ITAD Ruling No. 124-00

September 1, 2000 ITAD RULING NO. 124-00 RP-US-Art. 14 NIRC-Sec. 176 ITAD 59-00 Follosco Morallos & Herce Attorneys at Law Suite 311 Windsor Tower, 163 Legaspi St., Legaspi Village Makati City Attention: Atty . Rachel P . Follosco Gentlemen : This refers to your letter dated May 24, 2000 requesting, on behalf of your client, PACVEN WALDEN VENTURES III, L.P. (PACVEN), for tax treaty relief pursuant to the RP-US Tax Treaty. It is represented that PACVEN is a non-resident foreign partnership duly organized and existing under the laws of the State of Delaware; that it is not registered as a corporation/partnership in the Philippines as per certification dated May 30, 2000 issued by the Securities and Exchange Commission; that it has no permanent establishment in the Philippines; that it owns Four Million Three Hundred Thirty-three Thousand Six Hundred Five (4,333,605) shares of stock with a par value of P1.00 per share and subscription/acquisition price of P12.23 per share in MACONDRAY & COMPANY, INC. (MCI), a domestic corporation duly organized and existing under the laws of the Philippines; that on March 30, 2000, a Deed of Absolute Sale of Shares of Stock was entered into by and between PACVEN and MCI, INC. (MCI, Inc.), a non-resident foreign corporation duly organized and existing under the laws of the British Virgin Islands, whereby PACVEN sold its 4,333,605 shares in MCI to MCI, Inc. at a price of P14.5754 per share or for the total amount of Sixty-three Million One Hundred Sixty-four Thousand Twenty-six Pesos and Thirty-two Centavos (P63,164,026.32); that the assets of MCI do not consist principally of real property interest located in the Philippines, as shown in its latest Audited Financial Statements (as of December 31, 1999 and 1998). SEACTH Based on the foregoing, you request confirmation of your opinion that the sale of shares by PACVEN to MCI, Inc. is not taxable in the Philippines and that any gain which may have been realized by PACVEN from its sale of the shares is exempt from capital gains tax imposed under Section 28(B)(5)(c) of the National Internal Revenue Code. In reply, please be informed that Article 14 of the RP-US Tax Treaty provides, viz : "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 ." (Emphasis supplied) Relative thereto, the Reservation Clause of the same Treaty provides, viz: ". . . 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 that 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." (Emphasis supplied) Under the aforequoted provisions, the gains which will be realized by PACVEN from the sale of its shares of stock in MCI to MCI, Inc. shall be taxable only in the US. However, the Philippines may tax the gain from the disposition of an interest in a corporation if the assets of the corporation 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). AHEDaI Verification of the 1999 and 1998 Audited Financial Statements of MCI disclosed that its real property interest located in the Philippines is only 3% of its total assets, thereby making the assets of MCI not principally consisted of real property interest located in the Philippines. Accordingly, your opinion that the sale by PACVEN WALDEN VENTURES III L.P. of its shares of stock in MACONDRAY & COMPANY INC. to MCI, INC. is not subject to Philippine income tax since the assets of MACONDRAY & COMPANY INC. do not consist principally of real property located in the Philippines is hereby confirmed. However, the Deed of Sale of Shares of Stock shall be subject to the documentary stamp tax imposed under Section 176 of the Tax Code of 1997. (BIR Ruling No. 007-96 dated January 18, 1996) This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation it will be disclosed that the actual facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) LILIAN B. HEFTI Deputy Commissioner Legal & Inspection Group