ITAD Ruling No. 028-03

February 6, 2003 ITAD RULING NO. 028-03 Article 13 RP-Singapore Sec 176 NIRC BIR Ruling No. DA-ITAD-101-01 BIR Ruling No. DA-ITAD-127-01 Data One (Asia) Pte. Ltd. c/o Ms. Mary Dina Tacbianan, 6F IBM Plaza Eastwood City, Cyberpark, E. Rodriguez Jr. Ave., Quezon City 1110 Attention: Michael John Warren Chief Executive Officer Gentlemen : This refers to your letter dated October 24, 2002, requesting confirmation of your opinion to the effect that any gain derived from the sale by DataOne (Asia) Pte. Ltd. (D1 Singapore) of its shares of stock in DataOne (Asia) Philippines, Inc. (D1 Philippines) to Finacor Finance Corporation (Finacor) is not subject to capital gains tax pursuant to the RP-Singapore tax treaty. It is represented that D1 Singapore is a non-resident foreign corporation duly organized and existing under the laws of Singapore with registered office at #23 Church St., #15-01 Capital Square, Singapore 049481; 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 issued by the Securities and Exchange Commission (SEC) dated October 14, 2002; that D1 Philippines is a corporation duly organized and existing under the laws of the Philippines with office address at 6F IBM Plaza Eastwood City, Cyberpark, E. Rodriguez Jr. Ave., Quezon City 1110; that Finacor is a corporation duly organized and existing under the laws of the Philippines with office address at Unit 903 PS Bank Tower, Sen. Gil Puyat Ave., Ext., Makati City; that on February 14, 2001, D1 Singapore and Megaworld Corp. executed a Contract of Lease whereby Megaworld Corp., as the Lessor, leased the office premises to D1 Singapore, the Lessee, for a five (5) year lease term upon the condition that the lessee agrees to return and surrender the Leased Premises at the expiration of the term of lease in the same condition as it was found at the commencement of the lease, reasonable wear and tear and damage directly attributable to Force Majeure excepted, without any delay whatsoever, devoid of all occupants, furniture, articles and effects of any kind; that D1 Singapore is a registered stockholder of record and owns one hundred percent (100%) equity of the total subscribed and paid-up capital stock of D1 Philippines, equivalent to seven million nine hundred ninety-nine thousand nine hundred ninety-five (7,999,995) shares of stock with a par value of One Peso (Php1.00) per share; and that by virtue of the Deed of Sale dated September 6, 2002 executed by and between D1 Singapore and Finacor, D1 Singapore sold to Finacor six million four hundred thousand and one (6,400,001) of its shares in D1 Philippines comprising eighty percent (80%) plus one share of its shareholdings in D1 Philippines at One Peso and Seventy-Two Centavos (Php1.72) per share in the aggregate amount of Eleven Million and Twenty Thousand Pesos (Php11,020,000.00); that as shown in the adjusted statement as of August 2002, D1 Philippines has the following real properties in the Philippines: Machinery and Equipment P74,159,867 Computers/IT Infrastructure 133,233,592 Furniture and Office Fixtures 3,767,447 Office Machinery and. Equipment 383,682 Leasehold Improvement 19,144,753 Less: Provision for Impairment P(227,166,034) Accumulated Depreciation (737,257) TOTAL P2,786,050 =========== and that the real properties in the amount of P2,786,050 as against its total assets of P21,505,871 represent 12% of the total assets of D1 Philippines which is less than 50% of the carrying value of its total assets. EcSaHA 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. 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 realized by D1 Singapore from the sale of its shares of stock in D1 Philippines to Finacor are generally taxable 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 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 August 2002 Adjusted Financial Statements of D1 Philippines disclosed that its real property interest located in the Philippines is only 12% of its total assets, thereby making the assets of D1 Philippines not principally consisted of real property interest located in the Philippines. Thus, Article 13(3) of the RP-Singapore tax treaty will not apply. 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 D1 Singapore 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." (BIR Ruling No. DA-ITAD-101-01 dated October 26, 2001) Accordingly, your opinion that the sale by D1 Singapore to Finacor of its shares of stock in D1 Philippines is not subject to capital gains tax is hereby confirmed. However, the Deed of Sale executed by and between D1 Singapore and Finacor for the sale of the subject shares of stock shall be subject to the documentary stamp tax imposed under Section 176 of the National Internal Revenue Code of 1997. Furthermore, a certificate of authority to register the said transaction in the books of DataOne Philippines must be secured. Thus, DataOne Philippines is required to file a Capital Gains Tax Return (BIR Form No. 1707) accompanied by copies of the Deed of Sale and this ruling with the Revenue District Office No. 39-South, Quezon City (RDO 39), for the issuance of a Certificate Authorizing Registration (CAR) of the subject shares of stock of DataOne Singapore in favor of Finacor Finance Corporation. Upon presentment of proof of payment of documentary stamp thereon, the corporate secretary of DataOne Philippines shall be authorized to register in its Stock and Transfer Book the transfer of the shares from DataOne Singapore to Finacor Finance Corp. and to cancel and issue new certificates in the name of Finacor Finance Corporation. This ruling is issued on the basis of the facts as represented. However, if upon investigation it shall be disclosed that the facts are different, then this ruling shall be without force and effect insofar as herein parties are concerned. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service