ITAD Ruling No. 068-01

August 15, 2001 ITAD RULING NO. 068-01 Article 13 RP-Singapore BIR Ruling No. 067-90 BIR Ruling No. ITAD 44-00 Joaquin Cunanan & Co . 14th Floor Multinational Bancorporation Centre 6805 Ayala Avenue 1226 Makati City Attention: Mr . Alexander B . Cabrera Partner, Tax Services Department Gentlemen : This refers to your application for relief from double taxation dated October 12, 2000, requesting for a confirmation of your opinion that the gains derived by Singapore Network Services Pte Ltd. (SNS) from the transfer of its shares of stocks in EDINET Philippines, Inc. (EPI) are exempt from capital gains tax under the RP-Singapore Tax Treaty. It is represented that SNS is a corporation duly organized and existing under the laws of the Republic of Singapore with principal office address at 31 Science Park Road, SNS Hub, Singapore 117611; that it is not registered either as a corporation or as a partnership licensed to do business in the Philippines as per certification dated October 17, 2000 issued by the Securities and Exchange Commission; that EPI is a corporation organized and existing under the laws of the Philippines having its principal office at 6/F Ayala Life Building, Makati City; that SNS owns 3,000,000 shares of EPI with a par value of P10 per share with a total value of P30,000,000.00 representing forty percent (40%) of EPI's outstanding total shares of stocks; that SNS entered into a Stock Purchase Agreement dated March 6, 2001 with Ayala Corporation (AYALA), a corporation duly organized and existing under the laws of the Philippines, with principal office at 34th Floor, Tower One, Ayala Triangle, Ayala Avenue, Makati City; that pursuant to the Agreement, SNS sold all of its shares of stock in EPI to AYALA for US$1,950,000.00; that the purchase price shall be payable by the same funds directly transferred to a bank account designated by SNS; and that the assets of EPI do not consist principally of immovable property situated in the Philippines as evidenced by the company's financial statements. In reply, please be informed that Article 13 of the RP-Singapore Tax Treaty provides, viz: " Article 13 " GAINS FROM THE 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 a permanent establishment which an enterprises of a Contracting State has in the other Contracting State or of movable property pertaining to a fixed based 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 a 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 operations of such ships or aircraft, shall be taxable only in that State. CScaDH "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. (emphasis supplied) "4. Gains from the alienation of any property, other than those mentioned in paragraph 1, 2 and 3 shall taxable only in the Contracting State of which the alienator is a resident. Paragraph 3 of the aforequoted Article grants the Philippines the right to tax gains derived 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 the Regulations, it shall be understood to include real properties as understood under Philippines Laws; b) 'Principally', 'wholly or partially', directly principally' or 'attributable' more than 50% of the entire assets in terms of value; xxx xxx xxx" Verification of the December 31, 2000 and 1999 Audited Financial Statement of EPI disclose that its net property and equipment located in the Philippines are respectively valued at P12,204,647 and P14,053,777 representing less than fifty percent (50%) of its respective total assets of P31,977,656 and P39,921,408 thereby making the assets of EPI not consisted principally of real property located in the Philippines. Hence, the gains from the sale of the 3,000,000 shares of stock of SNS in EPI to AYALA is not taxable in the Philippines. (BIR Ruling No. 067-90) However, a certificate of authority to register the said transaction in the books of EPI must be secured. Thus, SNS, a nonresident foreign corporation, is required to file, although not required to pay the capital gains tax as above mentioned, a Capital Gains Tax Return (BIR Form No. 1707) accompanied by copies of the Stock Purchase Agreement and this ruling, with Revenue District Office No. 39 South Quezon City, so that the latter may issue a Certificate Authorizing Registration (CAR) of the said shares of stock in favor of AYALA. Moreover, Section 176 of the National Internal Revenue Code (Tax Code) of 1997 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 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: . . ." The same Tax 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 thereof, 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 EPI or AYALA in accordance with the provisions of the Tax Code of 1997. cTCEIS This ruling is issued on the basis of the foregoing facts as represented. However, if upon investigation it shall be disclosed or discovered that said facts are different, this ruling shall be considered as null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) EDMUNDO P. GUEVARA Deputy Commissioner Legal and Inspection Group