ITAD Ruling No. 113-01

November 8, 2001 ITAD RULING NO. 113-01 Art. 13, RP-Singapore Sec. 176, NIRC BIR Ruling No. ITAD-101-01 Padilla Law Office 7th Floor, Padilla-de los Reyes Bldg. 232 Juan Luna Street, Binondo, Manila 1006 Attention: Atty. Sabino Padilla, Jr. Gentlemen : This refers to your letter dated October 26, 2001 requesting confirmation of your opinion to the effect that the proposed sale by your client, Development Bank of Singapore, Ltd. (DBS Singapore), of its shares of stock in DBS Bank Philippines (DBS Philippines) to BPI Family Savings Bank (BPI) is not subject to capital gains tax pursuant to the RP-Singapore tax treaty. It is represented that DBS Singapore is a non-resident foreign corporation duly organized and existing under the laws of Singapore with principal office address at 6 Shenton Way, #40-00, DBS Building Tower One, Singapore 068809; that it is not registered either as a corporation or as a partnership licensed to do business in the Philippines per certification dated October 19, 2001 issued by the Securities and Exchange Commission; that DBS Philippines and BPI are corporations duly organized and existing under the laws of the Philippines; that DBS Singapore is the duly registered stockholder of record and owns Seventy One and 71/100 percent (71.71%) of the issued and outstanding capital stock of DBS Philippines, equivalent to Nineteen Million Four Hundred Seven Thousand Seven Hundred Seventy Nine (19,407,779) shares of stock, with a par value of One Hundred Pesos (P100.00) per share; that DBS Singapore also recently acquired an additional Seven Million Six Hundred Fifty Six Thousand Three Hundred Fifty Four (7,656,354) shares of stock of DBS Philippines from other stockholders of the latter, also with a par value of One Hundred Pesos (P100.00) per share; that in view of the aforementioned additional acquired shares of stock of DBS Singapore, the total shareholdings of DBS Singapore in DBS Philippines is now Twenty Seven Million Sixty Four Thousand One Hundred Thirty Three (27,064,133) shares of stock, representing 100% of the total outstanding capital stock of DBS Philippines; and that by virtue of the agreement dated August 15, 2001 executed by DBS Singapore and BPI, DBS Singapore proposed to sell to BPI the aforementioned shares in DBS Philippines for and in consideration of the amount of P58.60 per share, equivalent to an aggregate amount of P1,585,958,193.80. 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. Gains 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 ." (emphasis supplied) SCIcTD The gains which will be realized by DBS Singapore from the proposed sale of its shares of stock in DBS Philippines to BPI shall be taxable only in Singapore. However, under paragraph 3 of the aforequoted provision, the Philippines may tax the gains to be 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 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 2000 Audited Financial Statements of DBS Philippines disclosed that its real property interest located in the Philippines is only 3.44% of its total assets, thereby making the assets of DBS Philippines not principally consisted of real property interest located in the Philippines. Consequently, the gains, if any, shall be taxable only in Singapore since, pursuant to paragraph 4 of the said Article, "any capital gains which may be derived by DBS 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." Accordingly, your opinion that the proposed sale by DBS Singapore to BPI of its shares in DBS Philippines is not subject to capital gains tax is hereby confirmed. (ITAD Ruling No. 101-01 dated October 26, 2001) However, once the proposed sale is consummated and the Deed of Assignment of the subject shares of stock is executed by DBS Singapore and BPI, the Deed of Assignment shall be subject to the documentary stamp tax imposed under Section 176 of the National Internal Revenue Code of 1997. 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