ITAD Ruling No. 147-00

October 19, 2000 ITAD RULING NO. 147-00 RP-Singapore, Art. 13 NIRC Sec. 28 (b) (5) (c) ITAD 40-00 Romulo, Mabanta, Buenaventura Sayoc & De Los Angeles 30th Floor, Citibank Plaza 8741 Paseo de Roxas, Makati Attention: Priscilla B . Valer Jayson L . Fernandez Gentlemen : This refers to your tax treaty relief application dated May, 26, 2000, on behalf of IONA Investments, Pte Ltd (IONA), requesting confirmation of your opinion that the sale by IONA of its shares of stock in Macondray & Co. Inc. to MCI Inc. (MCI) is exempt from capital gains tax imposed under Section 28(b)(5)(C) of the Tax Code of 1997 pursuant to Article 13 of the RP-Singapore Tax Treaty. DHaECI It is represented that IONA is a nonresident foreign corporation duly organized and existing under the laws of Singapore with principal address at 250 North Bridge Road, #38-00 Raffles City Tower, Singapore; that it is not registered as a corporation or partnership and is not licensed to do business in the Philippines as per certification dated May 22, 2000 issued by the Securities and Exchange Commission; that MCI is a nonresident foreign corporation organized and existing under the Laws of the British Virgin Islands with registered office address at Tropic Isle Building, P.O. Box 438, Road Town Tortola, British Island; that Macondray & Co. is a domestic corporation duly organized and existing under Philippine laws; that IONA is the stockholder of record of Eighty one million five hundred thirty five thousand five hundred thirty (81,535,530) shares of stock with a par value of P1.00 per share and subscription/acquisition price of P11.77 per share of Macondray & Co. (the "subject shares"); that on May 28, 1999, IONA agreed to sell its 81,535,530 shares of stock to MCI with the "subject shares" at a price of P14.5754 per share with an aggregate total amount of P1,188,412,963.96. In reply, please be informed that Article 13(3) of the RP-Singapore Tax Treaty provides that: "Article 13 Gains from the Alienation of Property "xxx xxx xxx "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 partnership or a trust, the property of which consists principally of immovable property situated in a Contracting State, may be taxed in that State. xxx xxx xxx" In the instant case, the gains which shall be realized by IONA from the transfer of its shares of stock in Macondray & Co. Inc. to MCI shall be taxable only in Singapore. However, under the aforequoted provision, the Philippines may tax the 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. (a) and (b), Revenue Regulations No. 4-86). Verification of the Audited Financial Statement of Macondray & Co., disclosed that its net property and equipment located in the Philippine are valued at P3.892M in 1999 and P6.632M in 1998, representing less than fifty percent (50%) of its total assets of P6.331B and P3.229B, respectively, thereby making the assets of Macondray & Co. not consisted principally of real property interest located in the Philippines. Hence, the gain from sale of 81,535,530 shares of stock of IONA to MCI not taxable in the Philippines. (BIR Ruling No. ITAD 40-00) HDacIT Accordingly, the sale by IONA of its shares of stock in Macondray & Co. Inc. to MCI is exempt from capital gains tax imposed under Section 28(b)(5)(C) of the Tax Code of 1997 pursuant to Article 13(3) of the RP-Singapore Tax Treaty. However, the Deed of Assignment of Shares shall be subject to the documentary stamp tax imposed under Section 176 of the Tax Code of 1997. This ruling is being issued on the basis of the foregoing representations. However, if upon investigation it will be disclosed or discovered that the facts are different, then this ruling shall be considered null and void. DHcTaE Very truly yours, Commissioner of Internal Revenue By: (SGD.) LILIAN B. HEFTI Deputy Commissioner Legal and Inspection Group