ITAD Ruling No. 071-02

April 29, 2002 ITAD RULING NO. 071-02 Article 13 RP-Japan BIR Ruling No. 37-01 Sycip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Attention: E.C. Alcantara Tax Division Gentlemen : This refers to your application for relief from double taxation dated March 12, 2002, on behalf of your client, Mitsui Transnet (Philippines) Corporation (Mitsui Transnet) requesting for confirmation that the transfer by Mitsui & Co., Ltd. (Mitsui-Japan) of its shares of stock in Mitsui Transnet shall have the following tax implications: 1) No gain or loss shall be recognized as a result of the transfer and no Philippine income tax or capital gains tax shall be due from both Mitsui-Japan and Mitsui-Manila, pursuant to the RP-Japan tax treaty; and 2) No other tax shall be payable on the transaction other than the documentary stamp tax on the transfer by Mitsui-Japan of its shares of stock in Section 176 of the Tax Code, as amended. It is represented that Mitsui-Japan is a corporation duly organized and existing under and by virtue of the laws of Japan with office address at 2-1 Ohtemachi-Chome, Chiyoda-ku, Tokyo, Japan; that on August 12, 1959, it established a Philippine branch (Mitsui-Manila) to engage in the exportation, importation and sale of various kinds of commodities, to carry on an agency business, and to manufacture all types of machines in the Philippines; that Mitsui-Manila is a corporation duly organized and existing under the laws of Japan but licensed to do business in the Philippines, with principal office at 27th Floor, Pacific Star Building, Sen. Gil Puyat Avenue, Makati City; that Mitsui-Japan is the registered owner of 983,696 shares of stock in Mitsui Transnet, representing approximately 90% of the latter's entire outstanding capital stock; that Mitsui Transnet is a corporation duly organized and existing under and by virtue of the laws of the Philippines with office address at Unit 3, No. 7, Mountain Drive, Light Industry and Science Park of the Philippines II, Barangay La Mesa, Calamba, Laguna; that on December 1, 2000 Mitsui-Japan assigned 109,300 shares (out of its 983,696 shares in Mitsui Transnet to Mitsui-Manila; that in consideration of the said assignment, Mitsui-Japan shall pay in the amount of JP32,417,673 or the equivalent amount of Php14,611,728.71; and that the properties of Mitsui Transnet do not consist principally of immovable property. In reply, please be informed that Article 13 of the RP-Japan tax treaty provides as follows: "Article 13 "Capital Gains "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 Contracting State. EDCTIa "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." The situation of a parent company entering into a business transaction without the participation of its branch is recognized by the Supreme Court to be separate and distinct from the activities of the parent company for tax purposes in the case of Marubeni vs. CIR , ( G.R. No. 76573 dated September 14, 1989 ) where 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 ours) In the instant case, since the shares in Mitsui Transnet were purchased by Mitsui-Japan independently of Mitsui-Manila, accordingly, the subsequent assignment of said shares by Mitsui-Japan is that of Mitsui-Japan alone and not attributable to the branch. Based on the foregoing, the gains which will be realized by Mitsui-Japan from the transfer of its shares of stock to Mitsui-Manila shall be taxable only in Japan. However, under paragraph 4 of the aforequoted provision, the Philippines may tax the gains derived from the disposition of interest in a corporation if its entire assets consist principally of real property interest located in the Philippines. "Real Property Interest" means interest on properties enumerated in Sec. 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 read 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 Mitsui-Transnet disclosed that its property and equipment located in the Philippines are valued at P18,905,620.00 net of depreciation as of December 31, 2000 representing 1.07% of its total assets of P1,755,432,637.00 thereby making the assets of Mitsui-Transnet not consisted principally of real property interest located in the Philippines up to the date of subject sale. Accordingly, the sale by Mitsui-Japan of its shares of stock to Mitsui-Manila is exempt from capital gains tax imposed under Section 8(B)(5)(C) of the Tax Code of 1997. However, the Deed of Assignment of shares shall be subject to the documentary stamp tax imposed under Section 176 of the Tax Code of 1997. (BIR Ruling No. ITAD 37-01 dated March 22, 2001) This ruling is issued on the basis of the foregoing facts as represented. If upon investigation it shall disclosed that the facts are different, then this ruling shall be considered null and void. ESCTaA Very truly yours, (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service