ITAD Ruling No. 127-01

December 19, 2001 ITAD RULING NO. 127-01 Article 13, RP-Singapore tax treaty BIR Ruling No. DA-ITAD-101-01 BIR Ruling No. ITAD-36-01 Laya Mananghaya & Co. Certified Public Accountants and Management Consultants 22/F Anter 1000 Corporate Centre 139 Valero Street, Salcedo Village Makati City 1227 Attention: Remigio A. Noval Partner, Tax and Corporate Services Charlene O. Ang Assistant Manager, Tax and Corporate Services Gentlemen : This refers to your application for relief from double taxation dated November 12, 2001, on behalf of your client, TECHNITROL SINGAPORE HOLDINGS PTE. LTD. (TSH), requesting confirmation of your opinion that the gains to be realized by TSH from the proposed sale of its shares of stock in Pulse Philippines, Inc. (PPI) are exempt from capital gains tax in the Philippines, pursuant to Article 13 of the RP-Singapore tax treaty and Section 2 of Revenue Regulations No. 4-86. It is represented that TSH is a non-resident foreign corporation duly organized and existing under the laws of Singapore; that it is not registered either as a corporation or as a partnership and has not been licensed to do business in the Philippines per certification dated October 29, 2001 issued by the Securities and Exchange Commission, that PPI is a domestic corporation organized and existing under the laws of the Philippines; that its current capital structure is as follows: Name of Stockholders Nationality No. of shares Technitrol Singapore Holdings Singapore 324,978 Benjamin C. Zeta Filipino 2 Jose Vicente Y. Ting-ga Filipino 2 Bernadette San Jose Filipino 2 Drew Moyer American 4 Jocobus J.M. VanderKnyff American 4 Total Shares 324,992 ======= that the par value for each of the above shares is P100, that TSH intends to transfer its total shareholdings (i.e., the 324,978) in PPI in favor of Pulse Electronics Singapore Pte. Ltd. (PESPL), a non-resident foreign corporation domiciled in Singapore; that in consideration for said transfer, TSH shall be issued 37,987,778 shares (fully paid) of PESPL with a par value of S$1.00; that as shown in its audited financial statements as of December 31, 2000, PPI has the following real properties in the Philippines: ADaSEH Machinery and equipment P366,188,570 Plant and improvements 67,535,156 Furniture and fixtures and equipment 13,768,047 Transportation equipment 2,326,875 P449,818,648 Less accumulated depreciation 179,692,914 Total P270,125,734 ========== and that the real properties in the amount of P270,125,734 as against its total assets of P1,205,680,191 represent 22% of the total assets of PPI which is less than 50% of the carrying value of its total assets. 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." The gains which will be realized by TSH from the intended sale of its shares of stock in PPI to PESPL 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 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 PPI disclosed that its real property interest located in the Philippines does 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 said Article, any capital gains which may be derived by TSH 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 intended sale by TSH to PESPL of its shares in PPI is not subject to capital gains tax is hereby confirmed. (BIR Ruling No. DA-ITAD 101-01 dated October 26, 2001) However, once the intended sale is consummated and the Share Transfer Agreement of the subject shares of stock is executed by TSH and PESPL, said Agreement shall be subject to the documentary stamp tax imposed under Section 176 of the National Internal Revenue Code of 1997. This ruling shall be without force and effect unless and until an actual agreement or contract, which stipulations are found to be consistent with the representations made herein, has been entered into by the parties involved. Thus, upon reaching a binding agreement or contract between and among the parties in this case, the instrument must be presented to the International Tax Affairs Division of this Bureau within 15 days from its due execution for verification whether the representations made herein upon which this ruling is based are consonant with the actual facts of the transaction. (BIR Ruling No. DA-ITAD 36-01 dated March 21, 2001) Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service