ITAD Ruling No. 198-02

November 12, 2002 ITAD RULING NO. 198-02 Article 13 RP-Japan Section 27 (D) (2), 176 of the Tax Code of 1997, BIR Ruling No. ITAD-72-02 National Development Company NDC Building, 116 Tordesillas, St., Salcedo Village, Makati City Attention: Ms. Ofelia B. Roxas Assistant General Manager, Finance Group Gentlemen : This refers to your letter dated April 23, 2002 requesting for a ruling that the sale by Marubeni Corporation (MC) and Japan International Development Organization, Ltd. (JAIDO) of their shares of stock in First Cavite Industrial Estate, Inc. (FCIE) to the National Development Company (NDC) is not subject to capital gains tax pursuant to the RP-Japan tax treaty. cEaSHC It is represented that JAIDO and MC are corporations both organized and existing under the laws of Japan with principal office address respectively at 1-6-1 Ohtemachi, Chiyoda-ku, Tokyo, Japan and 4-2 Ohtemachi 1-Chome Chiyoda-ku, Tokyo, Japan; that they are not registered either as a corporation or as partnership licensed to do business in the Philippines per certification dated May 23, 2002 issued by the Securities and Exchange Commission; that NDC is a government corporation established and operating pursuant to Commonwealth Act No. 182 as revised by Presidential Decree No. 1648, as amended, with principal office at the NDC Building, 116 Tordesillas Street, Salcedo Village, Makati City; that NDC, MC and JAIDO entered into a Memorandum of Agreement on October 25, 1989 for the formation and establishment of FCIE, a joint venture company which was incorporated on December 14, 1990; that FCIE is a domestic corporation duly organized and existing under the laws of the Philippines located at FCIE Compound, Barangay Langkaan, Dasmarias, Cavite; that as of June 19, 2002, MC and JAIDO own Four Thousand (4,000) shares with a par value of One Thousand Pesos (P1,000) representing 40% of FCIE's capital stock; that as provided under the Share Purchase Agreement dated December 15, 2001 with the culmination of all the business and operational activities of FCIE, NDC, MC and JAIDO agreed to discontinue their joint venture collaboration with NDC acquiring the shares of MC and JAIDO thru a Share Purchase Agreement dated December 15, 2001. In reply, please be informed that Article 13 of the RP-Japan tax treaty provides that: "Article 13 "GAINS FROM THE ALIENATION OF PROPERTY "(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 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." Based on the aforequoted provisions, the gains realized by MC and JAIDO from the transfer of their shares of stock in FCIE to NDC are taxable in Japan. However, under paragraph 4 thereof, the Philippines 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 Section 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 understood to include real properties as understood under Philippine laws. Moreover, "Principally" means more than 50% of the entire assets in terms of value. [ Section 2(a) and (b), Revenue Regulations No. 4-86 ]. Verification of the Audited Financial Statements as of December 31, 2000 and December 31, 2001 of FCIE disclosed that FCIE's real property interest located in the Philippines is only about 0.12% and .038%, respectively, of its total assets thereby making the assets of FCIE not considered principally of real property interest located in the Philippines. Accordingly, this Office is of the opinion and so holds that the transfer by MC and JAIDO of their shares of stock in FCIE to NDC is exempt from capital gains tax imposed under Section 27(D)(2) of the Tax Code of 1997 pursuant to Article 13(4) and (5) of the RP-Japan tax treaty. However, the Share Purchase Agreement executed by and between them for the sale of the shares of stocks shall be subject to the documentary stamp tax imposed under Section 176 of the same Code. ( BIR Ruling DA-ITAD 72-02 dated April 30, 2002 ) Furthermore, a certificate of authority to register the said transaction in the books of FCIE must be secured. Thus, FCIE is required to file a Capital Gains Tax Return (BIR Form No. 1707) accompanied by copies of the Share Purchase Agreement and this ruling with Revenue District Office No. 39 South, Quezon City (RDO 39), for the issuance of a Certificate Authorizing Registration (CAR) of the subject shares of stock of MC and JAIDO in favor of NDC. Upon presentation of the aforesaid Capital Gains Tax Return as filed, the CAR, as well as the proof of payment of documentary stamp tax due thereon, the corporate secretary of FCIE shall be authorized to register the transfer of said shares from MC and JAIDO to NDC in the Stock and Transfer Book of the FCIE and to issue a new certificate in the name of NDC. 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 the herein parties are concerned. aEHAIS Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service