ITAD Ruling No. 199-02

November 18, 2002 ITAD RULING NO. 199-02 Article 13 RP-Singapore tax treaty ITAD No. 43-01; 68-01 Joaquin Cunanan & Co. 29th Floor, Philamlife Tower 8767 Paseo de Roxas 1226 Makati City Attention: Atty. Alexander Cabrera Partner, Tax Services Department Gentlemen : This refers to your letter dated November 27, 2001 requesting confirmation of your opinion that the sale by Zeller Singapore (ZS) of its shares of stock in Zeller Plastik Philippines, Inc. (ZPPI) to CarnaudMetalBox Inc. (CMB) is not subject to Philippine income/withholding tax pursuant to the RP-Singapore tax treaty. It is represented that ZS is a corporation organized and existing under the laws of Singapore with principal office address at 750 Chai Chee Road #08-02/03 Technopark @ Chai Chee, Singapore; that ZS is not registered either as a corporation or as a partnership and has not been licensed to do business in the Philippines as evidenced by a Certificate of Non-Registration issued by the Securities and Exchange Commission dated September 13, 2001; that CMB is a corporation also organized and existing under the laws of Singapore; that ZS is the registered owner of 24,250,000 shares of stock in ZPPI; that ZPPI is a corporation duly organized and existing under the laws of the Philippines, with business address at Philcrest Compound Building #3, Km. 23 West Service Road, Cupang, Muntinlupa City; that on August 1, 2001 a Sale of Business Agreement was entered into by and between ZS and CMB wherein "ZS as beneficial owner shall sell and CMB shall purchase and acquire the Business . . ., 'Business' means the business of rental of moulds and injection machines and trading in plastic closures and other packing materials including Fixed Assets, Investments, Stocks, Payables and Receivables in relation to the Business to be acquired and purchased by the Purchaser, as set out in the attached Schedule 1 but excluding cash in hand, income tax, withholding tax, goods and services tax and other taxes accounts" . In reply, please be informed that Article 13 of the RP-Singapore tax treaty provides as follows, viz : "Article 13 "GAINS FROM THE ALIENATION OF PROPERTY "1. Gains from the alienation of immovable property may be taxed in the Contracting 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 a Contracting State has in the other Contracting State or of movable property pertaining to a fixed base available to a resident of a Contracting State in the other Contracting 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. However, gains derived by an enterprise of a Contracting State 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. "3. Gains from the alienation of shares of a company, the property of which consists principally of immovable property situated in a Contracting State, may be taxed in that State. Gains from the alienation of an interest in a partnership or a trust, the property of which consists principally of immovable property situated in a Contracting State, may be taxed in that State. "4. Gains from the alienation of any property, other than those mentioned in paragraphs 1, 2, and 3 shall be taxable only in the Contracting State of which the alienator is a resident." Under the aforequoted provisions, the capital gains derived by ZS from the sale of its shares of stock in ZPPI to CMB is generally taxable in Singapore. However, the Philippines may tax the gains from the disposition of an interest in a corporation if the assets of the corporation consist principally of real property interest located in the Philippines. "Real Property Interest" means interest on properties enumerated in Section 3 of Revenue Regulation 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. [ Sec. 2(a) and (b), Revenue Regulations No. 4-86 ] Verification of the Audited Financial Statements as of December 31, 2000 and 1999 of ZPPI disclosed that ZPPI's real property interest located in the Philippines is 31% and 38%, respectively, of its total assets thereby making the assets of ZPPI not principally consisted of real property interest located in the Philippines. Accordingly, this Office is of the opinion and so holds that the sale by ZS to CMB of its shares of stock in ZPPI is not subject to Philippine income tax since the assets of ZPPI do not consist principally of real property located in the Philippines. ( BIR Ruling ITAD No. 43-01 and 68-01 dated April 16, 2001 and August 15, 2001 ) However, a certificate of authority to register the said transaction in the books of ZPPI must be secured. Thus, ZS, a nonresident foreign corporation, is required to file, although not required to pay the capital gains tax as above mentioned, a Capital Gains Tax Return (BIR Form No. 1707) accompanied by copies of the Sale of Business Agreement and this ruling, with Revenue District Office No. 39 South, Quezon City (RDO 39), for the issuance of Certificate Authorizing Registration (CAR) of the said shares of stock in favor CMB. Upon presentation of the aforesaid Capital Gains Tax Return as filed, the CAR, as well as the proof of payment of the documentary stamp tax due thereon, the corporate secretary of ZPPI shall be authorized to register the transfer of said shares from ZS to CMB in the Stock and Transfer Book of the ZPPI and to issue a new certificate in the name of CMB. Moreover, the Sale of Business Agreement executed by and between ZS and CMB for the sale of the said shares of stocks in ZPPI is subject to the documentary stamp tax imposed under Section 176 of the Tax Code of 1997. This ruling is issued on the basis of the foregoing 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