ITAD Ruling No. 199-00

December 8, 2000 ITAD RULING NO. 199-00 Article 13 RP-Netherlands BIR ITAD 18-00 Castro Cadiz & Carag Law Offices Suite 25PC, Eisenhower Condominium No. 7 Eisenhower Street, Greenhills San Juan, Metro Manila Attention: Attys . Othelo C . Carag and Anna Liza M . Ang-Co Gentlemen : This refers to your letter dated September 15, 2000 requesting for a confirmation of your opinion on the tax consequences of the proposed assignment and transfer by EPEC Nederland Holding BV of its shares of stock in EPHE Philippines Energy Company, Inc. (formerly El Paso Holding Company, Inc.) to El Paso Philippines Energy Co., Inc. It appears that EPEC Nederland Holding BV is a non-resident foreign corporation organized and existing under the laws of Netherlands with no permanent establishment in the Philippines; that on the other hand, EPHE Philippines Energy Company, Inc. is a corporation organized and existing under Philippine laws, with an authorized capital stock of Two Billion Nine Hundred Ninety Million Pesos (P2,990,000,000.00) divided into Sixty Eight Million Five Hundred Thousand (68,500,000) common shares with par value of Forty Pesos (P40.00) per share and Two Hundred Fifty Million (250,000,000) preferred non-voting redeemable shares with a par value of One Peso (P1.00) per share; that at present, the stockholders of EPHE Philippines Energy Company, Inc. are as follows: No. of Shares Paid-In Additional Paid-In 1. EPEC Nederland 34,250,000 P1,370,000,000.00 P3,689,000.00 Holding BV common shares 2. HEIPC Philippines Holdings Co., Inc. 34,250,000 P1,370,000,000.00 P2,188,300,000.00 common shares 3. El Paso Philippines 250,000,000 P250,000,000.00 0 Energy Co., Inc. preferred shares 318,500.000 P2,990,000,000.00 P2,191,989,000.00 ========== ============= ============== that aside from its common shares in EPHE Philippines Energy Company, Inc., EPEC Nederland Holdings BV also owns Two Hundred Three Thousand Five Hundred (203,500) shares of stock of El Paso Philippines Energy Co., Inc. ("EPPE Shares"), equivalent to one hundred percent (100%) of the outstanding shares of stock, with a par value of Forty Pesos (P40.00) per share or an aggregate par value of Eight Million One Hundred Forty Thousand Pesos (P8,140,000.00); that El Paso Philippines Energy Co., Inc. is also a corporation organized and existing under Philippine laws; that EPEC Nederland Holdings BV intends to transfer its Thirty Four Million Two Hundred Fifty Thousand (34,250,000) common shares of stock in EPHE Philippines Energy Company, Inc. (the "Subject Shares") at cost to El Paso Philippines Energy Co., Inc. as additional capital contribution of EPEC Nederland Holdings BV to El Paso Philippines Energy Co., Inc.; that the Subject Shares have an aggregate par value of One Billion Three Hundred Seventy Million Pesos (P1,370,000,000.00) and in the hands of EPEC Nederland Holdings BV, have a cost or basis of One Billion Three Hundred Seventy Three Million Six Hundred Eighty Nine Thousand Pesos (P1,373,689,000.00); that El Paso Philippines Energy Co., Inc. shall not issue additional shares to EPEC Nederland Holdings BV, but shall simply record the total cost of the Subject Shares as additional paid-in capital. DIAcTE You are now requesting for a confirmation of your opinion that: "1. El Paso Philippines Energy Co. is not subject to income tax upon its receipt of the Subject Shares from EPEC Nederland Holding BV based on Sec. 56 of Revenue Regulations No. 2. "2. Although EL Paso Philippines Energy Co. will not issue additional shares to EPEC Nederland Holding BV in exchange for the Subject Shares, the transfer of the Subject Shares is not subject to donor's tax (BIR Ruling DA-134-3-5-99). "3. To determine the adjusted basis of the EPPE Shares in the hands of EPEC Nederland Holding BV, the additional capital contribution of EPEC Nederland Holding BV equivalent to the total cost of the Subject Shares should be added to the original acquisition cost of the EPPE shares (BIR Ruling No. 107-95 dated 19 July 1995). "4. Since no additional shares will be issued by El Paso Philippines Energy Co. to EPEC Nederland Holding BV, Section 175 of the Tax Code which imposes documentary stamp tax (DST) on the original issue of shares of stock at the rate of Two Pesos (P2.00) on each Two Hundred Pesos (P200.00) of the par value of the shares will not apply. "5. There is no capital gain that will be derived from the disposition and transfer of the Subject Shares from EPEC Nederland Holding BV to El Paso Philippines Energy Co. since the Subject Shares are to be transferred at cost. Although the book value of the Subject Shares is higher than the cost or basis of the Subject Shares, capital gain presumed to have been realized for purposes of computing the capital gains tax under Revenue Regulations 2-82 shall not be subject to Philippine income tax under Section 27 (D) (2) of the Tax Code as amended, because any capital gain shall be taxable only in Netherlands, the State where EPEC Nederland Holding BV is a resident (Art. 13, RP-Netherlands Tax Treaty). "6. The transfer of the Subject Shares from EPEC Nederland Holding BV to El Paso Philippines Energy Co. is subject to DST at the rate of One Peso and Fifty Centavos (P1.50) on each Two Hundred Pesos (P200.00) of the par value of the Subject Shares pursuant to Section 176 of the Tax Code." In reply, please be informed that "where a corporation requires additional funds for conducting its business and obtains such needed money through voluntary pro-rata payments by its shareholders, the amounts so received being credited to its surplus account or to a special capital account, will not be considered income, although there is no increase in the outstanding shares of stock of the corporation. The payments in such circumstances are in the nature of voluntary assessments upon, and represent an additional price paid for, in shares of stock held by the individual shareholders, and will be treated as an addition to and as a part of the operating capital of the company." (Section 56, Revenue Regulations No. 2) Thus, since the Subject Shares will be transferred by EPEC Nederland BV Holding Co., Inc. as its additional capital contribution to El Paso Philippines Energy Co., Inc., the Subject Shares shall be treated as a capital investment which is not included within the purview of the term "taxable income" as defined in Section 31 in relation to Section 32 of the Tax Code of 1997 Hence, EPEC Nederland Holding BV's contribution consisting of the Subject Shares is not subject to income tax as well as donor's tax. (Section 56, Revenue Regulations No. 2; BIR Ruling No. 107-95 dated July 19, 1995; BIR Ruling No. 270-87 dated September 8, 1987; BIR Ruling [UN-195-7-1-94; BIR Ruling [UN-221-7-25-94]; BIR Ruling [DA-134-3-5-99]) We likewise confirm your opinion that in determining the adjusted basis of the EPPE Shares, the additional capital contribution of EPEC Nederland Holding BV equivalent to the total cost of the Subject Shares should be added to the original acquisition cost of the EPPE Shares (BIR Ruling No. 107-95 dated 19 July 1995). ATcEDS Since no additional shares will be issued by E1 Paso Philippines Energy Co., Inc. to EPEC Nederland Holding BV, the transfer is not subject to DST on the original issue of shares of stock under Section 175 of the Tax Code of 1997. Moreover, we confirm your opinion that there is no capital gains tax due on the disposition and transfer of the Subject Shares from EPEC Nederland Holding BV to El Paso Philippines Energy Co., Inc. Article 13 of the RP-Netherlands Tax Treaty provides as follows: "Article 13 GAINS FROM THE ALIENATION OF PROPERTY 1. Gains from the alienation of immovable property, as defined in paragraph 2 of Article 6, may be taxed in the State in which such property is situated. 2. Gains from the alienation of movable property forming part of the business property of a permanent establishment which an enterprise of one of the States has in the other State, or of movable property pertaining to a fixed base available to a resident of one of the State in the other State for the purpose of performing professional services, including such gains from the alienation of such permanent establishment (alone or together with the whole enterprise) or of such a fixed base, may be taxed in the other State. 3. Notwithstanding the provisions of paragraph 2, gains derived by an enterprise of one of the States from the alienation of ships and aircraft operated in international traffic and movable property pertaining to the Operation of such ships or aircraft shall be taxable only in that State. 4. Capital gains from the alienation of any property other than those mentioned in paragraphs 1, 2 and 3, shall be taxable only in the State of which the alienator is a resident . 5. The provisions of paragraph 4 shall not affect the right of each of the States to levy according to its domestic law a tax on gains from the alienation of any property derived by an individual who is a resident of the other State and has been a resident of the first mentioned State at any time during the six years immediately preceding the alienation of the property." (Emphasis supplied). It is clear from the aforequoted provisions of the RP-Netherlands Tax Treaty that capital gains from the alienation of any property other than those mentioned in paragraphs 1, 2 and 3 of Article 13 of the tax treaty shall be taxable only in the State where the alienator is a resident. Considering that sale of shares of stock is not among those mentioned in said paragraphs 1, 2 and 3 of Article 13 of the tax treaty, the gains that may be derived by EPEC Nederland Holding BV, which is a resident of Netherlands, from the transfer of the Subject Shares shall not be subject to Philippine income tax under Section 27(D)(2) of the Tax Code of 1997, but are subject to tax only in Netherlands (BIR Ruling 009-96 dated January 23, 1996). DHIETc However, the transfer of the Subject Shares from EPEC Nederland Holding BV to El Paso Philippines Energy Co., Inc. is subject to DST at the rate of One Peso and Fifty Centavos (P1.50) on each Two Hundred Pesos (P200.00) of the par value of the Subject Shares under Section 176 of the Tax Code of 1997. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) LILIAN B. HEFTI Deputy Commissioner Legal and Inspection Group