; that ACONA owns 2,100 Class B common voting shares and 196,500 Class C preferred non-voting shares of AFI's capital stock ("Shares"); that four Class B common voting shares of AFI are held in the name of various individuals acting as nominees and trustees ("Nominees") of ACONA; that on October 01, 2001, ACONA transferred the Shares as capital contribution to ASSOCIATES INTERNATIONAL HOLDINGS CORPORATION ("AIHC"), a wholly-owned subsidiary of ACONA duly organized and existing under the laws of the State of New York, U.S.A. In reply, please be informed that Article 14 of the RP-US tax treaty in relation to its Reservation Clause provides, viz : "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 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 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." 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." xxx xxx xxx Based on the aforequoted Reservation Clause, the Philippines may tax 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 of AFI as of December 31, 2000 disclosed that out of its total assets valued at P660,263,662.00, only P25,998,170 (property and equipment), or less than 4% of its total assets, may be considered as real property interests thereby making AFI's assets not principally consisting of real property interest located in the Philippines. In view of the foregoing, this Office confirms your opinion as it hereby holds that any gain realized by ACONA from the transfer of its shares in AFI to AIHC is not subject to capital gains tax. (BIR Ruling No. ITAD-100-01 dated October 26, 2001) However, the Deed of Assignment of Shares of Stocks is subject to the documentary stamp tax imposed under Section 176 of the NIRC. 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