ITAD Ruling No. 076-01

September 12, 2001 ITAD RULING NO. 076-01 PR-Japan Article 13 BIR Ruling No. ITAD 24-99 R.S. Bernaldo & Associates Unit 1810 Cityland Condominium 10 Tower 1 6815 Ayala Avenue cor. H.V. dela Costa Ext. Makati City 1200 Attention: Atty. Rosario S. Bernaldo Managing Partner Gentlemen : This refers to your letter dated April 27, 1999, requesting confirmation of your opinion that the transfer by Sumitomo Corporation-Japan (Sumitomo-Japan) to Sumitronics Asia Holdings Pte. Ltd.-Singapore (Sumitronics-Asia) of its shares in Sumitronics Philippines, Inc. (Sumitronics-Phils.) is not subject to capital gains tax pursuant to the RP-Japan Tax Treaty. It is represented that Sumitomo-Japan is a non-resident foreign corporation duly organized and existing under the laws of Japan; that it is not registered as a corporation/partnership in the Philippines as per certification dated May 16, 2000 issued by the Securities and Exchange Commission; that Sumitronics-Phils. is a corporation duly organized and existing under the laws of the Philippines; that Sumitronics-Asia is a non-resident foreign corporation organized and existing under the laws of Singapore; that Sumitomo-Japan is the stockholder of record of seventy-eight percent (78%) of the outstanding capital stock of Sumitronics-Phils. equivalent to Fifty Seven Million Nine Hundred Thousand (57,900,000) shares of stock, with a par value of One Peso (1.00) per share, or an aggregate par value of Fifty Seven Million Nine Hundred Thousand Pesos (P57,900,000.00); that on April 05, 1999, by virtue of the Deed of Sale, Sumitomo-Japan transferred and assigned its shareholdings in Sumitronics-Phils. to Sumitronics-Asia consisting of Fifty Seven Million Nine Hundred-Thousand (57,900,000) shares of stock for Sixty Four Million Nine Hundred Twelve Thousand Five Hundred Thirty One Pesos Only (P64,912,531.00); that in exchange, Sumitomo-Japan will receive equivalent Sumitronics-Asia shares of stocks as alleged in the Secretary's Certificate dated May 23, 2000; that at the time of the transfer, the bulk of Sumitronics-Phils. assets is in the form of accounts receivable and inventory. In reply, please be informed that Article 13 of the RP-Japan Tax Treaty provides that: "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 Contracting State has in the other Contracting State or of any other 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 permanent establishment (alone or together with the whole enterprise) or 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 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 ." gains which will be derived by Sumitomo-Japan from the transfer of its shares of stocks in Sumitronics-Phils. to Sumitronics-Asia shall be taxable only in Japan. However, under the aforequoted provision of paragraph 4 supra, 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. 2 (a) and (b), Revenue Regulations No. 4-86) Verification of the 1998 and 1999 Audited Financial Statements of Sumitronics-Phils. disclosed that its real property interest is less than 50% of its entire assets. As represented, since Sumitronics-Phils. real property interest does not exceed 50% of its entire assets, the gains, if any, to be derived by Sumitomo-Japan from the sale of its shares of stock in Sumitronics-Phils. to Sumitronics-Asia, are not subject to capital gains tax imposed under Section 25 (A) (3) of the Tax Code of 1997. However, the Share Transfer Agreement shall be subject to the documentary stamp tax imposed under Section 176 of the said Tax Code. (ITAD 24-99) This ruling is being issued on the basis of the facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) EDMUNDO P. GUEVARA Deputy Commissioner Legal and Inspection Group