ITAD Ruling No. 043-01

April 16, 2001 ITAD RULING NO. 043-01 RP-UK Tax Treaty Art. 12 RP-Singapore Tax Treaty Art. 12 Tax Code of 1997 - Sec. 176 BIR Ruling Nos. ITAD - 29-00 & 93-00 Joaquin Cunanan & Co . 14th Floor Multinational Bancorporation Centre 6805 Ayala Ave. 1226 Makati City Attention: Atty . Mary Assumption S . Bautista-Villareal Principal Tax Services Department Gentlemen : This refers to your letter dated August 23, 2000 requesting on behalf of your clients, BG Plc (BGP), BG Overseas Holdings Limited (BGOHL) and British Gas Asia Pacific Holdings Pte. Ltd. (BGAPHPL), confirmation of your opinion that the assignments of First Gas Holdings Corporation's (FGHC) shares of stocks under the facts and circumstances described hereunder are exempt from the payment of capital gains tax pursuant to the provisions of the RP-UK and RP-Singapore Tax Treaties. It is represented that BGP and BGOHL are corporations organized and existing under the laws of the United Kingdom with the same business address at 100 Thames Valley Park Drive, Reading, Berkshire RG6 1PT, United Kingdom; that both are not registered as a corporation or partnership licensed to do business in the Philippines as evidenced by a Certificate of Non-Registration issued by the Securities and Exchange Commission dated May 16, 2000; that BGAPHPL is a corporation organized and existing under the laws of Singapore with address at 83 Clemenceau Ave., 1408 UE Square, Singapore; that it is not registered as a corporation or partnership licensed to do business in the Philippines as evidenced by a Certificate of Non-Registration issued by the Securities and Exchange Commission dated September 28, 2000; that FGHC is a corporation organized and existing under the Philippine Laws with office address at 4th Floor, Benpres Bldg., Meralco Ave., Pasig City; that as of December 7, 1999, FGHC has a total subscribed and paid-up capital of P1,260,841,000 consisting of 126,084,100 shares broken down as follows: Name No. of Shares First Philippine Holdings Corp. 64,302,888 BGAPHPL 17,933,640 BGP 32,499,988 Meralco Pension Fund 11,347,569 Peter D. Garrucho, Jr. 1 Elpidio L. Ibaez 1 Oscar Lopez 1 Frank Chapman 1 Derek Fisher 1 that on the same date, BGP assigned its FGHC's 32,499,998 shares in favor of BGOHL; that subsequently, BGOHL assigned the same shares in favor of BGAPHPL; and that BGAPHPL then later assigned to British Gas Consolidated Holdings (Philippines), Inc. (BGCHPI), a domestic corporation with office address at Unit 805, Tektite West Tower, PSE Centre, Exchange Road, Ortigas Center, Pasig City, a total of 50,433,640 FGHC shares, consisting of the 32,499,998 shares transferred by BGOHL, the 17,933,640 shares issued in BGAPHPL's name, and the 2 shares held by the stockholders Messrs. Frank Chapman and Derek Fisher. SaCDTA In reply, please be informed that Article 12 of the RP-UK Tax Treaty provides as follows: "Article 12 "Gains from the Alienation of Property "(1) Capital gains from the alienation of immovable property as defined in paragraph (2) of Article 6 may be taxed in the Contracting State in which such property is situated. "(2) Capital 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 a permanent (alone or together with the whole enterprise) or of such a fixed base may be taxed in the other State. "(3) Notwithstanding the provisions of paragraph (2) of this Article capital gains derived by a resident 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 and aircraft shall be taxable only in that Contracting State. "(4) Capital gains from the alienation of any property other than those mentioned in Paragraphs (1), (2) and (3) of this Article shall be taxable only in the Contracting State of which the alienator is a resident . (Emphasis supplied) xxx xxx xxx" Under the above-mentioned provisions, gains from the alienation of shares of stock shall be taxable only in the country of the alienator. Since BGP and BGOHL are residents of UK, such transfers are taxable only in UK. (BIR Ruling No. ITAD-29-00) On the other hand as regards the transfer of the shares from BGAPHPL to BGCHPI, Article 13 of the RP-Singapore Tax Treaty provides: "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. xxx xxx xxx" Accordingly, capital gains derived by BGAPHPL from its transfer of shares of stock to BGCHPI is generally taxable in Singapore. However, paragraph 3 of the same Article grants the Philippines the right to tax gains derived from the disposition of interest in a corporation if its assets consist principally of real property interests located in the Philippines. "Real Property Interest" means 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. (a) and (b), Revenue Regulations No. 4-86). Verification of the Audited Financial Statement of FGHC disclosed that its net property and equipment located in the Philippines are valued at P209,145,817 in 1999 and P209,825,499 in 1998, representing less than fifty percent (50%) of its total assets of P5,054,619,592 and P2,033,772,089, respectively, thereby making the assets of FGHC not consisted principally of real property interest located in the Philippines. cACHSE Accordingly, this Office is of the opinion and so holds that the gains from the transfer by BGP of its 32,499,998 FGHC shares to BGOHL, the subsequent transfer of the same shares of stocks by BGOHL to BGAPHPL, and the final transfer by BGAPHPL of its accumulated 50,433,640 FGHC shares to BGCHPI, are not subject to Philippine income tax. (BIR Ruling No. ITAD-93-00) However, each Deed of Assignment for the series of transfers 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 null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) EDMUNDO P. GUEVARA Deputy Commissioner Legal and Inspection Group