ITAD Ruling No. 149-03

October 2, 2003 ITAD RULING NO. 149-03 Article 13, RP-Japan Tax Treaty BIR Ruling No. ITAD-127-00 BIR Ruling No. ITAD-60-01 Sycip Gorres Velayo & Co ., 6760 Ayala Avenue, 1226 Makati City Attention: Ma. Victoria A. Villaluz Tax Division Gentlemen : This refers to your application for relief from double taxation dated August 5, 2003 on behalf of your client, Ajinomoto Co., Inc. (ACI), requesting confirmation of your opinion that the sale by ACI of its shareholdings in California Manufacturing Company, Inc. (CMCI) to Unilever Philippines, Inc. (UPI) is not subject to capital gains tax pursuant to the RP-Japan tax treaty. It is represented that ACI is a corporation duly organized and existing under the laws of Japan, with principal office located at 15-1, Kyobashi 1-chome, Chuo-ku, Tokyo 104-8315, Japan; that it is not registered either as a corporation or as a partnership and has not been licensed to do business in the Philippines per certification issued by the Securities and Exchange Commission dated April 8, 2003; that ACI is the registered and beneficial owner of 200,000 shares (inclusive of four (4) nominal shares) of common stock of CMCI with a par value of P100 per share or an aggregate value of P20,000,000.00; that ACI and UPI entered into a stock purchase agreement whereby ACI agreed to sell its shares of stock in CMCI to UPI; that the purchase price of these shares shall be US$145,500,000; that CMCI is a corporation organized and existing under Philippine laws; that it is engaged in the business of manufacturing, selling, dealing, importing and exporting food and food products of every class and description, fresh, canned or reserved or otherwise, and all other food preparation; that the underlying assets of CMCI as shown by its latest audited financial statements of December 31, 2002 do not consist principally of immovable assets considering that out of the total assets of CMCI amounting to P4,244,592,111, the book value of its property, plant and equipment amounts only to P881,968,310 or approximately twenty one percent (21%) of its total assets. In reply, please be informed that Article 13 of the RP-Japan tax treaty provides as follows, viz : "Article 13 "Gains from the Alienation of Property "1. Gains derived by a resident of a Contracting State from the alienation of immovable property as defined in paragraph 2 of Article 6 and situated in the other Contracting State may be taxed in that other Contracting State. "2. Gains from the alienation of any property, other than immovable 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 any property, other than immovable 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 that other Contracting State. "3. Gains derived by a resident of a Contracting State from the alienation of ships or aircraft operated in international traffic and any property, other than immovable property, pertaining to the operation of such ships or aircraft shall be taxable only in that Contracting State. "4. Gains from the alienation of shares of a company, a partnership or a trust the property of which consists principally of immovable property situated in a Contracting State, may be taxed in that Contracting State. "5. Gains from the alienation of any property other than those referred to in paragraphs (1), (2), (3), and (4) shall be taxable only in the Contracting State of which the alienator is a resident. xxx xxx xxx" In the instant case, the gains which will be realized by ACI from the transfer of its shares of stock in CMCI to UPI shall be taxable in Japan. However, based on paragraph 4 of 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). HADTEC Verification of the 2001 and 2002 Audited Financial Statement of CMCI disclose that its real property interest located in the Philippines represents less than 50% of its total assets, thereby making the assets of CMCI not consisted principally of real property interest located in the Philippines. Consequently, this Office is of the opinion and so holds that the gains that may be derived by ACI shall be taxable only in Japan. Paragraph 4 of Article 13 clearly states that "any capital gains from the alienation of any property, other than those mentioned in paragraph 1, 2 and 3 of Article 13 of the RP-Japan tax treaty shall be taxable only in the Contracting State of which the alienator is a resident". ( BIR Ruling No. DA-ITAD 72-02 dated April 30, 2002 ). Inasmuch as the assets of CMCI do not consist principally of real property interest located in the Philippines, your opinion that the gains from the contemplated sale of shares of stock by ACI to UPI are not subject to capital gains tax is hereby confirmed. This ruling shall be without force and effect unless and until an actual agreement or contract, which stipulations are found to be consistent with the representations made herein, has been entered into by the parties involved. Thus, upon reaching a binding agreement or contract between and among the parties in this case, the instrument must be presented to the International Tax Affairs Division of this Bureau within 15 days from its due execution for verification whether the representations made herein upon which this ruling is based are consonant with the actual facts of the transaction and for corresponding issuance of certification that the aforementioned sale transaction is not subject to capital gains tax pursuant to RMO No. 30-2002 but such transfer of shares shall be subject to Documentary Stamp Tax under Section 176 of the 1997 Tax Code. ( BIR Ruling No. ITAD-36-01 ) Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service