ITAD Ruling No. 045-02

April 9, 2002 ITAD RULING NO. 045-02 RP-US Tax Treaty Article 14 BIR Ruling No. ITAD 003-01 Sycip Gorres Velayo & Co. 6760 Ayala Avenue, 1226 Makati City Attention: C. P. Noel Tax Division Gentlemen : This refers to your application for relief from double taxation dated March 5, 2001, on behalf of your client, AT&T Communications Services International, Inc. (AT&T), requesting for confirmation of your opinion that the gains derived by AT&T from the sale of its shares of stocks in Subic Telecommunications Company, Inc. (Subic Telecoms) to Philippine Long Distance Company (PLDT) are exempt from capital gains tax pursuant to Article 14 of the RP-US tax treaty. It is represented that AT&T is a corporation duly organized and existing under the laws of the State of Delaware, with principal office address at 412 Mt. Kemble Avenue, Morristown, New Jersey, U.S.A.; that it is not registered either as a corporation or as a partnership licensed to do business in the Philippines per certification dated March 8, 2001 issued by the Securities and Exchange Commission; that PLDT is a corporation organized and existing under the laws of the Philippines having its principal office at Ramon Cojuangco Building, Makati Avenue, Makati City; that AT&T is the registered and/or beneficial owner of Ten Million (10,000,000) common shares (inclusive of two (2) director's qualifying shares) with a par value of Ten Pesos (P10) per share of Subic Telecoms, representing forty percent (40%) of the latter's outstanding capital stock; that AT&T and PLDT entered into a Stock Purchase Agreement dated January 26, 2001 wherein the former sold to the latter the said Ten Million (10,000,000) common shares of stock of Subic Telecoms; that in consideration of the said shares, PLDT shall pay AT&T the amount of Eight Million United States Dollars (US$8,000,000), or Three Hundred Eighty Million Seven Hundred Twenty Thousand Pesos (P380,720,000.00) as stated in the Deed of Absolute Sale of Shares dated February 16, 2001; that on February 8, 2001, AT&T and PLDT agreed to amend the said Stock Purchase Agreement to move the closing date and the first payment date from February 9, 2001 to February 16, 2001; that on February 16, 2001 a Deed of Absolute Sale of Shares was executed pursuant to the provisions of the Stock Purchase Agreement; that Subic Telecoms is a corporation duly organized and existing under the laws of the Philippines with business address at Bldg. 60, Sampson Avenue, Subic Bay Freeport, Olongapo City; and that the audited Financial Statement of Subic Telecoms as of December 31, 2000 and its unaudited Financial Statement as of January 31, 2001 show that its real property interest located in the Philippines is less than 50% of the value of its total assets and therefore does not consist principally of immovable property as shown thereof. In reply, please be informed that Article 14 of the RP-US tax treaty provides, viz: "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." Further, Article 1 of the Reservation Clause of the RP-US tax treaty states that: "Notwithstanding the provisions of Article 14 of the Convention relating to Capital Gains, both the Philippines and United States may tax gains 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 gains 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." The aforequoted Article grants the Philippines the right to tax gains from the disposition of interest in a corporation if its assets consist principally of real property interests located in the Philippines. Section 2 of Revenue Regulations No. 4-86 provides guidance on the meaning of "consisting principally of real property interest": "SEC. 2. Definitions . For purposes of these Regulations, the following terms and phrases shall be understood to mean "a) `Real Property Interest' interest on properties enumerated in Section 3 which are not, however, exclusive of others that are similarly situated. As used in the treaties and in these Regulations, it shall be understood to include real properties as understood under Philippines Laws; "b) `Principally', `wholly or principally', `directly principally' or `attributable' more than 50% of the entire assets in terms of value; xxx xxx xxx Since the assets of Subic Telecoms do not consist principally of real property interest located in the Philippines based on its Financial Statement for the year ended 2000, this Office confirms your opinion as it hereby holds that the gains realized by AT&T from the sale of its shares of stock in Subic Telecoms to PLDT are not subject to Philippine income tax. (BIR Ruling No. ITAD 003-01) However, a certificate of authority to register the said transaction in the books of Subic Telecoms must be secured. Thus, AT&T, being a nonresident foreign corporation, is required to file, although not required to pay the capital gains tax, a Capital Gains Tax Return (BIR Form No. 1707), accompanied by this ruling and the Stock Purchase Agreement, with Revenue District Office No. 39 South Quezon City, so that the latter may issue a Certificate Authorizing Registration (CAR) of the subject shares of stock in favor of PLDT. Further, the Deed of Absolute Sale of Shares shall be subject to the documentary stamp tax imposed under Section 176 of the Tax Code of 1997. Upon presentment of proof of payment of the documentary stamp tax, the Corporate Secretary of Subic Telecoms can register in the Stock and Transfer Book the shares from AT&T to PLDT. This ruling is issued on the basis of the foregoing representations. However, if upon investigation it shall be disclosed or discovered that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service