ITAD Ruling No. 072-02

April 30, 2002 ITAD RULING NO. 072-02 RP-Japan, Article 13 BIR Ruling No. ITAD-06-02 Narciso Jimenez Gonzales Liwanag Bello Valdez & Caluya SOL Building, 112 Amorsolo Street Legaspi Village, 1229 Makati City Attention: Atty. Jose V.E. Jimenez Atty. Enrico D. Cruz Gentlemen : This refers to your application for relief from double taxation dated October 16, 2001 on behalf of your client, Pilipinas Kyorihitsu, Inc. (PKI), requesting confirmation of your opinion that the gains to be realized from the transfer of its shares of stocks by Marubeni Corporation (MC) to Marubeni Auto Sales Corporation (MASC) shall not be subject to Philippine income tax pursuant to the RP-Japan tax treaty. It is represented that MC is a corporation duly organized and existing under the laws of Japan with principal address at 34-2, Ohtemachi 1-Chome, Chiyoda-Ku, Tokyo, Japan; that PKI is a corporation organized and existing under the laws of the Philippines with principal office at Km. 75, Barangay Inosloban, Lipa City, Batangas: that MC is the stockholder of record of 24,999 shares of common stock and is the beneficial owner of one (1) share of stock under the name of its nominee director, Mr. Yoshiki Takada, or an aggregate shareholdings of 25,000 shares, with par value of One Thousand Pesos (P1,000) per share, equivalent to Twenty-Five Million Pesos (Php25,000,000) representing ten per cent (10%) of the entire stockholdings of PKI; that MASC is a corporation duly organized and existing under the laws of Japan, with business address at 1-2-3, Ohtemachi, Chiyoda-ku, Tokyo 102, Japan; that pursuant to the Deed of Conveyance, MC cedes, transfers and conveys all its stockholdings in PKI to MASC; and that for and in consideration of the said transfer, MASC agreed to pay MC the total purchase price of THIRTY-THREE MILLION THREE HUNDRED SEVENTY-SEVEN THOUSAND AND TWO (Php33,377,002) Philippine Pesos. In reply, please be informed that Article 13(4) and (5) of the RP-Japan tax treaty provides that: "Article 13 "Gains from the Alienation of Property "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. DcSACE "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. xxx xxx xxx" In the instant case, the gains which will be realized by MC from the transfer of its shares of stock in PKI to MASC shall be taxable in Japan. However, based on paragraph 4 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 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.(a) and (b), Revenue Regulations No. 4-86). Verification of the Audited Financial Statements for the years ended 2000 and 2001 of PKI disclosed that its net property and equipment located in the Philippines are valued at P195M and P216M, respectively, representing less than fifty percent (50%) of its total assets of P612M and P618M, respectively, thereby making the assets of PKI not consisted principally of real property interest located in the Philippines. Accordingly, this office is of the opinion and so holds that the transfer by MC of its shares of stock in PKI to MASC is exempt from capital gains tax imposed under Section 27(D)(2) of the Tax Code of 1997 pursuant to Article 13(4) and (5) of the RP-Japan tax treaty. However, the Deed of Conveyance executed by and between them for the sale of shares of stocks shall be subject to the documentary stamp tax imposed under Section 176 of the Tax Code of 1997. Furthermore; a certificate of authority to register the said transaction in the books of PKI must be secured. Thus, PKI is required to file a Capital Gains Tax Return (BIR Form No. 1707) accompanied by copies of the Deed of Conveyance and this ruling with Revenue District Office No. 39 South, Quezon City (RDO 39), for the issuance of a Certificate Authorizing Registration (CAR) of the subject shares of stock of MC in favor of MASC. Upon presentment of proof of payment of documentary stamp thereon, the corporate secretary of PKI shall be authorized to register in its Stock and Transfer Book the transfer of the shares from MC to MASC and to cancel and issue new certificates in the name of MASC. This ruling is issued on the basis of the foregoing representations. However, if upon investigation it shall be disclosed or discovered that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service