ITAD Ruling No. 084-01

October 3, 2001 ITAD RULING NO. 084-01 RP-US Tax Treaty Art. 14 Tax Code of 1997 - Sec. 176 BIR Ruling No. ITAD - 127-00 Sycip, Salazar, Hernandez & Gatmaitan Sycip Law All Asia Capital Centre 105 Paseo de Roxas Makati City 1226 Attention: Atty. Angel M. Salita, Jr. Atty. Roel A. Refran Gentlemen : This refers to your letter dated January 9, 2001, on behalf of your client The Prudential Insurance Company of America (PICA), requesting for exemption from Philippine tax on any gain that it may derive from the transfer of its shares of stock in The Prumerica Life Insurance Company, Inc. (Prumerica) to Prumerica International Insurance Holdings, Ltd. (PIIHL) pursuant to Article 14 of the RP-US Tax Treaty. It is represented that PICA is a corporation duly organized and existing under the laws of the State of New Jersey, USA with business address at 751 Broad Street, Newark, New Jersey, USA; that it is not registered either as a corporation or as a partnership licensed to do business in the Philippines per certification issued by the Securities and Exchange Commission dated September 7, 2000; that PICA is the registered owner of 2,500,000 shares (inclusive of 5 nominal shares) in Prumerica, a domestic corporation with office address at 22nd Floor Multinational Bancorporation Centre, 6805 Ayala Avenue, Makati City; that on August 18, 2000, PICA executed a Deed of Assignment covering all of the said 2,500,000 shares in favor of PIIHL, a corporation duly organized and existing under the laws of the State of Delaware, USA with registered office address at 1013 Centre Road, Wilmington, Delaware, USA; and that although the Deed of Assignment is dated August 18, 2000, the said shares cannot be actually transferred to PIIHL due to the required tax clearance in relation for such transfer. In reply, please be informed that Article 14 of the RP-US Tax Treaty provides as follows: "Article 14 "CAPITAL GAINS "(1) Gains from the alienation of tangible personal (movable) property forming part of the business property of a permanent establishment which a resident of a Contracting State has in the other Contracting State or of tangible personal (movable) 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 the other State. However, gains derived by a resident of a Contracting State from the alienation of ships, aircraft or containers operated by such resident in international traffic shall be taxable only in that State, and gains described in Article 13 (Royalties) shall be taxable only in accordance with the provisions of Article 13. "(2) Gains from the alienation of any property other than those mentioned in paragraph 1 or in Article 7 (Income from Real Property) shall be taxable only in the Contracting State of which the alienator is a resident." Furthermore, the Reservation Clause of the same treaty provides, in part, as follows: "Article 1 "Notwithstanding the provisions of Article 14 relating to capital gains, both the United States and the Philippines may tax gain from the disposition of an interest in a corporation if its assets consist principally of a real property interest located in the country. Likewise, both countries may tax gain from the disposition of an interest in a partnership, trust or estate to the extent the gain is attributable to a real property interest in one of the countries. The term 'real property interest' is to have the meaning it has under the law of the country in which the underlying real property is located." Based on the aforequoted provisions, it is clear that any gains which may be derived by PICA from the alienation of any property other than those mentioned in paragraph (1) of Article 14 of the RP-US Tax Treaty shall be taxable only in the State where the alienator is a resident. But, under the Reservation Clause of the same treaty, the Philippines may tax the gains derived from the disposition of interest in a corporation if its assets consist principally of real property interests located in the Philippines. "Real Property Interest" means 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 Statement of Prumerica disclosed that its net property and equipment located in the Philippines are valued at P58.3M in 1999 and P33.2M in 1998, representing less than fifty percent (50%) of its total assets of P416.7M and P334.9M, respectively, thereby making the assets of Prumerica not consisting principally of real property interest located in the Philippines. Accordingly, your opinion is hereby confirmed that any gain derived by PICA from the transfer from its shares of stock in Prumerica to PIIHL is not subject to capital gains tax as imposed under Section 28(B)(5)(c) of the National Internal Revenue Code (Tax Code) of 1997. However, a certificate of authority to register the said transaction in the books of Prumerica must be secured. Thus, PICA, being a nonresident foreign corporation, is required to file, although not required to pay the capital gains tax, a Capital Gains Tax Return (BIR Form No. 1707) accompanied by copies of the Deed of Assignment and this ruling, with Revenue District Office No. 51 Pasay (RDO 51), in order for the latter to issue a Certificate Authorizing Registration (CAR) of the said shares of stock in favor of PICA. (BIR Ruling No. ITAD 127-00) Likewise, the Deed of Assignment shall be subject to the Documentary Stamp Tax imposed under Section 176 of the Tax Code of 1997. Upon presentment of proof of payment of the documentary stamp tax, the Corporate Secretary of Prumerica can register in the Stock and Transfer Book the shares from PICA to PIIHL. This ruling is issued on the basis of the foregoing facts as represented. If upon investigation, it will be disclosed that the facts are different, then this ruling shall be null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service