ITAD Ruling No. 058-00

March 13, 2000 ITAD RULING NO. 058-00 RP-US Art. 14 (2) ITAD 52-99 SyCip Salazar Hernandez & Gatmaitan 105 Paseo de Roxas 1200 Makati City Attention: Atty . Hector M . de Leon, Jr . Atty . Carina C . Laforteza Atty . Cresencio T . Meneses Gentlemen : This refers to your letter dated January 26, 2000 requesting for a ruling exempting your client, J.P. Morgan Overseas Capital Corporation ("JPMOCC") from Philippine tax on any gain that it may derive from its sale of 80,250,503 shares of stock of Bank of the Philippine Islands ("the Corporation"), in favor of BPI Capital Corporation ("BPI Capital") pursuant to the provisions of Article 14 (2) of the RP-US Tax Treaty. It is represented that JPMOCC is a corporation organized and existing under the laws of the State of Delaware, U.S.A. with address at 229 South State St. Dover, Delaware, U.S.A.; that it` is not licensed to do business in the Philippines as evidenced by a Certificate of Non-Registration issued by the Securities and Exchange Commission dated December 2, 1999; that BPI Capital is a Philippine corporation organized and existing under the laws of the Philippines with address at Ayala Avenue, Makati City; that the Corporation is also a domestic corporation organized and existing under the Philippine laws with address at BPI Bldg., Ayala corner Paseo de Roxas Avenues, Makati City; that JPMOCC owned 80,250,503 shares in the Corporation with a par value of P10.00 per share which represents approximately nine point nine percent (9.9%) of the entire outstanding capital of the Corporation; and that on December 21, 1999, JPMOCC sold its 80,250,503 shares with an aggregate par value of PHP802,505,030.00 in favor of BPI Capital. Please be informed that Article 14 of the RP-US Tax Treaty, states: "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. On the other hand, the Reservation Clause of the RP-US Tax Treaty, in pertinent part, provides: "Article 1 "(1) Notwithstanding the provisions of Article 14 of the Convention relating to capital gains, both the Philippines and the United States may tax gain from the disposition of an interest in a corporation if its assets consists principally of 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 that 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. cdlex Note that under the Reservation Clause, the Philippines may tax the gains derived from the disposition of interests in a corporation if its assets consist principally of real property interest located in the Philippines. "Principally" means more than 50% of the entire assets in terms of value (Sec. 2 Revenue Regulations No. 4-86). The value of the real property interest of the Corporation located in the Philippines as appearing on its interim financial statements as of September 30, 1999 is only 3% of its total assets, which is less than 50% of the value of its total assets. In reply, please be informed that gains which will be realized by JPMOCC from the sale of its shares of stock in the Corporation to BPI Capital shall be taxable only in the United States, pursuant to Article 14 (2) in relation to the Reservation Clause of the RP-US Tax Treaty. Hence, said gain will not be subject to Philippine tax. However, notwithstanding this exemption, the sale of shares of stock is subject to the documentary stamp tax in accordance with Section 176 of the Tax Code, as amended. This ruling is issued on the basis of the foregoing 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.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal and Enforcement Group