ITAD Ruling No. 166-00

October 30, 2000 ITAD RULING NO. 166-00 Art 14 and Reservation Clause, RP-United States Tax Treaty Secs. 28 (B) (5) (c) & 176 NIRC 466-88 Sycip Salazar Hernandez & Gatmaitan Sycip Law-All Asia Capital Center 105 Paseo de Roxas, Makati Attention: Atty . Ricardo Ma . P . G . Ongkiko Atty . Ernesto S . Taio, Jr . Atty . Jhoanna Jasmine M . Javier Gentlemen : This refers to your letter dated September 14, 1999, requesting on behalf of your clients, A.H. Robins (Philippines) Company, Inc. (A.H. Robins-Philippines), A.H. Robins Company, Inc. (A.H. Robins-USA) and American Home Products Corporation (AHPC) , confirmation of your opinion that the transfer of shares in A.H. Robins-Philippines from A.H. Robins-USA to AHPC, pursuant to a merger of A.H. Robins-USA into AHPC, is a tax-exempt transaction. It is represented that A.H. Robins-USA is a non-resident foreign corporation duly organized and existing under the laws of the United States of America with principal address at No. 5 Giralda Farms, Madison, New Jersey, United States; that AHPC is also a non-resident foreign corporation duly organized and existing under the laws of the United States with principal address at 1013 Centre Road, Wilmington City, New Castle, Delaware, United State; that A.H. Robins-Philippines is a corporation duly organized and existing under the laws of the Philippines with principal address at 2236 Chino Roces Avenue, Makati City; that A.H. Robins-USA owns 2,007,620 shares of stock in A.H. Robins-Philippines with a par value of P10.00 each; that AHPC owns all the outstanding shares of stock of A.H. Robins-USA; that under the General Corporation Law (Law) of the State of Delaware, in any case in which at least 90 percent of the outstanding shares of each class of stock of a corporation is owned by another corporation, and one of the corporations is a corporation of the state of Delaware, the corporation having such stock ownership may either (1) merge the other corporation into itself, or (2) merge itself into the other corporation; that, pursuant to the first-mentioned option of the said Law, on July 23, 1998, the Board of Directors of AHPC adopted a resolution authorizing the merger of A.H. Robins-USA into AHPC whereby all the assets and liabilities of A.H. Robins-USA were transferred to AHPC; that, as a result of the merger, all the 2,007,620 shares of stock in A.H. Robins-Philippines owned by A.H. Robins-USA were transferred to AHPC. CEDScA In reply thereto please be informed that on the basis of the facts as herein represented no sale exchange or disposition of stock took place between A.H. Robins USA and AHPC because there is no effective transfer of beneficial ownership of A.H. Robins-USA's shares of stock in A.H. Robins-Philippines to AHPC. In a merger the absorbing corporation (AHPC) succeeds to the rights and liabilities of the absorbed corporation (A.H. Robins-USA) and merely carries on the identity of the latter (A H. Robins-USA) (BIR Ruling No. 466-88 dated September 29, 1988). Consequently no gain was realized by A.H. Robins-USA. Moreover, assuming that "gain" was realized in the merger the same is exempt from capital gains tax imposed under Section 28(B)(5)(c) of the National Internal Revenue Code of 1997 in accordance with Article 14 (Capital Gains) of the Philippines-United States Tax Treaty in relation to its Reservation Clause quoted as follows: "Article 14 CAPITAL GAINS "1. Gains from the alienation of tangible personal (movable) property forming part of the business property of a permanent establishment which a resident of a Contracting State has in the other Contracting State or of tangible personal (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 persona! 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 the other State. However, gains derived by a resident of a Contracting State from the alienation of ships, aircraft or contractors operated by such resident in international traffic shall be taxable only in that State, and gains described in Article 13 (Royalties) shall be taxable only in accordance with the provisions of Article 13. "2. Gains from the alienation of any property other than those mentioned in paragraph 1 or in Article 7 (Income from Real Property) shall be taxable only in the Contracting State of which the alienator is a resident." (RESERVATION CLAUSE) ". . . 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 that country. Likewise, both countries may tax gain from the disposition of an interest in a partnership trust or estate to the extent the gain is attributable to a real property interest in one of the countries. The term 'real property interest' is to have the meaning it has under the law of the country in which the underlying real property is located." The aforequoted Clause permits the Philippines to tax gains derived from the disposition of interest in a corporation if its assets consist principally of real property interests located in the Philippines. Section 2 of Revenue Regulations No. 4-86 provides guidance on the meaning of "consisting principally of real property interest": "SEC. 2. Definitions . For purposes of these Regulations, the following terms and phrases shall be understood to mean a) 'Real Property Interest' interest on properties enumerated in Section 3 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; b) 'Principally', 'wholly or principally', 'directly principally' or 'attributable' more than 50 % of the entire assets in terms of value; xxx xxx xxx" Based on A.H. Robins-Philippines' audited financial statements ending November 30, 1997 and November 30, 1998, none of its assets constitute immovable property. This is because on November 30, 1990, A.H. Robins-Philippines sold all its substantial assets to Wyeth Philippines and, consequently, on the same date, the first-mentioned company ceased normal operations and terminated all its employees. Hence, this Office confirms your opinion as it hereby holds that any gain assumed to have been realized by A.H. Robins-USA on the transfer of its shares of stock in A.H. Robins-Philippines to AHPC, pursuant to a merger of A.H. Robins-USA into AHPC, is not subject to Philippine income tax. CHIEDS Although exempt, the said merger, however, is subject to .the documentary stamp tax imposed under Section 176 of the National Internal Revenue Code of 1997. In fine, while any gain that may be realized by A.H. Robins-USA in its merger into AHPC is not subject to Philippine income tax, the same merger, however, is subject to the documentary stamp tax. This ruling is being 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 rendered null and void. Very truly yours, (SGD.) LILIAN B. HEFTI Deputy Commissioner Legal & Inspection Group