ITAD Ruling No. 084-02

May 8, 2002 ITAD RULING NO. 084-02 RP-US Art. 14 Tax Code of 1997 Sec. 176 BIR Ruling No. DA-ITAD-84-01 Sycip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Attention: Atty. E. C. Alcantara Tax Division Gentlemen : This refers to your letter dated February 18, 2002 on behalf of your client, Keihin America Corporation (KAC), requesting confirmation of your opinion as follows: (1) the gain realized by KAC for the sale of its shares of stock in Everett Steamship Corporation (ESC) to Keihin Co., Ltd. (KCL) is exempt from capital gains tax imposed under Section 28(B)(5)(c) of the Tax Code of 1997, as amended, pursuant to Article 14(2) of the RP-US tax treaty; and (2) the Deed of Absolute Sale of ESC shares is subject to Documentary Stamp Tax (DST) imposed under Section 176 of the Tax Code of 1997, as amended. It is represented that KAC is a corporation duly organized and existing under the laws of the State of Delaware, USA, with business address at 2000 East Carson Street, Carson, California; that it is not registered either as a corporation or as a partnership licensed to do business in the Philippines as evidenced by a Certificate of Non-Registration issued by the Securities and Exchange Commission dated February 18, 2002; that KAC holds 260,322 common shares which represent 99.9% ownership of all the outstanding and issued common shares of ESC, a corporation duly organized and existing under the laws of the Philippines; that ESC has an authorized capital stock of 280,000 shares with a par value of P100.00 per share of which 260,329 shares are issued and outstanding; that on January 15, 2002, KAC and KCL entered into a Deed of Absolute Sale of Shares of Stock wherein KAC transfers, assigns and conveys all its 260,322 common shares in ESC to the latter for the price of P41,799,075.00 to be paid in U.S. Dollars (US$) at the exchange rate prevailing at the time of payment; and that on February 4, 2002, pursuant to the Deed of Absolute Sale, KAC filed and paid the DST to the authorized bank amounting to P195,241.50. In reply, please be informed that Article 14 of the RP-US tax treaty provides as follow: "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 gain which may be derived by KAC 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. However, 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 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 Audited Financial Statements of ESC for 1999 and 2000 as well as the unaudited financial statement as of December 31, 2001 disclosed that its net property and equipment located in the Philippines represent 1.93%,1.5% and 0.96%,respectively, of its total assets, thereby making the assets of ESC not consisted principally of real property interest located in the Philippines. Accordingly, your opinion is hereby confirmed that any gain derived by KAC from the sale from its shares of stock in ESC to KCL 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 and the Deed of Absolute Sale shall be subject to documentary stamp tax pursuant to Section 176 of the same Tax Code. However, a certificate of authority to register the said transaction in the books of ESC must be secured. Thus, KAC, 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 Absolute Sale of Shares of Stock and this ruling, with Revenue District Office No. 39 South-Quezon City (RDO 39),in order for the latter to issue a Certificate Authorizing Registration (CAR) of the said shares of stock in favor of KCL. Upon presentment of proof of payment of the documentary stamp tax, the Corporate Secretary of ESC shall register in the Stock and Transfer Book the shares from KAC to KCL. 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.) MILAGROS V. REGALADO Assistant Commissioner Legal Service