ITAD Ruling No. 165-00

October 30, 2000 ITAD RULING NO. 165-00 Article 12 RP-UK Article 13-RP-Singapore; RP-Canada; RP-Indonesia; RP-Japan: RP-Malaysia Article 14-RP-USA; RP-Thailand 17-99 Sycip Gorres Velayo & Co. 6760 Ayala Avenue Makati City Attention: Atty . M . F . A . Balili Tax Division Gentlemen : This refers to your letter dated October 14, 1999 requesting, on behalf of your client, Ionics EMS, Inc. (IEI), confirmation of your opinion that the sale of shares of stock of a Philippine company that are listed and traded in the Stock Exchange of Singapore (SES) by shareholders who are residents of Singapore, Malaysia, Indonesia, Thailand, Japan, United Kingdom, United States of America and Canada, is exempt from the capital gains tax (CGT). As represented, IEI is a corporation duly organized and existing under and by virtue of the laws of the Philippines, the primary purpose of which is to engage in the business of manufacturing electronic products and parts, component and accessories; that it has an authorized capital stock of Two Billion Pesos (P2,000,000,000.00) divided into one billion (1,000,000,000) shares with a par value of Two Pesos (P2.00) per share; that of the authorized capital stock, two hundred sixty-five million (265,000,000) shares, with a total par value of Five Hundred Thirty Million Pesos (P530,000,000.00) has been subscribed and paid upon incorporation; that IEI intends to have its shares of stock listed with the SES for trading therein; that since trading in Singapore of SES-listed shares is made on the scripless settlement system, trading is conducted with ease and convenience since the delivery or collection of share certificates is no longer necessary, and the risk of lost or forged certificates is minimized since investors need not deliver the physical certificates; that under the scripless settlement system SES-listed shares are first "immobilized" and "lodged" with the Central Depository of Singapore (Pte) Ltd. (CDP); that the CDP is a subsidiary of the SES which provides depository, clearing and computerized book-entry settlement for trades in the SES; that as depository for the SES-listed shares, the documents evidencing title in respect of the SES-listed shares (e.g. the share certificates) are deposited with the CDP and are registered in its name as depository; that as a result of the immobilizing and lodging of the shares of IEI in the CDP for purposes of trading, the stockholder of record in the books of IEI is the CDP; that transfers of such immobilized SES-listed shares are then effected electronically whereby the CDP system debits or credits the investor's securities accounts through a computerized book-entry system; that in Singapore, the prospective buyers of the IEI shares being traded in the SES will include non-resident foreign persons who are residents of the following countries: Singapore, Malaysia, Indonesia, Thailand, Japan, United Kingdom, United States of America, and Canada; and that not more than 50% of the entire assets of IEI, in terms of value, consist of real property located in the Philippines. In reply, please be informed of the following provisions of the pertinent tax treaties entered into by the Government of the Republic of the Philippines. to wit: Article 13, paragraph 3 of the RP-Singapore Tax Treaty, RP-Malaysia Tax Treaty and Canada Tax Treaty; paragraph 4 of the RP-Indonesia Tax Treaty, and RP-Japan Tax Treaty, provides: "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. . . ." Likewise, Article 14, paragraph 9 of the RP-US Tax Treaty provides: "Gains from the alienation of any property other than those mentioned in paragraph (1) [tangible personal property forming part of the business property of a permanent establishment] or in Article 7 (Income from Real Property) shall be taxable only in the Contracting State of which the alienator is a resident." SDTIaE The Protocol of the RP-US Tax Treaty also provides : ". . . notwithstanding the provisions of Article 14 relating to capital gains, both the United States and the Philippines may tax gain from the disposition of an interest in a corporation if its assets consist principally of a real property interest located in the country. . . ." Article 14, paragraphs 4 and 7 of the RP-Thailand Tax Treaty likewise provides: "4. 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. . . ." "7. Gains from the alienation of any property, other than those mentioned in paragraphs 1, 2, 3, 4, and 5 shall be taxable only in the Contracting State of which the alienator is a resident. Nothing in this paragraph shall prevent either Contracting State from taxing the gains or income from the sale or transfer of shares or other securities." The last sentence herein provides a saving clause for paragraph 4 in an instance where the alienation of shares of a company is taxable in the other State. Finally, Article 19, paragraph 4 of the RP-UK Tax Treaty provides: "Capital gains from the alienation of any property other than those mentioned in paragraphs (1) [ ie, immovable property ], (2) [ movable property forming part of the business property of a permanent establishment ], and (3) [ ships and aircraft in international traffic ] of this Article shall be taxable only in the Contracting State of which the alienator is a resident." As gleaned from the foregoing provisions of the tax treaties the gains to be derived by the shareholders of IEI shares, who are residents of Singapore, Malaysia, Thailand, Japan, United Kingdom, United States of America and Canada, shall be taxable only in the country where the alienator is a resident. However, the Philippines may tax the gains derived from the disposition of interest in a corporation if its 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 originally 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]. HCDAac Since as represented, the entire assets of IEI do not consist of more than 50% real properties or real property interests located in the Philippines, the sale of shares of stocks by the shareholders of IEI who are residents of the aforementioned countries is within the contemplation of the tax exemption provisions of the subject tax treaties. Moreover, the aforementioned tax treaties contains substantially similar provision under Article 2 (Taxes Covered) of the said treaties which provides as follows: "The Agreement (Convention) shall also apply to any identical or substantially similar taxes which are subsequently imposed in addition to, or in place of, the existing taxes." Considering the foregoing, the reclassification of the tax on sale, barter or exchange of shares of stock listed and traded through the stock exchange from Title II (Tax on Income) to Title V (Other Percentage Taxes) of the Tax Code, does not remove the same from the coverage of the provisions of the above-mentioned tax treaties. Article 2 (Taxes Covered) of the RP-Denmark and RP-Hungary Tax Treaties likewise provides, as follows: ". . . the income tax imposed under the Title II and the stock transaction tax in accordance with Section 124-A[Sec. 127 (A) under the Tax Code of 1997] of the National Internal Revenue Code of the Republic of the Philippines . . ." Accordingly, your opinion is hereby confirmed. The sale, barter or exchange of shares of stock listed and traded through the local stock exchange by residents of Singapore, Malaysia, Thailand, Japan, Canada, United States of America and United Kingdom is exempt from stock transaction tax under Section 127 (A) of the Tax Code of 1997. (BIR Ruling No. ITAD 17-99) However. the said sale of shares of stocks is subject to documentary stamp tax in accordance with Section 176 of the Tax Code of 1997. Please be reminded that each non-resident corporation/individual still needs to apply for tax treaty relief in order to avail of the benefit of the tax treaty provisions. Attached herewith is a copy of Revenue Memorandum Order No. 1-2000 for your guidance. ADaEIH Very truly yours, (SGD.) LILIAN B. HEFTI Deputy Commissioner Legal & Inspection Group