ITAD Ruling No. 161-02

September 16, 2002 ITAD RULING NO. 161-02 ARTICLE 13 & PROTOCOL (7), RP-New Zealand Section 176, NIRC BIR Ruling No. ITAD-113-01 Laya Mananghaya & Co. 22/F Philamlife Tower 8767 Paseo de Roxas Makati City 1226 Attention: Mr. Francisco G. Tagao Ms. Charlene O. Ang Gentlemen : This refers to your letter dated June 26, 2002 on behalf of your client, New Zealand Dairy Board (NZDB), requesting confirmation that the gain to be realized by NZDB from the sale of its shares of stocks in the Philippine Dairy Products Corporation (PDPC) is exempt from capital gains tax pursuant to Article 13 of the RP-New Zealand tax treaty in relation to paragraph 7 of its Protocol. It is represented that NZDB is a non-resident foreign corporation duly organized and existing under the Dairy Board Act of 1961 of New Zealand, with principal office at Wellington, New Zealand; 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 Certificate of Non-registration issued by the Securities and Exchange Commission (SEC) dated June 28, 2002; that PDPC, on the other hand, is a corporation duly organized and existing under the laws of the Philippines, with principal office at Legaspi cor. Eagle St., Bo. Ugong, Pasig City, that PDPC has an authorized capital stock of Five Hundred Million Pesos (Php500,000,00.00) divided into five hundred million (500,000,000) common shares with a par value of One Peso (Php1.00) per share; that of the total authorized capital stock, one hundred eighty million one hundred seventy thousand seven hundred sixty (180,170,760) common shares are issued and outstanding; that the current shareholding structure of PDPC is as follows: NAMES No. of Shares Owned San Miguel Corporation 126,119,528 Ramon S. Ang 1 Ma. Belen C. Buensuceso 1 Enrique A. Gomez, Jr. 1 Ferdinand K. Constantino 1 Elias F. Segundo 1 New Zealand Dairy Board 54,051,225 Mark Wynne 1 Lawerence Pakiam 1 Tim Launder 1 that NZDB is the owner of record of fifty four million fifty one thousand two hundred twenty five (54,051,225) fully paid common shares of PDPC; that Messrs Mark Wayne, Lawerence Pakiam and Tim Launder are holding the shares in trust for NZDB: that in a Deed of Assignment dated June 28, 2002, NZDB and its nominee-stockholders sold their total shareholdings in PDPC in favor of San Miguel Pure Foods Company, Inc. (SMPFC), a domestic corporation organized and existing under Philippine laws for and in consideration of the amount of Two Hundred Million Pesos (Php200,000,000.00). In reply, please be informed that Article 13 of the RP-New Zealand tax treaty in relation to paragraph 7 of its Protocol provides, viz: "Article 13 "ALIENATION OF PROPERTY "1. Income or gains derived by a resident of Contracting State from the alienation of immovable property referred to in Article 6, and situated in the other Contracting State may be taxed in that other State. "2. Income or gains form 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 independent personal services, including such income or gains from the alienation of such permanent establishment (alone or together with the whole enterprise) or such fixed base, may be taxed in that other State. "3. Income or gains derived by an enterprise of a Contracting State from the alienation of ships or aircraft operated in international traffic or movable property pertaining to the operation of such ships or aircraft, shall be taxable only in that State. "4. Income or gains from the alienation of any property, other than those mentioned in this Article, shall be taxable only in the Contracting State of which the alienator is a resident. (emphasis supplied) "PROTOCOL "xxx xxx xxx "7. With reference to article 13, 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. (emphasis supplied) xxx xxx xxx Based on the aforequoted Article 13 of the RP-New Zealand tax treaty, the gains realized by NZDB from the sale of its shares of stock in PDPC to SMPFC are taxable only in New Zealand. However, under paragraph 7 of the Protocol of the RP-New Zealand tax treaty, the Philippines may tax the gains derived from the disposition of shares 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. 2[a] and [b], Revenue Regulations No. 4-86 ). Verification of the Audited Financial Statements of PDPC as of December 31, 2001 disclosed that out of its total assets valued at P1,216,765,376.00, only P274,542,256.00 (property and equipment), or approximately 22.56% of its total assets, may be considered as real property interests thereby making PDPC's assets not principally consisting of real property interest located in the Philippines. In view thereof, this Office confirms your opinion as it hereby holds that the gains realized by NZDB from the sale of its shares in PDPC to SMPFC are not subject to capital gains tax. ( BIR Ruling No. ITAD-113-01 dated November 08, 2001 ) However, the Deed of Assignment of Shares of Stocks executed between NZDB and SMPFC is subject to the documentary stamp tax imposed under Section 176 of the National Internal Revenue Code of 1997. This ruling is 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 without force and effect insofar as the herein parties are concerned. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service