ITAD Ruling No. 146-00

October 19, 2000 ITAD RULING NO. 146-00 RP-UK Article 12 NIRC Sec. 127 139-98 ITAD 17-99 Sycip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Attention: J . A . Osana Tax Division Gentlemen : This refers to your letter dated September 1, 2000 requesting confirmation of your opinion that the sale of shares of stock of Pilipinas Shell Petroleum Corporation (PSPC) by Shell Petroleum Corporation (SPCO) is exempt from the stock transaction tax imposed under Section 127 (A) of the Tax Code. DHacTC It is represented that SPCO is a corporation duly organized and existing under the laws of United Kingdom, with office address at Shell Center London, SEI 7NA; that it is not registered as a corporation or partnership licensed to do business in the Philippines, as per certification dated May 31, 2000 issued by the Securities and Exchange Commission; that PSPC is a corporation duly organized and existing under the laws of the Philippines; that SPCO was the registered owner of Four Hundred Sixty Three Million Nine Hundred Eighty Eight Thousand Nine Hundred Ninety Eight (463,988,998) shares in PSPC, including seven (7) shares in the name of nominees, with a par value of P1.00 per share, with an aggregate value of Four Hundred Sixty Three Million Nine Hundred Eighty Eight Thousand Nine Hundred Ninety Eight pesos (P463,988,998); that PSPC is required to offer at least ten percent (10%) of its common stock to the public by virtue of the Republic Act No. 8479, Section 22, otherwise known as the Downstream Oil Industry Deregulation Act. of 1998; and that in compliance thereof, PSPC is planning to sell its common shares of stocks with a par value of P1.00 per share, either, by primary offering (involving unissued common shares of stock) or by secondary offering (involving outstanding common shares of stock). In BIR Ruling No. ITAD-113-00, it was held that the gains derived by SPCO, which is a resident of the United Kingdom (UK),from the assignment of its shares of stock in PSPC are not subject to the capital gains tax imposed under Section 28 (B)(5)(c) of the Tax Code of 1997 ,but are subject to tax only in UK based on the provision of Article 12(4) of the RP-UK tax treaty. In your September 1, 2000 letter, you are seeking amendment of BIR Ruling No. ITAD-113-00 to further include your position that the sale of PSPC shares of stock by SPCO is exempt from the of 1% stock transaction tax imposed under Section 127 (A) of the Tax Code of 1997. In reply, please be informed of the following pertinent provisions: Article 12(4) of the RP-United Kingdom Tax Treaty provides as follows: "Article 12 Gains from the Alienation of Property xxx xxx xxx 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" Moreover, Section 127(A) of the 1997 Tax Code provides as follows: "Section 127. Tax on Sale, Barter or Exchange of Shares of Stock Listed and Traded through the Local Stock Exchange or through Initial Public Offering . (A) Tax on Sale, Barter or Exchange of Shares of Stock Listed and Traded through the Local Stock Exchange . There shall be levied, assessed and collected on every sale, barter, exchange or other disposition of shares of stock listed and traded through the local stock exchange other than the sale by a dealer in securities, a tax at the rate of one-half of one percent ( of 1%) of the gross selling price or gross value in money of the shares of stock sold, bartered, exchanged or otherwise disposed which shall be paid by the seller or transferor. HTCaAD (B) ..." Such being the case, your opinion is hereby confirmed. Notwithstanding the re-classification of the tax on the sale, barter or exchange of shares of stock listed and traded through the local stock exchange from Title II (Tax on Income) to Title V of the 1997 Tax Code, income therefrom is still covered by the provisions of tax treaties which grant to residents of treaty countries tax exemption on capital gains from the sale of shares of stock in domestic corporation (BIR Ruling No. 139-98). Thus, the reclassification of the tax on the sale, barter or exchange of shares of stock listed and traded through the stock exchange as percentage tax under Section 127(A) of the Tax Code of 1997 does not remove the sale, barter or exchange from the coverage of the provisions of Article 2 paragraph 2 of the RP-United Kingdom tax treaty, which provides as follows: "2. This Convention shall also apply to any identical or substantially similar taxes which are imposed by either Contracting State after the date of signature of this Convention in addition to, or in place of, the existing taxes. The Contracting States shall notify each other of the changes which have been made to their respective taxation laws." Accordingly, aside from the gains derived by SPCO, a resident of UK, from the assignment of its shares of stock in PSPC which are not subject to the capital gains tax imposed under Section 28(B)(5)(c) of the 1997 Tax Code but are subject to tax only in UK, the sale of PSPC shares of stock by SPCO is likewise exempt from the of 1% stock transaction tax imposed under Section 127(A) of the Tax Code of 1997. (BIR Ruling No. 139-98 dated September 28, 1998 and ITAD 17-99 dated August 10, 1999) Moreover, notwithstanding this exemption, the sale of shares of stock is subject to the documentary stamp tax in accordance with Section 176 of the Tax Code of 1997. 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 rendered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) LILIAN B. HEFTI Deputy Commissioner Legal and Inspection Group