ITAD Ruling No. 130-01

December 26, 2001 ITAD RULING NO. 130-01 RP-US Article 14 & Reservation Clause NIRC Sec. 28 (B) (5) (c) & 176 BIR Ruling No. ITAD-166-00 Castillo Laman Tan Pantaleon & San Jose Law Offices The Valero Tower, 122 Valero Street, Salcedo Village, 1227 Makati City Attention: Atty. Eva Policar-Bautista Atty. J. Gregson A. Castillo Atty. Nini Priscilla D. Sison Gentlemen : This refers to your letter dated November 06, 2001 on behalf of your client, BRIDGESTONE/FIRESTONE, INC. ("BFI"), requesting confirmation that the transfer of shares in Philtread Holdings Corporation ("Philtread") from BFI to BRIDGESTONE/FIRESTONE NORTH AMERICAN TIRE, LLC ("BFNAT"), pursuant to a merger of BFI into BFNAT, is a tax-exempt transaction. It is represented that BFI is a non-resident foreign corporation duly organized and existing under the laws of the State of Ohio with principal office at City of Akron, Summit Country, Ohio, U.S.A.; that it is not registered either as a corporation or as a partnership licensed to engage business in the Philippines per Certificate of Non-registration issued by the Securities and Exchange Commission (SEC) dated October 22, 2001; that Philtread, formerly registered under the name of Philtread Tire & Rubber Corporation per SEC Registration Certificate No. 998 dated March 22, 2001, is a corporation duly organized and existing under the laws of the Philippines; that its shares of stock are listed in the Philippine Stock Exchange; that BFI owns Thirteen Million One Hundred Thirty-Seven Thousand and Two Hundred Eighty-Six (13,137,286) shares of stock in Philtread with a par value of P1.00 per share; that BFNAT, on the other hand is a non-resident foreign corporation duly organized and existing under the laws of the State of Delaware, U.S.A.; that BFI and BFNAT wish to enter into a merger in accordance with the laws of the States of Ohio and Delaware, with BFNAT as the surviving entity; that by virtue of the merger of BFI into BFNAT, all the rights, privileges, powers, properties, assets and liabilities of BFI will be automatically transferred to BFNAT and BFI shall cease to exist as a corporate entity; that as a result of the merger, all the 13,137,286 shares of stock in Philtread owned by BFI will be transferred to BFNAT. In reply, please be informed that on the basis of the facts as herein represented, no sale, exchange, or disposition of stock will take place between BFI and BFNAT since there is no effective transfer of beneficial ownership of BFI's shares of stock in Philtread to BFNAT. In a merger, the absorbing corporation (BFNAT) succeeds to the rights and liabilities of the absorbed corporation (BFI) and merely carries on the identity of the latter. Consequently, no gain will be realized by BFI. (BIR Ruling No. ITAD-166-00, dated October 30, 2000 citing BIR Ruling No. 466-88 dated September 29, 1988) Even assuming that gain is deemed to be realized in the merger, the same is exempt from capital gains tax imposed under Section 28(B)(5)(c) of the National Internal Revenue Code of 1997 (NIRC) in accordance with Article 14 (Capital Gains) of the RP-US tax treaty in relation to its Reservation Clause which 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 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." (Reservation Clause) ". . . 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." Based on the aforequoted clause, the Philippines may tax gains 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 Audited Financial Statements of Philtread for the year ended December 31, 2000 disclosed that none of its assets constitute immovable property. In 1994, the company ceased its tire manufacturing operations to avert further deterioration of its financial condition. Consequently, Philtread sold certain parcels of land to Sucat Land Corporation, and on February 09, 1995 has entered into an agreement with Siam Tyre (Singapore) Pte Ltd. and MSF Tire and Rubber Inc. for the sale of the company's inventories, property, plant and equipment. With this development, the Company's primary business activity has been changed to that of a holding company. Accordingly, this Office confirms your opinion and as it hereby holds that any gain assumed to be realized by BFI on the transfer of its shares of stock in Philtread to BFNAT pursuant to the merger, is not subject to Philippine income tax. (BIR Ruling No. ITAD-166-00 dated October 30, 2000) However, the transfer of the shares of stock as a consequence of the said merger is subject to the documentary stamp tax (DST) imposed under Section 176 of the NIRC. Upon presentation of proof of payment of the DST, the Corporate Secretary of Philtread can register the transfer of the shares from BFI to BFNAT in the stock and transfer books of Philtread and cancel and issue new stock certificates in the name of BFNAT. 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