ITAD Ruling No. 101-01

October 26, 2001 ITAD RULING NO. 101-01 Art. 13, RP-Singapore Tax Treaty BIR Ruling DA-ITAD No. 38-00 Sycip, Salazar, Hernandez & Gatmaitan SYCIPLAW-All Asia Capital Center, 105 Paseo de Roxas, Makati City Attention: Mr. Hector M. de Leon, Jr. Mr. Benedicto P. Panigbatan Gentlemen : This refers to your letter dated May 22, 2001, requesting confirmation of your opinion to the effect that the gains derived by CSE Systems & Engineering Ltd. ("CSE"') from the transfer of its shares in EBWORX PHILIPPINES, INC. formerly "Solutions Exchange, Inc.," (EBWORX Philippines) to EBWORX, LTD., are not subject to capital gains tax pursuant to the RP-Singapore tax treaty. It is represented that CSE is a corporation duly organized under the laws of Singapore with business address at 10 Collyer Quay, #19-08, Ocean Building, Singapore 049315; 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 May 8, 2001; that it is the registered owner of Seventy-Five Thousand (75,000) shares of stock in Ebworx Philippines; that Ebworx Philippines is a domestic corporation with business address at Unit 2501, 25/F Antel Corporate Center, 139 Valero St., Salcedo Village, Makati City, Philippines; that, on the other hand, Ebworx Ltd. is a corporation organized and existing under the laws of Singapore, with business address at 36 Robinson Road, #18-01, City House, Singapore 068877; and that on June 1, 2000 by virtue of the Deed of Absolute Sale of Shares of Stock executed by CSE and Ebworx Ltd., CSE sold, transferred and conveyed to Ebworx Ltd. the total of 75,000 shares of stock with a par value of Philippine Pesos: Twenty (PhP20.00) per share or an aggregate par value of Philippine Pesos: One Million Five Hundred Thousand (PhP1,500,000.00), representing approximately thirty percent (30%) of the entire issued and outstanding capital stock of the CSE as of the said date. In reply, please be informed that Article 13 of the RP-Singapore tax treaty provides as follows: "Article 13 GAINS FROM THE ALIENATION OF PROPERTY 1. Gains from the alienation of immovable property may be taxed in the Contracting State in which such property is situated. 2. Gains from the alienation of movable property forming part of the business property of a permanent establishment which an enterprise of a Contracting State has in the other Contracting State or of 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 professional services, including such gains from the alienation of such 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 an enterprise of a Contracting State from the alienation of ships and aircraft operated in international traffic and movable property pertaining to the operation of such ships or aircraft, shall be taxable only in that State. 3. Gains from the alienation of shares of a company, the property of which consists principally of immovable property situated in a Contracting State, may be taxed in that State. Gains from the alienation of an interest in a partnership or a trust, the property of which consists principally of immovable property situated in a Contracting State, may be taxed in that State. 4. G ains from the alienation of any property, other than those mentioned in paragraphs 1, 2, and 3 shall be taxable only in the Contracting State of which the alienator is a resident. (underscored for emphasis). xxx xxx xxx Based on the foregoing, the gains which will be realized by CSE from the transfer of its shares of stock in Ebworx Philippines to Ebworx, Ltd are generally taxable in Singapore. However, under the aforequoted provision of paragraph 3 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 the 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 Financial Statements for the Six Months Ended June 30, 2000 of Ebworx Philippines disclosed that it has no real property interest located in the Philippines, thereby making the assets of Ebworx Philippines not principally consisted of real property interest located in the Philippines. Thus, Article 13 (3) of the RP- Singapore tax treaty will not apply. Consequently, the gains shall be taxable only in Singapore since, pursuant to paragraph 4 of the said Article, "any capital gains which may be derived by CSE from the alienation of any property, other than those mentioned in paragraphs 1, 2 and 3 of Article 13 of the RP-Singapore tax treaty shall be taxable only in the Contracting State of which the alienator is a resident." However, the transfer of stocks from CSE Systems & Engineering Ltd. to Ebworx, Ltd shall be subject to the documentary stamp tax imposed under Section 176 of the Tax Code of 1997. Accordingly, this Office is of the opinion and so holds that the gains derived by CSE from the sale of its shares in Ebworx Philippines to Ebworx, Ltd. are not subject to capital gains tax. (BIR Ruling No. ITAD 38-00 dated February 4, 2000). This ruling is issued on the basis of the 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