ITAD Ruling No. 037-01

March 22, 2001 ITAD RULING NO. 037-01 RP-Japan, Art. 13 ITAD 93-00 SyCip Gorres Velayo & Co 3rd Floor, Insular Life Bldg. Cor. Corordo and Gen Maxilom Avenues Cebu, City, Philippines Attention: Lauris L . Dela Pea Tax Division Gentlemen : This refers to your letter dated June 30, 2000, requesting confirmation of your opinion that the capital gains from the sale of shares of stock of Sanki Kogyo Co. Ltd. (Sanki) and Fujii Sangyo Co. Ltd. (Fujii) to FAS Cebu Corporation (FAS) are not subject to capital gains tax pursuant to the RP-Japan Tax Treaty. It is represented that FAS is a domestic corporation organized and existing under the laws of the Philippines with principal office address at the Mactan Economic Zone, Lapu-lapu City; that Sanki and Fujii are non-resident foreign corporations organized and existing under the laws of Japan; that Sanki and Fujii are not registered as a corporation or partnership licensed to do business in the Philippines per Securities and Exchange Commission certification dated June 14, 2000; that Sanki and Fujii each owns Two Million Nine Hundred Ninety Nine Thousand Nine Hundred Ninety Nine ( 2,999,999) common shares of FAS, having a par value of One Peso (P1.00) per share and each comprising 20% of the outstanding capital stock; that on July 03, 2000, Sanki and Fujii assign and transfer to FAS their entire shareholdings. 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 the 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 on 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 permanent establishment (alone or together with the whole enterprise) or of 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 or aircraft by a resident 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 trust the property of which consist principally of immovable property situated in a Contracting State, may be taxed in that Contracting State. "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." EaHATD Based on the foregoing, the gains which will be realized by Sanki and Kogyo from the transfer of their shares of stock to FAS shall be taxable only in Japan. However, under paragraph 4 of the aforequoted provision, 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 read 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 FAS disclosed that its net property and equipment located in the Philippines are valued at P4,084,361 net of depreciation as of March 31, 2000 representing less than fifty percent (50%) of its total assets of P51,320,398 thereby making the assets of FAS not consisted principally of real property interest located in the Philippines up to the date of subject sale. Hence, the gains from the sale of shares of stock of Sanki and Kogyo to FAS are not taxable in the Philippines. (BIR Ruling No. ITAD 93-00) Accordingly, the sale by Sanki and Kogyo of their shares of stock to FAS is exempt from capital gains tax imposed under the Section 28(B)(5)(C) of the Tax Code of 1997. However the Deed of Assignment of Shares shall be subject to the documentary stamp tax imposed under Section 176 of the Tax Code of 1997. This ruling is issued on the basis of the foregoing facts as represented. 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.) LILIAN B. HEFTI Deputy Commissioner Legal and Inspection Group