ITAD Ruling No. 080-01

September 24, 2001 ITAD RULING NO. 080-01 Article 13 (4) Philippines-Japan Tax Treaty BIR Ruling No. ITAD-37-01 Diaz Murillo Dalupan (L.C. Diaz & Co.) Certified Public Accountants 5th Floor, Don Jacinto Building Dela Rosa Street corner Salcedo Streets Legaspi Village, Makati City Attention: Atty. Millard M. Manseguiao Director, Tax and Corporate Service Gentlemen : This refers to your letter dated June 18, 2001 requesting for a confirmatory ruling that gains derived by Precision Springs Co., Ltd. (Precision-Japan ) from the sale of its shares of stock in Precision Springs Manila, Incorporated Precision-Manil a) and in Precision Springs Cebu, Incorporated (Precision-Cebu ) to Mitsubishi Steel Manufacturing Company, Ltd. (Mitsubishi ) are exempt from capital gains tax, pursuant to Article 13 of the Philippines-Japan Tax Treaty. It is represented that Precision-Japan is a corporation organized and existing under the laws of Japan with principal office at 15, 3-chome, Shiohama, Ichikawa, Chiba, Japan; that Precision-Japan is not registered either as a corporation or as a partnership licensed to do business in the Philippines as per certification issued by the Securities and Exchange Commission dated January 12, 2001; that Mitsubishi is a corporation likewise organized and existing under the laws of Japan with principal office at 2-22, 3-chome, Harumi, Chuo-ku, Tokyo, Japan; that Precision-Manila and Precision-Cebu , with respective principal offices at Block 1, Lot 1, Light Industrial Science Park 2, Barrio Real, Calamba, Laguna and at 5th Street, Philippine Economic Zone Authority-Mactan, Pusok, Lapu-Lapu City, Mactan Island, Cebu, are corporations organized and existing under the laws of the Philippines and registered with the Philippine Economic Zone Authority ; that, as of August 31, 2000, Precision-Japan owns 57,999,995 shares of stock in Precision-Manila and 23,999,995 shares of stock in Precision-Cebu , each share in both corporations having a par value of P1.00; that, on the same date, Precision-Japan sold its 57,999,995 shares of stock in Precision-Manila and 23,999,995 shares of stock in Precision-Cebu to Mitsubishi for a consideration of 223,900,000 Japanese yen (for Precision-Manila ) and 276,500,000 Japanese yen (for Precision-Cebu ); and that, on October 10, 2000, the corresponding documentary stamp taxes thereon amounting to PhP435,000.00 (for Precision-Manila ) and PhP180,000.00 (for Precision-Cebu ) were paid to the Bureau of Internal Revenue District Offices No. 56 (Calamba, Laguna) and No. 80 (Mandaue City), respectively. In reply, please be informed that Article 13, paragraph 4 of the Philippines-Japan Tax Treaty provides: "Article 13 xxx xxx xxx 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. xxx xxx xxx" Section 2 of Revenue Regulations No. 4-86 (Determination of Whether the Assets of a Corporation Consist Principally of Real Property Interest under the Philippine Tax Treaties ) issued by the Minister of Finance and the Commissioner of Internal Revenue on April 8, 1986 provides guidance on the meaning of the phrase " consists principally of immovable property ." "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 Philippine Laws; b) ' Principally', 'wholly or principally', 'directly principally' or 'attributable' more than fifty percent of the entire assets in terms of value; "xxx xxx xxx" A perusal of the Summary of Property, Plant and Equipment as of August 31, 2000 (the date of sale) of Precision-Manila and Precision-Cebu reveals that 26 percent and 15 percent, respectively, of their total assets constitute real property interests in the Philippines. Consequently, Article 13 (4) of the Philippines-Japan Tax Treaty will not apply. The gains shall be taxable only in the country where the alienator is a resident. Accordingly, gains derived by Precision-Japan from the sale of its shares of stock in Precision-Manila and in Precision-Cebu to Mitsubishi are exempt from capital gains tax imposed under Section 28(B)(5)(c) of the National Internal Revenue Code of 1997 (NIRC of 1997) which provides: xxx xxx xxx (c) Capital Gains from Sale of Shares of Stock not Traded in the Stock Exchange A final tax at the rates prescribed below is hereby imposed upon the net capital gains realized during the taxable year from the sale, barter, exchange or other disposition of shares of stock in a domestic corporation, except shares sold, or disposed of through the stock exchange: Not over P100,000 5 percent On any amount in excess of P100,000 10 percent" Although such gains are exempt from capital gains tax, the transfer, however, by Precision-Japan of its shares of stock in Precision-Manila and in Precision-Cebu to Mitsubishi are subject to the documentary stamp tax imposed under Section 176 of the NIRC of 1997, viz : "Section 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 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: and Provided, further , That in the case of stock without par value the amount of the documentary stamp tax herein prescribed shall be equivalent to twenty-five percent (25%) of the documentary stamp tax paid upon the original issue of said stock." Moreover, Section 201 of the NIRC of 1997 mentions: "Section 201. Effect of Failure to Stamp Taxable Document . An instrument, document or paper which is required by law to be stamped and which has been signed, issued, accepted or transferred without being duly stamped, shall not be recorded, nor shall it or any copy thereof or any record of transfer of the same be admitted or used in evidence in any court until the requisite stamp or stamps shall have been affixed thereto and cancelled. xxx xxx xxx" Finally, since the corresponding documentary stamp taxes on the transfer were paid to the Bureau of Internal Revenue, the Corporate Secretaries of Precision-Manila and Precision-Cebu , upon presentation to them of the relevant Certificates Authorizing Registration, are authorized to: record in their Stock and Transfer Books the transfer of the shares of stock in Precision-Manila and in Precision-Cebu from Precision-Japan to Mitsubishi ; cancel stock certificates previously issued to Precision-Japan; and issue new stock certificates in the name of Mitsubishi . This ruling is issued on the basis of the foregoing facts as represented. However, if upon investigation it shall 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