ITAD Ruling No. 059-01

July 17, 2001 ITAD RULING NO. 059-01 Article 13, RP-Japan Tax Treaty NIRC-SEC. 176 BIR Ruling No. ITAD-24-99 DA-ITAD-059-01 Joaquin Cunanan & Co. 14TH Floor, Multinational Bancorporation Centre 6805 Ayala Avenue, Makati City Attention: George J. Lavadia Principal, Tax Services Department Gentlemen : This refers to your letter dated December 17, 1999 requesting confirmation of your opinion that the sale/transfer by ITOCHU CORPORATION (hereinafter referred to as Itochu-Japan) of its shares of stock in SOUTHERN CROSS CEMENT CORPORATION (hereinafter referred to as SCCC) is not subject to Philippine income/withholding tax pursuant to Article 13 of the RP-Japan Tax Treaty. It is represented that Itochu-Japan is a foreign corporation organized and existing under the laws of Japan with principal address at 5-1, Kita-Aoyama, 2-chome, Minato-ku, Tokyo, 107-8077, Japan; that Itochu-Japan has an existing branch in the Philippines with office address at 16/F 6788 Ayala Avenue, Oledan Square, Makati City; that SCCC is a corporation existing under the laws of the Philippines, registered with the Securities and Exchange Commission; that Itochu-Japan is the beneficial and record owner of Three Hundred Sixty Four Thousand Eight Hundred (364,800) shares of SCCC; that due to SCCC's ongoing corporate restructuring, Itochu-Japan directly offered to sell/transfer without the involvement of its Philippine branch all of its SCCC shares to two (2) Japanese companies, TAIHEIYO CEMENT CORPORATION (hereinafter referred to as Taiheiyo Cement) and TOKUYAMA CORPORATION (hereinafter referred to as Tokuyama), both foreign corporations organized and existing under the laws of Japan; that the One Hundred Eighty Two Thousand Four Hundred (182,400) shares are to be transferred to Taiheiyo Cement and the remaining One Hundred Eighty Two Thousand Four Hundred (182,400) shares to Tokuyama; and that Itochu-Japan's Philippine branch has no participation in its investment in SCCC since the branch was organized to engage in trading and construction businesses in the Philippines. In reply, please be informed that Article 7 of the RP-Japan Tax Treaty provides: " Article 7 "(1) The profits of an enterprise of a Contracting State shall be taxable only in that Contracting State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as foresaid, the profits of the enterprise may be taxed in that other Contracting State but only so much of them as is attributable to that permanent establishment . (Emphasis supplied) "(2) Subject to the provisions of paragraph (3), where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment . aCSEcA "(3) In determining the profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the permanent establishment, including executive and general administrative expenses so incurred, whether in the Contracting State in which the permanent establishment is situated elsewhere . "xxx xxx xxx" Moreover, in the case of Marubeni vs. CIR (G.R. No. 76573 dated September 14, 1989), it was held that: " The general rule that a foreign corporation is the same juridical entity as its branch office in the Philippines cannot apply here. This rule is based on the premise that the business of the foreign corporation is conducted through its branch office, following the principal-agent relationship theory . It is understood that the branch becomes its agent here. So that when the foreign corporation transacts business in the Philippines independently of its branch, the principal agent relationship is set aside. The transaction becomes one of the foreign corporation, not of the branch. Consequently, the taxpayer is the foreign corporation, not the branch or the resident foreign corporation. Corollary, if the business transaction is conducted through the branch office, the latter becomes the taxpayer, and not the foreign corporation ." (Emphasis supplied) Thus, in the instant case, income derived by Itochu-Japan in the sale of its shares in SCCC made independently of its Philippine branch shall be considered as income of Itochu-Japan and shall be governed by the provisions of Article 13 of the RP-Japan Tax Treaty, which provides as follows: " Article 13 "(1) Gains derived by a resident of a Contracting State from the alienation of immovable property as defined in paragraph (2) of Article 6 and situated in the other Contracting State may be taxed in that other Contacting State. "(2) Gains from the alienation of any property, other than immovable 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 any property, other than immovable 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 that other Contracting State . "(3) Gains derived by a resident of a Contracting State from the alienation of ships or aircraft operated in international traffic and any property, other than immovable property, pertaining to the operation of such ships or aircraft shall be taxable only in that Contracting State . "(4) Gains from the alienation of shares of a company, a partnership or a trust the property of which consists principally of immovable property situated in a Contracting State, may be taxed in that Contracting State . "(5) Gains from the alienation of any property other than those referred to in paragraphs (1), (2), (3) and (4) shall be taxable only in the Contracting State of which the alienator is a resident ." Based on the foregoing, the gains which will be realized by Itochu-Japan from the sale of its shares of stock in SCCC to Taiheiyo Cement and Tokuyama shall be taxed only in Japan. However, the Philippines may tax the gains derived from such disposition if SCCC's assets consist principally of real property interest located in the Philippines. "Real Property Interest" means interest on property 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). Accordingly, verification of the Audited Financial Statement of SCCC discloses that out of its total assets of P621,901,642.00 in December 1999 and P573,621,375.00 in December 1998, its real property assets located in the Philippines consist of P248,251,428.00 or 39.92% and P263,153,475.00 or 45.88% of its total assets, respectively, thereby making the assets of SCCC not consisted principally of real property interest located in the Philippines. In view thereof, this Office is of the opinion and so holds that the sale/transfer of ITOCHU-Japan of its shares of stock in SCCC to Taiheiyo Cement and Tokuyama is not subject to Philippine income tax. However, the Deed of Absolute Sale shall be subject to the documentary stamp tax imposed under Section 176 of the Tax Code of 1997. (BIR Ruling No. ITAD-24-99 dated September 10, 1999) This ruling is issued based on the foregoing facts as represented. However, if upon investigation, it shall be disclosed or discovered that the facts are different, then this ruling shall be considered null and void. AIECSD Very truly yours, Commissioner of Internal Revenue By: (SGD.) EDMUNDO P. GUEVARA Deputy Commissioner Legal and Inspection Group