ITAD Ruling No. 029-99

1999 ITAD RULING NO. 029-99 RP-Japan Article 13 007-96 SyCip Gorres Velayo & Co. 6760 Ayala Avenue, Makati City Attention: Atty . E . C . Alcantara Tax Division Gentlemen : This refers to your letter dated August 30, 1999 requesting confirmation of your opinion that the sale of shares of stock in Toyota Motor Philippines Corporation (TMPC) owned and held by Mitsui & Co., Ltd. (Mitsui) to Maximus Management Holding Corporation (MMHC) is not subject to capital gains tax pursuant to Article 13 of the RP-Japan Tax Treaty. It is represented that Mitsui is a corporation organized and existing under and by virtue of the laws of Japan; that it is the legal and registered owner of 1,975,500 shares of the capital stock of TMPC, a domestic corporation with principal place of business at Bicutan, Km. 15, South Superhighway, Paraaque, Metro Manila; that Mitsui intends to sell its 1,185,300 shares in TMPC to MMHC, a corporation duly incorporated and registered with the Philippine Securities and Exchange Commission (SEC); that as of December 31, 1998, the assets of TMPC do not consist principally of immovable property located in the Philippines. In reply, please be informed that pursuant to Article 13 of the RP-Japan Tax Treaty, stating: "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. "(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 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 of such a fixed base, may be taxed in that other Contracting State. llcd "(3) Gains derived by a resident of a Contracting State from the alienation of ships or 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 . (emphasis ours) "(5) Gains from the alienation of any property other than 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 Mitsui from the sale of its shares of stock in TMPC, a domestic corporation, to MMHC shall be taxable only in Japan. However, under paragraph 4 of the aforequoted provision supra , the Philippines may tax the gains derived from the disposition of interest in a corporation if its 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 other 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) On the basis of the foregoing, it is the opinion of this Office as it hereby holds that the sale by Mitsui to MMHC of the shares of stocks issued by TMPC to the former is not subject to capital gains tax. The value of the real property interests of TMPC that are located in the Philippines does not exceed fifty percent of its total assets of P6,152,604,000 considering that of the total amount of P3,833,504,000 (net of depreciation) of "Property, Plant and Equipment," P2,638,590,000 is immovable property. Accordingly, the percentage of immovable property over total assets of TMPC is only 43%. Such being the case, any capital gains which Mitsui might derive from the disposition of its shares in TMPC is not subject to capital gains tax. This ruling is being issued on the basis of the foregoing facts as represented and will be considered null and void if upon investigation it will be disclosed that the facts are different. prcd Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal and Enforcement Group