ITAD Ruling No. 127-00

September 1, 2000 ITAD RULING NO. 127-00 Article 14, RP-US Tax Treaty Sec. 176, Tax Code Benitez Parlade Africa Herrera Parlade & Panga Law Offices 15th Floor, Security Bank Centre, 6776 Ayala Avenue, Makati City Attention: Atty . Gwendolynn S . Santillan Gentlemen : This refers to your application for relief from double taxation dated December 10, 1999, filed on behalf of FLOUR CITY ARCHITECTURAL METALS, INC. (Flour City-US), requesting for confirmation of your opinion that the assignment of Flour City-US of its shares of stock in FLOUR CITY-ARLO CORP. (Flour City-Arlo) is exempt from capital gains tax pursuant to the RP-US Tax Treaty. It is represented that Flour City-US is a corporation organized and existing under the laws of the State of Delaware, USA, with no permanent establishment in the Philippines, as per certification dated October 5, 1999 issued by the Securities and Exchange Commission; that it holds 78,650 shares, representing 55% of the total stockholdings, of Flour City-Arlo; that Flour City-Arlo is a domestic corporation organized for the purpose of engaging in business in the Philippines for the supply, fabrication, and construction of tower curtain walls and other related works; that it has an authorized capital stock of 143,000 common shares with a par value of P100 per share; that Messrs. John Y. Tang, Michael Kaisersatt, and Kim Werner are, among others, incorporators of Flour City-Arlo; that the said incorporators were designated trustees of the shares of Flour City-US in Flour City-Arlo, and that they executed, separately, a Declaration of Trust; that as trustees, their respective subscriptions in Flour City-Arlo were actually paid for by Flour City-US but were placed in their individual names as incorporators to comply with the provision of the Corporation Code of the Philippines, which allows only individuals to be incorporators; that on January 28, 1999, Flour City-US executed a Deed of Assignment wherein it assigned, transferred and conveyed all its rights and interests on its 78,650 shares in Flour City-Arlo to Flour City Architectural Metals(L), Ltd. (Flour City-Labuan), a foreign corporation not engaged in business in the Philippines; and that as the new owner, Flour City-Labuan instructed the said three trustees to turn over all their respective stockholdings, save for one qualifying share each, which are then held in trust again by the said trustees for Flour City-Labuan. In reply, please be informed that Article 14 of the RP-US Tax Treaty provides as follows, 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." SECATH Furthermore, the Reservation Clause of the same treaty provides, in part, as follows: "Article I " Notwithstanding the provisions of Article 14 of the Convention relating to the capital gains both the Philippines and the United States may tax gains from the disposition of an interest in a corporation if its assets consists principally of a real property interest located in the 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 clear from the aforequoted provisions that any capital gains which may be derived by Flour City-US from the alienation of any property other than those mentioned in paragraph (1) of Article 14 of the RP-US Tax Treaty shall be taxable only in the State where the alienator is a resident. Moreover, the Reservation Clause of the same treaty does not apply in this case. It is to be noted that under the Reservation Clause, the Philippines may tax the gains derived from the disposition of interests 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). The value of the real property interest of Flour City-Arlo located in the Philippines as appearing in its audited financial statements for the calendar year December 31, 1998 is less than 50% of the value of its total assets. Accordingly, your opinion that any gain that may be realized by Flour City-US from the assignment of its share in Flour City-Arlo to Flour City-Labuan is not subject to the capital gains tax imposed under Section 28(B)(5)(c) of the National Internal Revenue Code (Tax Code) of 1997 is hereby confirmed since the assets of Flour City-Arlo as of December 31, 1998 do not consist principally of real property interest located in the Philippines. CcEHaI However, a certificate of authority to register the said transaction in the books of Flour City-Arlo must be secured. Thus, Flour City-US, being a nonresident foreign corporation, is required to file, but is not required to pay the capital gains tax, a Capital Gains Tax Return (BIR Form No. 1707) accompanied by copies of the Deed of Assignment 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 AIB. Moreover, Section 176 of the Tax Code of 1997 (Tax Code) provides, viz : "Sec. 176. Stamp Tax on Sales, Agreements to Sell, Memoranda of Sales, Deliveries or Transfer of Due-bills, Certificates of Obligation, or Shares or Certificates of Stock . 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 issue of said stock." The same Code 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 Philippine 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, 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 either Flour City-US or Flour City-Labuan in accordance with the provisions of the Tax Code of 1997. Upon presentment of proof of payment of the documentary stamp tax, the Corporate Secretary of Flour City-Arlo can register in the Stock and Transfer Book the shares from Flour City-US to Flour City-Labuan. This ruling is being issued on the basis of the foregoing facts as represented. If upon investigation, it will be disclosed that the facts are different, then this ruling shall be null and void. HcACST Very truly yours, (SGD.) LILIAN B. HEFTI Deputy Commissioner Legal and Inspection Group