ITAD Ruling No. 145-00

October 17, 2000 ITAD RULING NO. 145-00 Article 12, RP-UK Tax Treaty Section 176, Tax Code of 1997 44-00 BIR Ruling No. ITAD-145-00 Cable and Wireless plc Telecoms Plaza 316 Sen. Gil J. Puyat Avenue Salcedo Village, Makati City Attention: Mr . Brian Holbutt Gentlemen : This refers to your tax treaty relief application dated June 30, 2000 requesting confirmation that the gain derived by Cable and Wireless plc-UK (C&W UK) from its sale of shares of stocks in Eastern Telecommunication Philippines, Inc. (ETPI) to a domestic company are exempt from Philippine income tax pursuant to the RP-UK Tax Treaty. It is represented that C&W UK is a corporation duly organized and existing under the laws of United Kingdom, with office address at 124 Theobalds Road, London, United Kingdom; that C&W UK has a Philippine branch Cable and Wireless plc-Philippines (C&W Phil) which was organized on June 26, 1978 as per Certificate issued by the Securities and Exchange Commission to engage in providing technological, operational and management assistance-to Philippine entities in which C&W UK or any of its subsidiaries has an equity investment; that C&W UK was the registered owner of Ten Million Four Hundred Thousand (10,400,000) shares of the capital stock issued by ETPI; that C&W UK intends to sell such shares to a domestic company; that ETPI is a corporation duly organized and existing under the laws of the Philippines with office address at 7th Floor, Telecoms Plaza, 316 Gil Puyat Avenue, Makati City; that notwithstanding the existence of the C&W Phil, C&W UK invested in the shares of stocks of ETPI independently of the branch and that the branch did not have any participation in the transaction. In reply, please be informed that Article 12 of the RP-UK Tax Treaty provides as follows: "Article 12 Gain from the Alienation of Property 1. Capital gains from the alienation of immovable property, as defined in paragraph (2) of Article 6, may be taxed in the Contracting State in which such property is situated. DHECac 2. Capital 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 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. 3. Notwithstanding the provisions of paragraph (2) of this Article, capital gains derived by a resident 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 and aircraft shall be taxable only in that Contracting State. 4. Capital gains from the alienation of any property other than those mentioned in paragraphs (1),(2) and (3) of this Article shall be taxable only in the Contracting State of which the alienator is a resident. xxx xxx xxx" The situation of a parent company entering into a transaction without the participation of its branch was recognized by the Supreme Court in the case of Marubeni Corporation vs . Court of Tax Appeals (G.R. No. 76573 dated September 14, 1989). In said case, the Supreme Court ruled that: "The general rule that a foreign corporation is the same juridical entity as its branch office in the Philippines cannot apply here. This rule is based on the premise that the business of the foreign corporation is conducted through its branch office .following the principal-agent relationship theory. It is understood that the branch becomes its agent here. So that when the foreign corporation transacts business in the Philippines independently of its branch, the principal-agent relationship is set aside . The transaction becomes one of the foreign corporation not of the branch. Consequently, the taxpayer is the foreign corporation, not the branch or the resident foreign corporation . Corollarily, if the business transaction is conducted through the branch office, the latter becomes the taxpayer, and not the foreign corporation .(emphasis ours) Similarly, when C&W UK sells the ETPI shares of stock in its own name and independently of its Philippine branch, such transaction is that of C&W UK and should not be attributed to its branch C&W Phil but to C&W UK alone. Applying the foregoing provision, the capital gains from the alienation of any property other than those mentioned in paragraphs 1, 2 and 3 of Article 12 shall be taxable only in the State where the alienator is a resident. Therefore, the gains derived by C&W UK, a resident of the United Kingdom (UK),from its sale of shares of stock in ETPI are not subject to the capital gains tax imposed under Section 28 (B)(5)(c) of the 1997 Tax Code. (ITAD Ruling 44-00) However, Section 176 of the National Internal Revenue Code of 1997 (Tax 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. Should the said tax is not paid, both parties to the contract may be made liable to the tax. Moreover, a certificate of authority to register the said transaction in the books of ETPI must be secured. Thus, C&W UK, being a nonresident foreign corporation, is required to file, although 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. 39 - South Quezon City (RDO 39),so that the latter may issue a Certificate Authorizing Registration (CAR) of the said shares of stock in favor of the domestic company. Upon presentment of proof of payment of the documentary stamp tax, the Corporate Secretary of ETPI can register in the Stock and Transfer Book the shares bought by the domestic company from the C&W UK. 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 considered null and void. aEcDTC Very truly yours, Commissioner of Internal Revenue By: (SGD.) LILIAN B. HEFTI Deputy Commissioner Legal and Inspection Group