ITAD Ruling No. 201-00

December 26, 2000 ITAD RULING NO. 201-00 RP-Japan Article 13 ITAD 40-00 Bengzon Narciso Cudala Jimenez Gonzales & Liwanag Attorneys & Counselors at Law SOL Building, 112 Amorsolo Street Legaspi Village, 1229 Makati City Attention: Jose V . E . Jimenez Jenalyn R . Carabeo Gentlemen : This refers to your tax treaty relief application dated September 1, 2000, on behalf of Marubeni Corporation (Marubeni), requesting for exemption from Philippine income tax on the sale of its shareholdings in Nachi Pilipinas Industries Inc. (NPII) to Nachi-Fujikoshi Corporation (Nachi-Fujikoshi), pursuant to Article 13 of the RP-Japan Tax Treaty. It is represented that Marubeni is a nonresident foreign corporation duly organized and existing under the laws of Japan with principal address at 4-2, Ohtemachi 1-chome, Chiyoda-ku, Tokyo, Japan; that NPII is a corporation organized and existing under and by virtue of Philippine laws, with principal office at 15th Avenue, Manalac Cpd/Arturo Drive Sta. Maria Industrial Estate Bagumbayan, Taguig Metro Manila; that Marubeni is the stockholder of record for 4,999 shares of common stock and is the beneficial owner of one (1) share under the name of its nominee Director Mr. Takeshi Hojo, or an aggregate shareholding of 5,000 shares, at par value of One Thousand Pesos per share, for a total of Five Million Pesos (P5,000,000.00) of NPII; that Nachi-Fujikoshi is a corporation duly organized and existing under the laws of Japan, with business address at World Trade Center, 4-1, Hamamatsucho 2-chome, Minato-ku, Tokyo, Japan; that on August 11, 2000, Marubeni sold all said shareholding to Nachi-Fujikoshi; that for and in consideration of the foregoing premises, Marubeni agreed to sell and transfer its shares for a total purchase price of SIX MILLION THREE HUNDRED FORTY THOUSAND SEVENTY SIX (PHP6,340,076.00) Philippine Pesos, subject to the conditions set forth in the Deed of Conveyance. In reply, please be informed that Article 13 (3) of the RP-Japan Tax Treaty provides that: "Article 13 Gains from the Alienation of Property "xxx xxx xxx "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 partnership or a trust, the property of which consists principally of immovable property situated in a Contracting State, may be taxed in that State. cCHETI xxx xxx xxx" In the instant case, the gains which will be realized by Marubeni from the transfer of its shares of stock in NPII to Nachi-Fujikoshi shall be taxable only in Japan. However, under the aforequoted provision, 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. (Sec. (a) and (b), Revenue Regulations No. 4-86). Verification of the August 2000 Interim Financial Statement and 1999 Audited Financial Statement of NPII, disclosed that its net property and equipment located in the Philippines are valued at P14.69M in August 2000 and P18.10M in 1999, representing less than fifty percent (50%) of its total assets of P95.45M and P83.78M, respectively, thereby making the assets of NPII not consisted principally of real property interest located in the Philippines. Hence, the gain from sale of 5000 shares of stock of Marubeni to Nachi-Fujikoshi is not taxable in the Philippines. (BIR Ruling No. ITAD 40-00) Accordingly, your opinion is hereby confirmed that the sale by Marubeni of its shares of stock in NPII to Nachi-Fujikoshi is exempt from capital gains tax imposed under Section 28(b)(5)(C) of the Tax Code of 1997 pursuant to Article 13(3) of the RP-Japan Tax Treaty. 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. Upon presentment of proof of payment of documentary stamp thereon, the corporate secretary of NPPI shall be authorized to register the transfer of the shares from Marubeni to Nachi-Fujikoshi in the Stock and Transfer Book of the Corporation concerned and to cancel and issue new certificates in the name of Nachi-Fujikoshi. This ruling is issued on the basis of the foregoing representations. However, if upon investigation it will be disclosed or discovered 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