ITAD Ruling No. 071-03

May 12, 2003 ITAD RULING NO. 071-03 Arts. 1 & 4, RP-Japan BIR Ruling No. ITAD 212-02 Fernandez Santos & Lopez 25th Floor, Pacific Star Building Cor. Sen. Gil J. Puyat and Makati Avenues 1200 Makati City Attention: Mr. Eliseo A. Fernandez Senior Managing Partner Gentlemen : This refers to your application for relief from double taxation dated November 25, 2002 on behalf of your client, Mitsubishi Corporation (Mitsubishi-Japan), requesting confirmation of your opinion that the gains to be realized by Mitsubishi-Japan from the transfer of its shares of stocks in Kansai Paint Philippines, Inc. (Kansai-Phil.) to Kansai Paint Co., Ltd. (Kansai-Japan) shall not be subject to Philippine income tax pursuant to Article 13, in relation to Article 4, of the RP-Japan tax treaty. It is represented that Mitsubishi-Japan is a corporation duly organized and existing under the laws of Japan with principal address at 6-3, Marunouchi 2-Chome, Chiyoda-ku, Tokyo, Japan; that it is a resident foreign corporation licensed to engage in business in the Philippines as shown in the Certification issued by the Securities and Exchange Commission dated November 28, 2002; that Kansai-Japan is a corporation also organized and existing under the laws of Japan with office address at 33-1, Kanzaki-cho, Amagasaki City, Hyogo Prefecture, Japan; that Kansai-Phil. is a corporation organized and existing under the laws of the Philippines with principal address at 14th Floor Locsin Bldg. Ayala Avenue, Makati City; that Mitsubishi-Japan is the absolute and beneficial owner of 7,994 shares of stock with a par value of One Thousand Pesos (P1,000) per share comprising 100% of the issued share capital of Kansai-Phil.; that on March 15, 2002, a Share Sales Agreement was entered into by and between Mitsubishi-Japan and Kansai-Japan, whereby Mitsubishi-Japan assigned, transferred and conveyed to Kansai-Japan Five Thousand Six Hundred (5,600) shares of stocks for and in consideration of Eight Million Nine Hundred Ninety-One Thousand Three Hundred Thirty-One Pesos (P8,991,331.00) which shall be paid to Mitsubishi-Japan in Tokyo in equivalent amount of Yen amounting to Twenty-One Million Six Hundred Sixty Nine Thousand One Hundred Seven Japanese Yen (Y21,669,107). In reply, please be informed that Article 1 of the RP-Japan tax treaty provides, viz: "Article 1 "This Convention shall apply to persons who are residents of one or both of the Contracting States." Also, Article 4 provides: "Article 4 "1. For the purposes of this Convention, the term 'resident of a Contracting State' means any person who, under the laws of that Contracting State, is liable to tax therein by reason of his domicile, residence, place of head or main office, place of incorporation or any other criterion of a similar nature. But this term does not include any person who is liable to tax in that Contracting State in respect only of income from sources therein ." (Emphasis supplied.) "2. Where by reason of the provisions of the preceding paragraph a person is a resident of both Contracting States, then the competent authorities of the Contracting States shall determine by mutual agreement the Contracting State of which that person shall be deemed to be a resident for the purposes of this Convention." Based on Article 1 of the RP-Japan tax treaty, the Convention applies to persons who are considered resident of one or both of the Contracting States. Corollarily, Article 4 paragraph 1 thereof provides that the term "resident" excludes a person who is liable to tax in that Contracting State (in this case, Philippines), in respect only of income from sources therein. For purposes of the application of the RP-Japan tax treaty, Mitsubishi-Japan is classified as resident of Japan, though engaged in trade or business in the Philippines, being liable to tax in the Philippines in respect only of its income from all sources within the Philippines. Accordingly, Mitsubishi-Japan, being a resident of Japan, can apply for tax treaty relief under the RP-Japan tax treaty with regard to the gains it realized from the transfer of its shares of stock in Kansai-Phil. to Kansai-Japan. DSAICa Moreover, Article 13 of RP-Japan tax treaty provides: 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 Contracting 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 on 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 resident is a resident ." Based on the aforequoted provisions, the gains realized by Mitsubishi-Japan from the transfer of its shares of stock in Kansai-Phil. to Kansai-Japan are taxable in Japan. However, under paragraph 4 thereof, 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 in properties 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. ] Verification of the Audited Financial Statements of Kansai-Phil. as of December 31, 2001 and June 30, 2002 show that its real property interest is valued at 2,926,286 or 7.09% of its total assets. Thus, Kansai-Phil.'s assets do not consist principally of real property interest located in the Philippines. Accordingly, this Office confirms your opinion as it hereby holds any gain assumed to be realized by Mitsubishi-Japan from the transfer of its shares of stock in Kansai-Phil. to Kansai-Japan by virtue of the Share Sales Agreement is not subject to Philippine income tax. ( BIR Ruling No. ITAD 212-02 dated November 28, 2002 ) However, the Share Sales Agreement is subject to documentary stamp tax (DST) imposed under Section 176 of the Tax Code of 1997. This ruling is issued on the basis of the facts as represented. However, if upon investigation it shall be discovered that the facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service