ITAD Ruling No. 170-00

October 30, 2000 ITAD RULING NO. 170-00 Art. 14 & Reservation Clause, RP-US 135-94 Sycip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Attention: Atty . C . P . Noel Tax Division Gentlemen : This refers to your application for tax treaty relied on behalf of American Cyanamid Company (ACCO), requesting confirmation of your opinion that the gains to be realized by ACCO from the sale of its stockholdings in Cyanamid Agricultural Products Phils. Inc. (CAPPI) to BASF Aktiengesellschaft (BASF) are exempt from capital gains tax by virtue of the RP-US Tax Treaty. It is represented that ACCO is a nonresident foreign corporation organized and existing under the laws of the State of Maine, United States of America with principal office located at Five Giralda Farms, Madison, New Jersey 07940, USA; that BASF is also a nonresident foreign corporation organized and existing under the laws of the Federal Republic of Germany; that CAPRI is a domestic corporation, a wholly-owned subsidiary of ACCO, organized and existing under Philippines laws; that ACCO owns 2,130,400 shares in CAPRI as of June 29. 2000; that Ricardo J. Romulo, Wilma M. Valdemoro-Cua, Lee Chong Seong, Yvette Marie G. Rodriguez and Marissa Mariano-Castulo are all nominees of one share each in CAPPI and the beneficial owner is ACCO; that ACCO sold its CAPPI shares to BASF effective as of midnight of June 30, 2000; that CAPPI has not real property interest located in the Philippines. In reply, please be informed that Article 14 of the RP-US Tax Treaty provides: "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 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 the other State. However, gains derived by a resident of Contracting State from the alienation of ships, aircraft or containers 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. IESDCH 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. The above-quoted provision must be applied in relation with the Reservation Clause of the same treaty, to wit: "1. reservation that, 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 of 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 above-quoted Reservation Clause allows the Philippines to tax the gains from sale, exchange or other disposition of shares or interest in a domestic corporation if the assets of that corporation consist principally of real property located in the Philippines. It must be noted that the term "principally" means, under Sec. 2 of Revenue Regulations No. 4-86, more than fifty percent (50%) of the entire assets in terms of value. Considering that CAPPI has no real property interest located in the Philippines (as shown in its Detailed Schedule of Fixed Assets with corresponding explanation dated September 7, 2000) and considering further that CAPPI is a wholly owned subsidiary of ACCO whose outstanding capital stock of more than 40% is owned by a foreign national and, as such, is not allowed to own land in the Philippines under the Constitution and other pertinent laws, your opinion that the gains derived by ACCO from the sale of its stockholdings in CAPPI to BASF are exempt from capital gains tax pursuant to the RP-US Tax Treaty is hereby confirmed. (BIR Ruling No. 135-94) Furthermore, the transfer of shares in CAPPI held By Romulo, Valdemoro-Cua, Lee, Mariano-Castulo and Rodriguez, as nominee shareholders (the beneficial owner of such shares being ACCO) to BASF is likewise exempt from capital gains tax pursuant to the same treaty. However, the said transaction shall be subject to documentary stamp tax in accordance with Section 176 of the Tax Code of 1997. This ruling is being issued on the basis of the foregoing facts as represented. However, if it will be disclosed or discovered upon investigation 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