ITAD Ruling No. 040-01

April 6, 2001 ITAD RULING NO. 040-01 Art. 14, RP-US Tax Treaty Sec. 176, NIRC BIR Ruling No. ITAD-111-00 BIR Ruling No. ITAD-8-01 Castillo Laman Tan Pantaleon & San Jose Law Offices The Valero Tower 122 Valero St., Salcedo Village 1227 Makati City Attention: Atty . J . Gregson A . Castillo Atty . Milagros P . San Jose Gentlemen : This refers to your letter dated March 1, 2001 requesting confirmation of your opinion to the effect that the gains derived by Barnes & Noble, Inc. (B&N) from the sale and transfer of its shares in Electronic Publishing Ventures, Inc. (EPVI) to CPI, Inc. (CPI) are not subject to capital gains tax pursuant to the RP-US Tax Treaty. It is represented that B&N is a corporation duly organized and existing under the laws of the State of Delaware, USA with principal office address at 122 Fifth Avenue, New York, New York, USA 10011; that it is not registered as a corporation/partnership licensed to do business in the Philippines per certification issued by the Securities and Exchange Commission dated February 28, 2001; that EPVI is a corporation duly organized and existing under the laws of the Philippines with principal office address at 17 th Floor, Citibank Square, 1 Eastwood Avenue, Eastwood City Cyberpark, Bagumbayan, Quezon City; that CPI is a Delaware corporation with principal executive address at Valley Office Complex, Bldg. 1, 180 Old Tappan Road, Old Tappan, New Jersey, USA; and that on February 23, 2001 by virtue of the Acquisition Agreement executed by B&N and CPI, B&N sold and transferred to CPI 10,050,000 shares of stock of EPVI with a par value of P1.00 per share, comprising 100 % of the entire outstanding capital of the corporation. In reply, please be informed that Article 14 of the RP-US Tax Treaty provides as follows: "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 (Royalties) 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." Moreover, the Reservation Clause of the RP-US Tax Treaty provides: (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;" It is provided under the afore-quoted Reservation Clause of the RP-US Tax Treaty that 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 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 2001 Interim Financial Statements of EPVI disclosed that its real property interest located in the Philippines is only 10.22% of its total assets, thereby making the assets of the same not principally consisting of real property interest located in the Philippines. Accordingly, your opinion that the gains derived by Barnes & Noble, Inc. (B&N) from the sale of its shares in Electronic Publishing Ventures, Inc. (EPVI) to CPI, Inc. (CPI) are not subject to capital gains tax is hereby confirmed. (BIR Ruling No. ITAD-111-00 dated August 28, 2000 and BIR Ruling No. ITAD-8-01 dated February 12, 2001) However, the Acquisition Agreement entered into by B&N and CPI shall be subject to the documentary stamp tax imposed under Section 176 of the Tax Code of 1997. ADEaHT This ruling is 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.) EDMUNDO P. GUEVARA Deputy Commissioner Legal and Inspection Group