ITAD Ruling No. 177-03

November 24, 2003 ITAD RULING NO. 177-03 Articles 2&3, RP-US tax treaty BIR Ruling No. DA-ITAD-134-03 Laya Mananghaya & Co. Certified Public Accountants and Management Consultants 22/F Philamlife Tower, 8767 Paseo de Roxas 1226 Makati City Attention: Remegio A. Noval Partner, Tax & Corporate Services Gentlemen : This refers to your letter dated September 5, 2003 requesting confirmation of your opinion that the RP-US tax treaty would apply in the taxation of various income derived from sources within the Philippines by your clients, Ampere Investment Group (BVI) (Ampere), Roundhill Assets, Ltd. (BVI) (Roundhill) and REMEC, Inc. (Remec). It is represented that Ampere, Roundhill, and Remec are non-resident foreign corporations organized and existing under the laws of the United States of America (USA); that Remec was formed under the laws of California, USA on January 26, 1983 while Ampere and Roundhill were originally organized under the laws of the British Virgin Islands on January 27, 2001 and January 5, 2001, respectively, but have domesticated to Delaware, USA by the execution and filing of their respective Certificates of Domestication and Incorporation with the Secretary of State of Delaware on November 18, 2002 for the purpose of expanding business in the USA; that Ampere, Roundhill and Remec are not registered either as corporations or as partnerships and have not been licensed to do business in the Philippines per certifications issued by the Securities and Exchange Commission dated May 15, 2003; that Remec Manufacturing Philippines, Inc. (RMPI) is a domestic corporation duly organized and existing under the laws of the Philippines; that Remec owns 1,078,720 shares of stock in RMPI while Ampere and Roundhill respectively own 3,963,870 and 5,358,691 shares of stock in RMPI; and that pursuant to the reorganization of Remec's overall international structure, Remec, Ampere and Roundhill intend to transfer all their shares in RMPI to RMPI, LLC, another non-resident foreign corporations organized and existing under the laws of the USA. LLjur It is your contention that the execution and filing of Certificates of Domestication and Incorporation with the Secretary of State of Delaware results in the complete domestication of Ampere and Roundhill for purposes of residency under the RP-US tax treaty, consequently, the RP-US tax treaty will apply in the taxation of various income derived from sources within the Philippines by Remec, Ampere and Roundhill, more particularly on capital gains from the transfer of their respective shares in RMPI, royalty and dividend income. In reply, please be informed that Article 3 of the RP-US tax treaty provides as follows: "Article 3 "FISCAL RESIDENCE 1. In this Convention: a) The term "resident of the Philippines" means: (i) A Philippine corporation, and (ii) Any other person (except a corporation or any entity treated as a corporation for Philippine tax purposes) resident in the Philippines for purposes of Philippine tax, but in the case of a professional partnership, estate, or trust only to the extent that the income derived by such partnership, estate or trust is subject to Philippine tax as the income of a resident either in the hands of the respective entity or of its partners or beneficiaries. b) The term "resident of the United States" means: (i) A United States corporation , and (emphasis supplied) (ii) Any other person (except a corporation or any entity treated as a corporation for United States tax purposes) resident in the United States for purposes of United States tax, but in the case of a partnership, estate, or trust only to the extent that the income derived by such partnership, estate, or trust is subject to United State tax as the income of a resident either in the hands of the respective entity or of its partners or beneficiaries." In this connection, Article 2(1)[e](i) of the same treaty provides; viz : "Article 2 "GENERAL DEFINITIONS 1. In this Convention, unless the context otherwise requires: "xxx xxx xxx" (e)(i) The term "United States corporation" means a corporation (or any unincorporated entity treated as a corporation for United States tax purposes) which is created or organized in or under the laws of the United States or any state thereof or the District of Columbia; and Based on the above treaty provisions, the term "resident of the United States" includes a corporation created or organized in or under the laws of the USA or in any state thereof. In the case of Remec, the fact that it is originally incorporated under the laws of California, more particularly under the General Corporation Code of California, confirms that Remec is a United States corporation, consequently, a resident thereof. On the other hand, in determining the residency of Ampere and Roundhill, corporations originally formed in British Virgin Islands, we apply the domestic laws of the United: States. In this connection, Section 388, Title 8 of the Delaware Code provides: 388. Domestication of non-United States corporations. "xxx xxx xxx" (b) Any non-United States corporation may become domesticated in this State by filing with the Secretary of State: (1) A certificate of domestication which shall be executed in accordance with subsection (g) of this section and filed in accordance with 103 of this title; and (2) A certificate of incorporation, which shall be executed, acknowledged and filed in accordance with 103 of this title. "xxx xxx xxx" (f) The filing of a certificate of domestication shall not affect the choice of law applicable to the corporation, except that, from the date the certificate of domestication is filed, the law of this State, including this title, shall apply to the corporation to the same extent as if the corporation had been incorporated as a corporation to the same extent as if the corporation had been incorporated as a corporation of this State on that date. aEAIDH Under United States laws, more particularly in the State of Delaware, the filing of a certificate of domestication by a non-United States corporation results in its domestication in the United States. Ampere and Roundhill, though originally organized in British Virgin Islands, are now United States corporations within the purview of the term "resident" of the United States under the RP-US tax treaty. Such being the case, this Office is of the opinion and so holds that income derived by Ampere, Roundhill and Remec from sources within the Philippines are subject to the provisions of the RP-US tax treaty and, therefore, the herein US corporations may avail of the preferential tax rates on royalty and dividend income and tax exemption on business income and capital gains provided therein. ( BIR Ruling No. DA ITAD-134-03 dated August 29, 2003 ) However, please be advised that Revenue Bulletin No. 1-2003, which declares certain issues or subject matters as "No-Ruling Areas," provides as follows: "Section 2. List of No-Ruling Areas . The following shall hereby be construed and identified as "No-Ruling Areas": "xxx xxx xxx" t) Requests for rulings on issue/s or transactions based on hypothetical situations; "xxx xxx xxx" Hence, insofar as your letter describes transactions based on hypothetical situations, this Office declines to issue a ruling on the matter as the same falls within the purview of "No Ruling Areas" as declared supra . Rest assured that we shall be glad to assist you should you request for a ruling when these transactions are finally executed by the above parties. 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, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service