ITAD Ruling No. 111-01

October 30, 2001 ITAD RULING NO. 111-01 RP-UK Tax Treaty Art. 12 Tax Code of 1997 Sec. 176 BIR Ruling No. ITAD 44-00 BIR Ruling No. 011-87 Joaquin Cunanan & Co. 29th Floor Philamlife Tower 8767 Paseo de Roxas 1226 Makati City Attention: Ms. Tomasa H. Lipana Managing Partner Tax Services Gentlemen : This refers to your application for relief from double taxation dated May 29, 2000, on behalf of Whessoe LGA Technology Limited (WLTL), requesting confirmation of your opinion that the capital gains derived by WLTL from the sale of its shares of stocks in Whessoe Philippine Construction Inc. (WPCI) are exempt from Philippine capital gains tax, pursuant to the RP-UK Tax Treaty. It is represented that WLTL is a corporation duly organized and existing under the laws of the United Kingdom with business address at Brinkburn Road, Darlington, United Kingdom; that WLTL is not registered either as a corporation or as a partnership and has not been licensed to do business in the Philippines as evidenced by a Certificate of Non-Registration issued by the Securities and Exchange Commission dated April 17, 2001; that WPCI is a corporation organized and existing under the laws of the Philippines with business address at Unit 1001-88 Corporate Centre, Valero St. corner Cedeo St., Salcedo Village, Makati City; that WLTL is a registered owner of five thousand two-hundred (5,200) shares (inclusive of two shares held by nominee directors) with a par value of P100.00 per share., in WPCI; and that pursuant to a Share Purchase Agreement executed on May 17, 2000, WLTL transferred all its shares of stocks in WPCI to Messrs. John Tate and Kay Bracewell. In reply, please be informed that Article 14 of the RP-UK Tax Treaty provides as follows: "'Article 12 "GAINS FROM THE ALIENATION OF PROPERTY "1. Capital gains from the alienation of immovable property, as defined in paragraph 2 of Article 6, may be taxed in the Contracting State in which such property is situated. "2. Capital gains from the alienation of movable property forming part of 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 Contracting State in the other Contracting State for the purpose of performing professional 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. "3. Notwithstanding the provisions of paragraph 2 of this Article, capital gains derived by a resident 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 and aircraft shall be taxable only in that Contracting State. "4. Capital gains from the alienation of any property other than those mentioned in paragraphs 1, 2 and 3 of this Article shall be taxable only in the Contracting State of which the alienator is a resident. "xxx xxx xxx" It is clear from the aforequoted provision that the capital gains from the alienation of any property other than those mentioned in paragraphs 1, 2 and 3 of Article 12 shall be taxable only in the State where the alienator is a resident. Inasmuch as the sale of the subject shares of stock is not among those mentioned in paragraphs 1, 2 and 3, the gains derived by WLTL, a resident of the United Kingdom (UK), from the sale of shares of stock in WPCI are not subject to the capital gains tax imposed under Section 28(B)(5)(c) of the Tax Code of 1997, but subject to tax only in UK. (BIR Ruling No. 011-87) However, a certificate of authority to register the said transaction in the books of WPCI must be secured. Thus, WLTL, 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 Share of Purchase Agreement and this ruling, with Revenue District Office No. 51 Pasay (RDO 51), in order for the latter to issue a Certificate Authorizing Registration (CAR) of the said shares of stock in favor of the buyers, Messrs. Tate and Bracewell. (BIR Ruling ITAD No. 44-00) Moreover, Section 176 of the National Internal Revenue Code of 1997 (Tax Code) provides, viz : "Section 176. Stamp Tax on Sales, Agreements to Sell, Memorandum of Sales, Deliveries or Transfer of Due-bills, Certificate of Obligation, or Shares or Certificates of Stocks . On all sales, or agreements to sell, or memoranda of sales, or deliveries, or transfer of due-bills, certificates of obligation, or shares or certificates of stock in any association, company, or corporation, or transfer of such securities by assignment in blank or by delivery, or by any paper or agreement, or memorandum or other evidences of transfer or sale whether entitling the holder in any manner to the benefit of such due-bills, certificates of obligation or stock, or to secure the future payment of money, or for the future transfer of any due-bill, certificate of obligation or stock, there shall be collected a documentary stamp tax of One peso and fifty centavos (P1.50) on each Two hundred pesos (P200), or fractional part thereof, of the par value of such due-bill, certificate of obligation or stock: Provided , That only one tax shall be collected on each sale or transfer of stock or securities from one person to another, regardless of whether or not a certificate of stock or obligation is issued, indorsed, or delivered in pursuance of such sale or transfer: and Provided, further , That in the case of stock without par value the amount of the documentary stamp tax herein prescribed shall be equivalent to twenty-five percent (25%) of the documentary stamp tax paid upon the original issued of stock." The Tax Code of 1997 likewise provides that the corresponding documentary stamp taxes shall be levied, collected and paid, for and in respect of the transactions so had or accomplished, by the person making, signing, issuing, accepting, or transferring the document, instrument or paper wherever the same is made, signed, issued, accepted or transferred when the obligation or right arises from Philippines sources or the property is situated in the Philippines. Thus, the burden of paying the documentary stamp tax is placed upon the parties to the contract and leaves the tax to be paid indifferently by either party, and accordingly, the party assuming payment of said tax under the contract becomes directly liable therefor. But if for one reason or another, the said tax is not paid, either party to the contract may be made liable to the tax. In view of the foregoing and based on the Share Purchase Agreement, the documentary stamp tax (including penalties thereto, if there are any) on the said transaction must be paid and the corresponding return thereon be filed by the buyers in accordance with the provisions of the Tax Code. Failure of the buyers to do so shall hold WLTL the party liable to the documentary stamp tax. Upon presentment of proof of payment of the documentary stamp tax, the Corporate Secretary of WPCI shall register in the Stock and Transfer Book the shares from WLTL to the buyers. (BIR Ruling No. ITAD 44-00) This ruling is issued on the basis of the foregoing facts as represented. 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