ITAD Ruling No. 193-02

October 29, 2002 ITAD RULING NO. 193-02 C.L. Manabat & Co. 5th Floor, Salamin Building 197 Salcedo St., Makati City Attention: Atty. Domingo A. Lagundi, Jr. Tax Services Gentlemen : This refers to your letter dated June 19, 2002 requesting confirmation of your opinion that the sale by Sumitomo Corporation (Sumitomo-Japan) of its shares of stock in Mactan Steel Center, Inc. (Mactan) to United Steel Center Manila, Inc. United Steel) is not subject to capital gains tax pursuant to Article 7 of the RP-Japan tax treaty. It is represented that Sumitomo-Japan is a nonresident foreign corporation duly organized and existing under and by virtue of the laws of Japan with principal office at 2-1-1, Hitotsubashi, Chiyoda-ku, Tokyo, Japan with a branch in Manila; that Sumitomo-Japan is the legal and registered owner of 559,997 shares of the capital stock in Mactan, inclusive of the nominee shares held by its directors Messrs. Yukio Takada Kojiro Shimbo, Kazuhiro Atsushi; that Mactan is a domestic corporation with principal place of business at Mactan Economic Processing Zone, Lapu-lapu City, Cebu; that the Manila branch has no participation in Sumitomo-Japan's investment in Mactan; that United Steel is a corporation duly incorporated and registered with the Philippine Securities and Exchange Commission, with office address at Calamba, Laguna; that on March 8, 2002, Sumitomo-Japan directly offered to sell/transfer to United Steel the said 559,997 Mactan shares as well as all its other rights interest and participation pertaining to the said shares at a price equivalent to Ninety Seven and 13/100 Pesos (P97.13) per share for a total purchase price of Fifty Four Million Three Hundred Ninety Two Thousand Five Hundred Eight Pesos and 61/100 (P54,392,508.61); that Sumitomo-Japan's Manila branch did not have any involvement whatsoever in the said transaction with United Steel; that the assets of Mactan do not consist principally of immovable property located in the Philippines as shown in its audited financial statement as of December 2001. In reply, please be informed that Article 13 of the RP-Japan tax treaty provides as follows: "Article 13 "1. Gains derived by a resident of a Contracting State from the alienation of immovable property as defined in paragraph 2 of Article 6 and situated in the other Contracting State may be taxed in that other Contracting State. "2. Gains from the alienation of any property, other than immovable property, forming part of the business property of a permanent establishment which an enterprise of a Contracting State has in the other Contracting State or of any property, other than immovable 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 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 that other Contracting State. "3. Gains derived by a resident of a Contracting State from the alienation of ships or aircraft operated in international traffic and any property, other than immovable property, pertaining to the operation of such ships or aircraft shall be taxable only in that Contracting State. "4. Gains from the alienation of shares of a company, a partnership or a trust the property of which consists principally of immovable property situated in a Contracting State, may be taxed in that Contracting State. "5. Gains from the alienation of any property other than those referred to in paragraphs 1, 2, 3 and 4 shall be taxable only in the Contracting State of which the alienator is a resident." DaScAI The situation where a parent company enters into a business transaction without the participation of its branch is recognized by the Supreme Court to be a separate and distinct activity of the parent company from the branch for tax purposes. Thus, in the case of Marubeni vs. CIR , (G.R. No. 76573 dated September 14, 1989), it was held that: "The general rule that a foreign corporation is the same juridical entity as its branch office in the Philippines cannot apply here. This rule is based on the premise that the business of the foreign corporation is conducted through its branch office, following the principal-agent relationship theory. It is understood that the branch becomes its agent here. So that when the foreign corporation transacts business in the Philippines independently of its branch, the principal-agent relationship is set aside. The transaction becomes one of the foreign corporation, not of the branch. Consequently, the taxpayer is the foreign corporation, not the branch or the resident foreign corporation. Corollary, if the business transaction is conducted through the branch office, the latter becomes the taxpayer, and not, the foreign corporation ." (emphasis ours) In the instant case, any income derived by Sumitomo-Japan in the sale of its shares in Mactan to United Steel made independently of its branch shall be considered as income of Sumitomo-Japan and not that of the branch. Based on the aforequoted provisions, the gains which will be realized by Sumitomo-Japan from the sale of its shares of stock to United Steel shall be taxable in Japan. However, under paragraph 4 of the aforequoted provision, the Philippine may tax the gains derived from the disposition of interest in a corporation if its entire assets consist principally of real property interest located in the Philippines. "Real Property Interest" means interest on properties enumerated in Sec. 3 of Revenue Regulations No. 4-86 which are not, however, exclusive of others that are similarly situated. As used in the treaties and in the Regulations it shall be read 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 ) Verification of the Audited Financial Statement of Mactan disclosed that its property and equipment located in the Philippines are valued at P25,101,464 as of December 31, 2001, representing 9% of its total assets of P264,608,953 thereby making the assets of Mactan not consisted principally of real property interest located in the Philippines as of the date of subject sale. Accordingly, the sale by Sumitomo-Japan of its Mactan shares of stock to United Steel is exempt from capital gains tax imposed under Section 28(B)(5)(C) of the Tax Code of 1997. However, the Deed of Assignment of shares shall be subject to the documentary stamp tax imposed under Section 176 of the Tax Code of 1997. ( BIR Ruling No. ITAD 071-02 dated April 29, 2002 ) This ruling is issued on the basis of the facts as represented. However, if upon investigation it shall be disclosed or discovered that the facts are different, then this ruling shall be without force and effect insofar as herein parties are concerned. DcAEIS Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service