ITAD Ruling No. 133-00

September 19, 2000 ITAD RULING NO. 133-00 Art. 13 RP-Singapore Sec. 176 NIRC 261-89 67-90 Joaquin Cunanan & Co. 14th Floor Multinational Bancorporation Centre 6805 Ayala Avenue, Makati City Phone: 845-2728/Fax: 845-2806 Attention: Ms . Mary Assumption Bautista-Villareal Principal, Tax and Corporate Services Gentlemen : This refers to your letter dated September 7, 1999, requesting confirmation of your opinion that the purchase by your client, IBM Philippines Inc . ( IBMP ), of CSA Private Limited's ( CSA ) shareholdings in their joint venture company, ACI Systems , Inc . ( ACI ), is exempt from the payment of capital gains tax pursuant to Article 13 (Gains from the Alienation of Property) of the Philippines-Singapore Tax Treaty. HTASIa It is represented that CSA is a non-resident foreign corporation duly organized and existing under the laws of Singapore with principal address at 221 Henderson Road No. 08-00, Henderson Building, Singapore; that it is not registered as a corporation or partnership in the Philippines as per Securities and Exchange Commission certificate dated September 6, 1999; that IBMP is a corporation duly organized and existing under the laws of the Philippines with principal address at IBM Building 8757 Paseo de Roxas, Makati City; that ACI is also a corporation duly organized and existing under the laws of the Philippines with principal address at 11th Floor, Chatham House, 116 Valero cor. Herrera Streets, Salcedo Village, Makati City; that CSA owned 46,950 shares of stock in ACI with a par value of P100.00 each; that the shares owned by CSA are broken down as follows: 46,948 shares owned by CSA and 2 shares held in trust for CSA by the 2 nominees, Messrs. Johnny Moo and Seow Chuan Bin, both resident citizens of Singapore; that on August 17, 1999, a Share Purchase Agreement was entered into by and between CSA and IBMP whereby CSA transferred and sold its 46,948 common shares in ACI to IBMP in consideration of P11,288,450.00; and that, as provided in the same Agreement , CSA shall cause the nominees to transfer their 2 shares in ACI to IBMP . Based on the foregoing, it is your opinion that the gain resulting from the transfer by CSA of its ACI shares (including those of the nominees) is exempt from capital gains tax pursuant to the provisions of the RP-Singapore Tax Treaty. In reply, please be informed that paragraphs 1 and 3, Article 13 of the same 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." Paragraph 3 of the aforequoted Article grants the Philippines the right to tax gains derived from the disposition of interest in a corporation if its assets consist principally of real property interests located in the Philippines. Section 2 of Revenue Regulations No. 4-86 provides guidance on the meaning of "consisting principally of real property interest": "SEC 2. Definitions . For purposes of these Regulations, the following terms and phrases shall be understood to mean a) 'Real Property Interest' interest on properties enumerated in Section 3 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; b) 'Principally', 'wholly or principally', 'directly principally' or attributable' more than 50% of the entire assets in terms of value; xxx xxx xxx" Based on ACI 's audited financial statements dated August 31, 1999, only 7 percent of the total assets of ACI constitute its immovable property. Hence, this Office confirms your opinion as it hereby holds that the gains realized by CSA and by the 2 nominees from the sale of their shares of stock in ACI to IBMP are not subject to Philippine income tax. Although exempt, the said sale, however, is subject to the documentary stamp tax imposed under Section 176 of the National Internal Revenue Code of 1997. In fine, while gains realized by CSA and by the 2 nominees from the sale of their shares in stock in ACI to IBMP are not subject to Philippine income tax, the same sale, however, is subject to the documentary stamp tax. This ruling is being 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 rendered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) LILIAN B. HEFTI Deputy Commissioner Legal & Inspection Group