ITAD Ruling No. 111-00

August 28, 2000 ITAD RULING NO. 111-00 RP-US Art. 14 (2) 135-94 Platon Martinez Flores San Pedro & Leao 6th & 7th Floors Tuscan Building 114 Herrera St. Legaspi Village Makati City, Philippines Attention: Hector A. Martinez Gentlemen : This refers to your letter dated January 7, 2000 requesting on behalf of your client, Philip Morris Philippines, Inc., (PM Philippines), for confirmation of your opinion that the transfer of the shares of stock of PM Philippines by its parent corporation Philip Morris International Finance Corporation (PMIFCO) in favor of FTR Holding S.A. (FTR-H) is not subject to the capital gains tax pursuant to Article 14 (2) of the RP-US Tax Treaty in connection with the Reservation Clause of the said Treaty. It is represented that PM Philippines is a domestic corporation duly registered with the Securities and Exchange Commission; that PMIFCO is a non-resident foreign corporation duly organized and existing under the laws of the State of Delaware, U.S.A.; that it is not registered as a corporation/partnership in the Philippines as per certification dated June 28, 1999 issued by the Securities and Exchange Commission (SEC); that FTR-H is a non-resident foreign corporation duly organized and existing under the laws of Switzerland; that it is not registered to engage in business in the Philippines; that PM Philippines has an authorized capital stock of Fifty Million Pesos (P50,000,000.00) divided into Fifty Thousand (50,000) common shares with a par value of P1,000.00 each, of which Nineteen Thousand (19,000) common shares are issued and outstanding and the following are the registered owners of said shares: Name No. of Shares PMIFCO 18,992 Duck Y Song, 1 Harold Dyrvik 1 Marshall S. White 1 Roman Mabanta, Jr. 1 Jose F. Buenaventura 1 Cynthia R. Del Castillo 1 Herminio S. Ozaeta, Jr. 1 Owen Carsi-Cruz 1 that PMIFCO and FTR-H entered into an Agreement and Plan of Exchange and Reorganization (Reorganization Agreement) dated July 14, 1998 pursuant to which PMIFCO transferred to FTR-H all of PMIFCO's right, title and interest in the shares of the various corporations in exchange solely for newly issued shares of voting common stock of FTR-H; that under the Reorganization Agreement, PMIFCO transferred to FTR-H effective as of July 14, 1998 the 18,992 PM Philippines common shares owned by and registered in the name of PMIFCO in exchange for 1,294 newly issued shares of voting common stock of FTR-H; and that in a letter agreement dated November 30, 1999 between PMIFCO and FTR-H, it was clarified that the 8 common shares registered in the names of the individuals and held in trust for PMIFCO are included in the transfer from PMIFCO to FTR-H. CIDTcH In reply, please be informed that Article 14 (2) of the RP-US Tax Treaty provides, as follows: "Article 14 "Capital Gains "xxx xxx xxx "(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." In view of above-quoted provision of the RP-US Tax Treaty, gains which may be realized from the transfer of 19,000 PM Philippines shares by PMIFCO in favor of FTR-H in exchange for newly issued shares of voting common stock of FTR-H shall be taxable only in the United States. Moreover, please be informed that the Reservation Clause of the RP-US Tax Treaty, pertinent portion of which is quoted hereunder, states as follows: "Article I " Notwithstanding the provisions of Article 14 of the Convention relating to capital gains, both the Philippines and the United States may tax gains from the disposition of an interest in a corporation if its assets consist principally of real property interest located in that country . Likewise, both countries may tax gains 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." (emphasis supplied) It is to be noted that under the Reservation Clause, the Philippines may tax the gains derived from the disposition of interest 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, Revenue Regulations No. 4-86) [BIR Ruling No. 135-94 dated September 1, 1994] Verification of the audited Financial Statement as of December 31, 1997 and unaudited Financial Statement as of December 31, 1998, shows that PM Philippines' real property interest as of July 14, 1998 situated in the Philippines is 29% of the total assets of the corporation. ISTCHE In view thereof, your opinion is hereby confirmed. Gains, if any, which may be realized by your client from the transfer of PMIFCO shares of stock in PM Philippines to FTR-H shall be taxable only in the United States pursuant to Article 14 (2) of the RP-US Tax Treaty. Although exempt, the said sale, however, is subject to the documentary stamp tax imposed under Section 176 of the National Internal Revenue Code of 1997. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are materially different, then this ruling shall be considered as automatically revoked. Very truly yours, (SGD.) LILIAN B. HEFTI Deputy Commissioner Legal & Inspection Group