ITAD Ruling No. 104-02

May 28, 2002 ITAD RULING NO. 104-02 RP-US Art. 14 Tax Code of 1997 Sec. 176 BIR Ruling No. DA-ITAD-84-01 Sycip Salazar Hernandez & Gatmaitan 4th Floor Keppel Center, Cardinal Rosales Avenue cor. Samar Loop Street Cebu Business Park, 6000 Cebu City Attention: Atty. Danilo V. Ortiz Atty. Joseph Trillana T. Gonzales & Atty. Vincent E. Tomaneng Gentlemen : This refers to your letter dated January 8, 2002 on behalf of your client, PSINet Asia Holdings Inc. (PSI-US), requesting confirmation of your opinion that any gain it may derive from the transfer of its shares of stock in three (3) domestic corporations to Inter.Net Global Ltd. (INGL) shall be exempt from capital gains tax pursuant to the RP-US tax treaty. It is represented that PSI-US is a corporation duly organized and existing under the laws of the State of Delaware, USA with business address at 44983 Knoll Square, Ashburn, VA 20147, USA; that it is not registered either as a corporation or as a partnership licensed to do business in the Philippines as evidenced by Certificate of Non-Registration issued by the Securities and Exchange Commission dated November 6, 2001; that PSI-US is the absolute and registered owner of the following fully-paid shares of common stock (inclusive of qualifying shares issued to its nominee directors) in three (3) domestic corporations in the Philippines: Par Value Name of Domestic Corporation No. of Shares Per Shares Amount 1. PSINet Philippines, Inc. 64,000 P100.00 P6,400,000.00 (formerly IPhil. Comm. Network, Inc.) 2. Interdotnet Philippines, Inc. 390,000 10.00 P3,900,000.00 (formerly Internext Group, Inc.) 3. PSINet Philippines Holdings, Inc. 40,000 P1.00 P40,000.00 that the above-mentioned shares of stocks of PSI-US translate to a 40% ownership in each of the three (3) domestic corporations; that on January 1, 2001, PSI-US assigned, conveyed and transferred to INGL all its shares of stocks in the three (3) domestic corporations in full and complete settlement of its indebtedness to the latter; and that PSI-US had previously been registered with RDO No. 50 Makati City as a one-time taxpayer and was issued TIN 204-950-379-000 by virtue of its payment of the documentary stamp taxes due on its purchase of the aforementioned shares of stock in the three (3) domestic corporations. 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 PSI-US 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 interests 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 31 December 2000 Financial Statements of the three (3) domestic corporations namely: (1) PSINet Philippines Inc., (PSI-Phils) (2) Interdotnet Philippines Inc. (IPI) and (3) PSINet Philippines Holdings, Inc., (PSI-Holdings) disclosed that their net property and equipment located in the Philippines are 1.6%, .14% and .014%, respectively, of their total assets, thereby making the assets of the three (3) domestic corporations not consisted principally of real property interest located in the Philippines. Accordingly, this Office of the opinion and so holds that any gain derived by PSI-US from the transfer of its shares of stock in PSI-Phils, IPI and PSI-Holdings to INGL are 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 PSI-Phils, IPI and PSI-Holdings must be secured. Thus, PSI-US, 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 of Shares and this ruling, with Revenue District Office No. 39 South Quezon City (RDO 39), for the issuance of a Certificate Authorizing Registration (CAR) of the said shares of stock in favor of INGL. Upon payment of the documentary stamp tax in accordance with Section 176 of the Tax Code of 1997, the Corporate Secretary of PSI-Phils, IPI and PSI-Holdings shall register in the Stock and Transfer Book the shares from PSI-US to INGL. 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