ITAD Ruling No. 085-01

October 5, 2001 ITAD RULING NO. 085-01 Art. 14, RP-US Tax Treaty Sec. 176, NIRC BIR Ruling No. ITAD-40-01 Romulo Mabanta Buenaventura Sayoc & De Los Angeles 30th Floor, Citibank Tower Citibank Plaza 8741 Paseo de Roxas Makati City Attention: Ms. Wilma M. Valdemoro-Cua Mr. Jayson L. Fernandez This refers to your letter dated July 25, 2001 requesting confirmation of your opinion to the effect that the gains derived by onQ Holdings, Inc. ("onQ") from the sale of its shares in onQ Technology Philippines, Inc. ("onQ Phils.") to Device Dynamics, Inc. ("DDI") are not subject to capital gains tax pursuant to the RP-US tax treaty. It is represented that onQ is a corporation duly organized under the laws of the State of Delaware, U.S.A. with office address at 8201 E. Riverside Drive, Suite 100, building Four, Austin Texas; 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 July 23, 2001 and is the registered holder of Twenty Eight Thousand (28,000) shares of stock and subscription rights to Seven Hundred Sixty Eight Thousand Five Hundred Forty Five (768,545) shares of stock all with a par value of One Hundred Pesos (P100) in onQ Phils.; that onQ Phils. is a corporation duly organized under the laws of the Republic of the Philippines; that DDI is a corporation organized and existing under the laws of the State of Delaware, U.S.A.; and that on June 29, 2001, by virtue of the Stock Purchase Agreement executed by and between onQ and DDI, onQ sold to DDI the total of 28,000 shares of stock and its subscription rights of 768,545 shares of stock in onQ Phils.. 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." xxx xxx xxx" On the other hand, the Reservation Clause of the RP-US tax treaty, in pertinent part, provides: "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;" xxx xxx xxx" It is clear from the aforequoted provisions that any capital gains which may be derived by onQ from the alienation of any property other than those mentioned in paragraph (1) of Article 14 or in Article 7 (Income From Real Property) of the RP-US tax treaty shall be taxable only in the State where the alienator is a resident. It is to be noted, however, that under the Reservation Clause, the Philippines may tax the gains derived from the disposition of interests in a corporation if its assets consist principally of real property interest located in the Philippines. "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 as of December 31, 2000 of onQ Phils. disclosed that its real property interest is valued at P18,734,279 or 18% of total assets, thereby making the assets of onQ Phils. not principally consisted of real property interest located in the Philippines. Accordingly, this Office is of the opinion and so holds that the gains derived by onQ Holdings, Inc. from the sale of its shares in onQ Technology Philippines, Inc. to Device Dynamics, Inc. are not subject to capital gains tax. (BIR Ruling No. ITAD 40-01 dated April 6, 2001). However, the Stock Purchase Agreement entered into by and between onQ Holdings, Inc. and Device Dynamics, Inc. 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 documentary stamp tax thereon, the corporate secretary of onQ Technology Philippines, Inc. shall then be authorized to register the transfer of shares from onQ Holdings, Inc. to Device Dynamics, Inc. in the Stock and Transfer Book of the corporation and to cancel and issue new certificates in the name of DDI. This ruling is issued on the basis of the foregoing facts as represented. However, if upon investigation it shall be 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