ITAD Ruling No. 172-03

November 17, 2003 ITAD RULING NO. 172-03 RP-US, Art. 11 Quiason Makalintal Barot Torres & Ibarra 21st Floor, Robinsons PCI Bank Tower ADB Avenue cor. Pedro Poveda Road 605 Ortigas Center, Pasig City Attention: Atty. Ruelito Q. Soriano Gentlemen : This refers to your letter dated February 02, 2000 on behalf of your client, FIRST PHILIPPINE HOLDINGS CORPORATION (FPHC), requesting for a ruling on the applicable tax treaty rate on the cash distributions under FPHC's Meralco Global Depositary Receipts (GDR) Program. It is represented that FPHC is the registered owner of Thirty Million Nine Hundred Ninety-Nine Thousand Seven Hundred Forty (30,999,740) Class A common stock of Manila Electric Company (the "Meralco Shares"); that on March 04, 1999, FPHC granted and deposited with the Bank of New York (the "Depositary"), a nonresident foreign corporation, 30,999,740 Share Purchase Rights (SPRs) over the Meralco Shares; that the Depositary has issued Six Million One Hundred Ninety-Nine Thousand Nine Hundred Forty-Eight (6,199,948) Global Depositary Shares (GDSs) representing the SPRs, evidenced by Global Depositary Receipts (GDRs); that each GDS represents a participation in five SPRs in respect of five Meralco Shares; that out of the 6,199,948 GDSs issued by the Depositary, Six Million Twenty-Four Thousand Eight Hundred Forty-Eight (6,024,848) GDSs were offered in the United States to "qualified institutional buyers"; that the economic benefits pertaining to the Meralco Shares shall be delivered to the GDR Holder, specifically, all cash dividends or other cash distributions paid by Meralco to FPHC with respect to the Meralco Shares (the "Cash Distributions") shall be delivered to the GDR Holder; that the GDR Holders, as represented, are CAPITAL INTERNATIONAL RESEARCH AND MANAGEMENT INCORPORATED (CIRM), a non-resident foreign corporation duly organized and existing under the laws of the State of California, and CAPITAL RESEARCH AND MANAGEMENT COMPANY (CRMC), a non-resident foreign corporation duly organized and existing under the laws of the State of Delaware; that both corporations are not engaged in business in the Philippines as per certifications dated February 09, 2000 and March 15, 2000, respectively, issued by the Securities and Exchange Commission; and that both CIRM and CRMC, being the GDR Holders, have the option to purchase the said Meralco Shares. Based on the above representations, it is your opinion that the cash distributions described herein are equivalent to profits realized by FPHC from the ownership of the Meralco Shares and as such may, for tax purposes, qualify as "dividends" under the definition provided in the RP-US tax treaty. In reply, please be informed that Article 11 of the RP-US tax treaty provides, viz : "Article 11 "DIVIDENDS "(1) Dividends derived from sources within one of the Contracting States by a resident of the other Contracting State may be taxed by both Contracting States. ICHcTD "(2) The rate of tax imposed by one of the Contracting States on dividends derived from sources within that Contracting State by a resident of the other Contracting State shall not exceed (a) 25 percent of the gross amount of the dividend; or (b) When the recipient is a corporation, 20 percent of the gross amount of the dividend if during the part of the paying corporation's taxable year which precedes the date of payment of the dividend and during the whole of its prior taxable year (if any), at least 10 percent of the outstanding shares of the voting stock of the paying corporation was owned by the recipient corporation. "xxx xxx xxx "(5) The term "dividends" as used in this Convention means income from shares, mining shares, founders' shares or other rights, not being debt-claims, participating in profits, as well as income from other corporate rights assimilated to income from shares by the taxation law of the State of which the corporation making the distribution is a resident ." (Emphasis supplied) xxx xxx xxx In this connection, Section 22(L) of the National Internal Revenue Code of 1997 provides as follows: "Section 22. Definitions . When used in this Title: "xxx xxx xxx "(L) The term "shares of stock" shall include shares of stock of corporation, warrants and/or options to purchase shares of stock , as well as units of participation in a partnership (excluding general professional partnerships), joint stock companies, joint accounts, joint ventures taxable as corporations, associations and recreation or amusement clubs (such as golf, polo or similar clubs), and mutual fund certificates." "xxx xxx xxx Based on the above, it is clear that mere option to purchase shares of stock shall be treated as shares of stock. Accordingly, inasmuch as the GDR Holders have the option to purchase the subject shares, the cash distributions under FPHC's Meralco Global Depositary Receipts (GDR) Program qualify as "dividends" under the Tax Code of 1997 in relation to Article 11(5) of the RP-US tax treaty. Therefore, and since the GDR Holders represented herein, CIRM and CRMC, do not own shares of stock of either Meralco or FPHC but a mere option to purchase such shares, cash distributions under FPHC's Meralco Global Depositary Receipts (GDR) Program are subject to the preferential tax rate of 25% of the gross amount of the dividends pursuant to Article 11(2)(a) of the RP-US tax treaty. This ruling is issued on the basis of the 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, (SGD.) GUILLERMO L. PARAYNO, JR. Commissioner of Internal Revenue