ITAD Ruling No. 060-01

July 19, 2001 ITAD RULING NO. 060-01 Article 14, RP-US Tax Treaty BIR Ruling No. ITAD-127-00; BIR Ruling No. ITAD-36-01; DA-ITAD 060-01 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 May 17, 2001 on behalf of your client, GE Capital International Holdings Corporation (GE Capital), requesting confirmation of your opinion that the gains to be realized from the contemplated sale by GE Capital of all its shareholdings in GE Life Insurance Co., Inc. (GE Life) in favor of ATR-Kim Eng Capital Partners, Inc. (ATR-Kim Eng) and ATR-Kim Eng Capital Partners, Inc. Trust Department (ATR-Kim Eng-Trust Department) as trustee for the TPG Corporation Trust Fund (TPG) are exempt from capital gains tax pursuant to the RP-US Tax Treaty. It is represented that GE Capital is a corporation duly organized and existing under the laws of Delaware, USA, with principal offices located at 1209 Orange City of Wilmington, County of New Castle Delaware, USA; that it is not registered either as a corporation or as a partnership and has not been licensed to do business in the Philippines as per certification issued by the Securities and Exchange Commission dated June 18, 2001; that GE Life is a corporation organized and existing under Philippine laws with principal office address at 5th Floor, Philasia Life, Champaca II Building, 162 Alfaro Street, Salcedo Village, Makati City; that GE Life's current capital structure is as follows: Name of Stockholder No. of Shares GE Capital International Holdings Corp. 24,999,987 Manuel M. Alfonso 1 Eulogio A. Mendoza 1 Pacito V. del Rosario 1 Modesta M. Mammuad 1 Felix B. Amparo 1 Antonio Borromeo 1 Oscar M. Alejandro 1 Henry Joseph M. Herrera 1 Manuel G. Lopez 1 Antonio Ortiguerra 1 Rene Vargas 1 Jose Tamayo 1 Bienvenido 1 Total 25,000,000 ======== that GE Life is a wholly owned subsidiary of GE Capital and the thirteen (13) individual shareholders enumerated above merely hold their respective GE Life shares as nominees and in trust for GE Capital; that ATR-Kim Eng is a corporation organized and existing under the laws of the Philippines with principal office address at 17th Floor Tower One Exchange Plaza, Ayala Triangle, Ayala Avenue, Makati City; that GE Capital intends to sell its 19,500,000 shares of capital stock in GE Life with a total par value of P195,000,000 in favor of ATR-Kim Eng and the remaining 5,500,000 shares with a total par value of P55,000,000 in favor of the Trust Department of ATR-Kim Eng as trustee for TPG; that in consideration of the said shares, ATR-Kim Eng and ATR-Kim Eng-Trust Department shall pay GE Capital a total purchase price of P306,884,866 or P12.275 per share; that as of December 31, 2000, the Balance Sheet of GE Life shows that its Property and Equipment amount to only P5,152,611.00 (Net of Accumulated Depreciation) while its total assets amount to P481,055,426.00, thereby showing that GE Life's real properties in the Philippines do not comprise more than 50% of its total assets as such real properties approximately comprise one percent (1%) only of the total asset. In reply, please be informed that Article 14 of the RP-US Tax Treaty provides as follows, 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 . cHaADC "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 ." Furthermore, the Reservation Clause of the same treaty provides, in part, as follows: "Article I "Notwithstanding the provisions of Article 14 of the Convention relating to the capital gains, both the Philippines and the United States may tax gains from the disposition of an interest in a corporation if its assets consists principally of a real property interest located in the 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." It is clear from the aforequoted provisions that any capital gains which may be derived by GE Capital from the alienation of any property other than those mentioned in paragraph (1) of Article 14 of the RP-US Tax Treaty shall be taxable only in the State where the alienator is a resident. However, it is to be noted 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 GE Life located in the Philippines as appealing in its audited financial statements for the calendar year December 31, 2000 is less than 50% of the value of its total assets. Accordingly, this office is of the opinion and so holds that any gain that may be realized by GE Capital from the sale of its shares in GE Life to ATR-Kim Eng and ATR-Kim Eng-Trust Department is not subject to the capital gains tax imposed under Section 28(B)(5)(c) of the National Internal Revenue Code (Tax Code) of 1997 as the assets of GE Life as of December 31, 2000, as represented, do not consist principally of real property interest located in the Philippines. ( BIR Ruling No. ITAD 127-00 ) However, a certificate of authority to register the said transaction in the books of GE Life must be secured. Thus, GE Capital, being a nonresident foreign corporation, is required to file, although not required to pay capital gains tax, a Capital Gains Tax Return (BIR Form No. 1707) accompanied by copies of the Deed of Assignment and this ruling, with Revenue District Office No. 51 Pasay (RDO 51), in order for the latter to issue Certificate Authorizing Registration (CAR) of the said shares of stock in favor of ATR-Kim Eng and ATR-Kim Eng-Trust Department. Moreover, Section 176 of the Tax Code of 1997 (Tax Code) provides, viz : "SEC. 176. Stamp Tax on Sales, Agreements to Sell, Memoranda of Sales, Deliveries or Transfer of Due-bills, Certificates of Obligation, or Shares or Certificates of Stock. On all sales, or agreements to sell, or memoranda of sales, or deliveries, or transfer of due-bills, certificates of obligation, or shares or certificates of stock in any association, company, or corporation, or transfer of such securities by assignment in blank, or by delivery, or by any paper or agreement, or memorandum or other evidences of transfer or sale whether entitling the holder in any manner to the benefit of such due-bills, certificates of obligation or stock, or to secure the future payment of money, or for the future transfer of any due-bill, certificate of obligation or stock, there shall be collected a documentary stamp tax of One peso and fifty centavos (P1.50) on each Two hundred pesos (P200), or fractional part thereof, of the par value of such due-bill, certificate of obligation or stock: Provided, That only one tax shall be collected on each sale or transfer of stock or securities from one person to another, regardless of whether or not a certificate of stock or obligation is issued, indorsed, or delivered in pursuance of such sale or transfer: and Provided, further , That in the case of stock without par value the amount of the documentary stamp tax herein prescribed shall be equivalent to twenty-five percent (25%) of the documentary stamp tax paid upon the original issue of said stock ." TAcSCH The same Code provides that the corresponding documentary stamp taxes shall be levied, collected and paid, for and in respect of the transactions so had or accomplished, by the person making, signing, issuing, accepting, or transferring the document, instrument or paper wherever the same is made, signed, issued, accepted or transferred when the obligation or right arises from Philippines sources or the property is situated in the Philippines. Thus, the burden of paying the documentary stamp tax is placed upon the parties to the contract and leaves the tax to be paid indifferently by either party, and accordingly, the party assuming payment of said tax under the contract becomes directly liable therefor. But if for one reason or another, the said tax is not paid, either party to the contract may be made liable to the tax. In view of the foregoing, the documentary stamp tax (including penalties thereto, if there are any) on the said transaction must be paid and the corresponding return thereon be filed by either GE Capital or GE Life in accordance with the provisions of the Tax Code of 1997. Upon presentment of proof of payment of the documentary stamp tax thereon, the corporate secretary of GE Life shall then be authorized to register the transfer of the shares from GE Capital to ATR-Kim Eng, and ATR-Kim Eng-Trust Department in the Stock and Transfer Book of GE Life and to cancel and issue new certificates in the name of ATR-Kim Eng and ATR-Kim Eng-Trust Department as trustee for TPG. This ruling shall be without force and effect unless and until an actual agreement or contract, which stipulations are found to be consistent with the representations made herein, has been entered into by the parties involved. Thus, upon reaching a binding agreement or contract between and among the parties in this case, the instrument must be presented to the International Tax Affairs Division of this Bureau within 15 days from its due execution for verification whether the representations made herein upon which this ruling is based are consonant with the actual facts of the transaction. ( BIR Ruling No. ITAD-36-01 ) Very truly yours, Commissioner of Internal Revenue By: (SGD.) EDMUNDO P. GUEVARA Deputy Commissioner Legal and Inspection Group