ITAD Ruling No. 056-02

April 23, 2002 ITAD RULING NO. 056-02 RP-Singapore Article 3 ITAD No. 43-01 Romulo, Mabanta, Buenaventura Sayoc & Delos Angeles Attorneys-at-Law 30th Floor, Citibank Tower, Citibank Plaza 8741 Paseo de Roxas, Makati City Attention: J. Victor Emmanuel de Dios Jayson L. Fernandez Gentlemen : This refers to your application for relief from double taxation dated March 8, 2001, on behalf of your client, MC Capital Asia Pte. Ltd. (MCCA), requesting for a refund in the amount of P1,901,602.22, representing the capital gains tax paid by MCCA in connection with the sale of its shares of stock to MC Capital B.V. (MCBV), pursuant to Article 13 of the RP-Singapore tax treaty. It is represented that MCCA is a corporation organized and existing under the laws of Singapore with principal office address at 95 South Bridge Road #10-10, Pidemco Centre, Singapore 058717; that MCCA is not registered either as a corporation or as a partnership licensed to do business in the Philippines as evidenced by a Certificate of Non-Registration issued by the Securities and Exchange Commission dated March 27, 2001; that MCBV is a corporation organized and existing under the laws of Netherlands with principal office address at Aert van Nesstraat 45, 10th Floor, 3012 CA Rotterdam, the Netherlands; that MCCA and MCBV do not engage in trade or business in the Philippines; that MCCA is the registered owner of 103,048 common shares in Walden AB Ayala Management Co., Inc. (WAAMCI), and 38,628 common shares and 103,008 redeemable preferred shares in Walden AB Ayala Ventures Co., Inc. (WAAVCI) (hereinafter referred to as "the Shares"); that WAAMCI and WAAVCI are corporations duly organized and existing under the laws of the Philippines, with business address at 22nd Floor, 6750 Ayala Avenue, Makati City; that as shown in the Audited Financial Statements of WAAMCI and WAAVCI as of December 31, 1999 and December 31, 2000, the assets of both corporations do not consist principally of real property interest located in the Philippines; that on December 1, 2000, two Purchase Agreements were entered into by and between MCCA and MCBV, whereby MCCA sold the Shares to MCBV; and that on December 20, 2000, MCCA paid a total amount of P1,901,602.22 representing the capital gains tax imposed under Section 28(B)(5)(c) of the National Internal Revenue Code (Tax Code) of 1997. In reply, please be informed that Article 13 of the RP-Singapore tax treaty provides as follows, viz : "Article 13 "GAINS FROM 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 permanent establishment which an enterprise of 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 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. "4. Gains from the alienation of any property, other than those mentioned in paragraphs 1, 2, and 3 shall be taxable only in the Contracting State of which the alienator is a resident." Under the aforequoted provisions, the capital gains derived by MCCA from the sale of its shares of stock to MCBV is generally taxable in Singapore. However, the Philippines may tax the gain from the disposition of an interest in a corporation if the assets of the corporation consist principally of real property interest located in the Philippines. "Real Property Interest" means interest on properties enumerated in Section 3 of Revenue Regulation 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 Audited Financial Statements of WAAMCI and WAAVCI disclosed that WAAMCI's real property interest located in the Philippines is only about 4% of its total assets while WAAVCI has no real property thereby making the assets of WAAMCI and WAAVCI not principally consisted of real property interest located in the Philippines. Accordingly, this Office is of the opinion and so holds that the sale by MCCA to MCBV of its shares of stock in WAAMCI and WAAVCI is not subject to Philippine income tax since the assets of WAAMCI and WAAVCI does not consist principally of real property located in the Philippines. (BIR Ruling ITAD 43-01 dated April 16, 2001) Finally, notwithstanding the exemption from capital gains tax, the documentary stamp tax on the said transaction must be paid and the corresponding return thereon be filed by MCCA in accordance with Section 176 of the Tax Code of 1997. This ruling is issued based on the foregoing facts as represented and is rendered only for the purpose of determining whether MCCA is entitled to the benefits of the RP-Singapore tax treaty. To determine whether your request for tax refund should be given due course is upon the Office that will conduct the investigation for the purpose. Thus, we have endorsed the docket pertaining thereto (including a copy of this ruling) to Revenue District Office No. 39 South Quezon City for processing and investigation. Please be guided accordingly. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service