ITAD Ruling No. 125-00

September 1, 2000 ITAD RULING NO. 125-00 RP-Japan-Art. 13 NIRC-SEC. 176 ITAD 24-99 Joaquin Cunanan and Co. 14th Floor, Multinational Bancorporation Center 6805 Ayala Avenue, 1226 Makati City Attention: Atty . Alexander B . Cabrera Partner, Tax Services Department Gentlemen : This refers to your letter dated April 26, 2000 requesting on behalf of your client, CEBU TOYO CORPORATION (CTC), confirmation of your opinion that the gains derived by TOYO LENS CO., LTD. (TLC) from the transfer of its shares in CTC are exempt from capital gains tax pursuant to the RP-Japan Tax Treaty. It is represented that TLC is a non-resident foreign corporation duly organized and existing under the laws of Japan; that it is not registered as a corporation/partnership in the Philippines as per certification dated April 26, 2000 issued by the Securities and Exchange Commission (SEC); that it owns One Hundred Eighty-four Thousand Three Hundred Thirty-three (184,333) shares of stock with a par value of One Hundred Pesos (P100.00) per share or a total par value of Eighteen Million Four Hundred Thirty-three Thousand Three Hundred Pesos (P18,433,300.00) in CTC, a Philippine Economic Zone Authority (PEZA)-registered corporation duly organized and existing under the laws of the Philippines, with principal office at Lapu-lapu City; that on February 10, 1998 and on June 07, 1999, TLC respectively transferred its One Hundred Five Thousand Three Hundred Thirty-three (105,333) and Two Hundred Seventy-six Thousand Five Hundred (276,500) shares in CTC to Mr. Michi Miyahara, a Japanese national, as evidenced by a Deed of Confirmation of Declaration of Bonus Stock and a Deed of Assignment both dated June 07, 1999 and executed by TLC in favor of Mr. Michi Miyahara; that the assets of CTC do not consist principally of real property interest located in the Philippines, as shown in its Audited Financial Statements (AFS) as of period ended August 31, 1998 and August 31, 1999. In reply, please be informed that Article 13 of the RP-Japan Tax Treaty provides, viz : "Article 13 "(1) Gains derived by a resident of a Contracting State from the alienation of immovable property as defined in paragraph (2) of Article 6 and situated in the other Contracting State may be taxed in that other Contracting State. aDSTIC "(2) Gains from the alienation of any property, other than immovable 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 any property, other than immovable 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 that other Contracting State. "(3) Gains derived by a resident of a Contracting State from the alienation of ships or aircraft operated in international traffic and any property, other than immovable property, pertaining to the operation of such ships or aircraft shall be taxable only in that Contracting State. "(4) Gains from the alienation of shares of a company, a partnership or a trust the property of which consists principally of immovable property situated in a Contracting State, may be taxed in that Contracting State. "(5) Gains from the alienation of any property other than those referred to in paragraphs 1, 2, 3 and 4 shall be taxable only in the Contracting State of which the alienator is a resident." Based on the foregoing, the gains which will be realized by TLC from the transfer of its shares of stock in CTC to Mr. Michi Miyahara shall be taxed only in Japan. However, the Philippines may tax the gains derived from such disposition if CTC's assets consists 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). Accordingly, verification of the AFS of CTC discloses that out of its total assets of P430,977,439.00 in August 1999, and P255,438,896 in August 1998, its real property assets consist of P103,782,200.00 and P99,795,370, respectively, which are in both cases less than 50% of its entire assets. In view thereof, this Office hereby confirms your opinion that the transfer of TOYO LENS CO., LTD. of its shares of stock in CEBU TOYO CORPORATION to Mr. Michi Miyahara is not subject to Philippine income tax. However, the herein transfer 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) ECTIHa 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. (SGD.) LILIAN B. HEFTI Deputy Commissioner Legal & Inspection Group