ITAD Ruling No. 201-02

November 25, 2002 ITAD RULING NO. 201-02 RP-US, Article 13, Sec. 28 (B) (5) (c), NIRC BIR Ruling No. 015-82 and DA-ITAD 15-02 A.M. Sison, Jr. & Associates Suite 2002-A Security Bank Centre 6776 Ayala Avenue, 1226 Makati Philippines, P.O. Box 3280, MCPO Attention: Mr. Carlito Egaa Gentlemen : This refers to your application for relief from double taxation dated April 16, 2002, requesting confirmation of your opinion that the liquidating dividend by Upjohn, Inc. (Upjohn Phils.) to be distributed/remitted to its main stockholder/parent Pharmacia & Upjohn Company (Upjohn US), will result in the realization by the latter of capital gain (or loss) and that such gain, if any, is exempt from capital gains tax imposed under Section 24(C) of the 1997 Tax Code pursuant to Article 14 of the RP-US tax treaty. It is represented that Upjohn US is a corporation organized and existing under the laws of the United States of America with business address at 7000 Portage Road, Kalamazoo, Michigan 49001 USA; that it is not registered either as a corporation or as a partnership and has not been licensed to do business in the Philippines per certification issued by the Securities and Exchange Commission dated April 29, 2002; that Upjohn Phils is a corporation organized and existing under the laws of the Philippines with address at 31st Floor, Tower I, the Enterprise Center, Ayala Avenue, Makati City, Philippines; that as of August 7, 2002, Upjohn's issued outstanding capital stock consists of 57,657,657 common shares, 15 of which are registered in the name of five (5) individual stockholders/directors who are all nominees of Upjohn US and the remainder equivalent to 57,657,642 shares are registered in the name of Upjohn US; that on December 23, 1997, Upjohn Phils. by the majority vote of its Board of Directors and the vote of its stockholders owning or representing at least two-thirds of the outstanding capital stock, had resolved to shorten the term of its existence up to and until December 31, 1997 and, thus, amended its articles of incorporation, thereby dissolving Upjohn Phils; that Upjohn Phils had applied for and was issued by the Bureau of Internal Revenue (BIR) a "Tax Clearance Certificate for Dissolution Purposes"; that on August 7, 2000, SEC approved the dissolution of Upjohn Phils by its issuance of "Certificate of Filing of Amended Articles of Incorporation"; that Upjohn Phils continues as body corporate, but only for the three (3) years from date of SEC's approval of its dissolution, for the purpose of prosecuting and defending suits by or against it and enabling it to settle and close it affairs, to dispose of and convey its property and distribute its assets among its stockholders after paying valid claims of creditors; that all the assets of Upjohn Phils recorded in its book consist of personal properties and after satisfaction of any valid claims of creditors, there will still remain net asset which Upjohn Phils will distribute to its stockholder (Upjohn US); and that such distribution by Upjohn Phils of its net assets to its stockholder will result in the acquisition by the latter of liquidating dividends wherein said stockholder shall realize capital gain. In reply, please be informed that Article 14 of the RP-US tax treaty provides as follows, viz : "Article 14 "CAPITAL GAINS "1. Gains from the alienation of tangible personal (movable) property forming part of the business property of a permanent establishment which a resident of a Contracting State has in the other Contracting State or of tangible personal (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 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 the other State. However, gains derived by a resident of a Contracting State from the alienation of ships, aircraft or containers operated by such resident in international traffic shall be taxable only in that State, and gains described in Article 13 (Royalties) shall be taxable only in accordance with the provisions of Article 13. "2. Gains from the alienation of any property other than those mentioned in paragraph (I) or in Article 7 (Income From Real Property) shall be taxable only in the Contracting State of which the alienator is a resident." Furthermore, the Reservation Clause of the same treaty provides, in part, as follows: "Article I "Notwithstanding the provisions of Article 14 of the Convention relating to the capital gains, both the Philippines and the United States may tax gains from the disposition of an interest in a corporation if its assets consist principally of a real property interest located in the country. Likewise, both countries may tax gain from the disposition of an interest in a partnership, trust or estate to the extent the gain is attributable to a real property interest in one of the countries. The term 'real property interest' is to have the meaning it has under the law of the country in which the underlying real property is located." In addition, the annotations on the Corporation Code of the Philippines by Paras et al., defines "liquidating dividends" as follows: "These are dividends that are declared when a corporation liquidates by redeeming its outstanding stock for cash or by distributing its assets to stockholders in exchange for their stock. Such distribution is also known as distribution in liquidation. For tax purposes, liquidating dividends are treated, in effect, as sales of stock; hence any gain or loss to the stockholder is treated as capital gain or loss ." It is clear from the aforequoted provisions that the distribution of the remaining net asset by Upjohn Phils to its stockholder Upjohn US in exchange for the latter's stock known as liquidating dividends is treated as sales of stock for tax purposes, hence any gain or loss to the stockholder is treated as capital gains or loss; that any capital gains which may be derived by Upjohn US from the alienation of any property other than those mentioned in paragraph (I) of Article 14 of the RP-US tax treaty shall be taxable only in the State where the alienator is a resident. However, it is to be noted that under the Reservation Clause, the Philippines may tax the gains derived from the disposition of interests in a corporation if its assets consist principally of real property interest located in the Philippines. "Principally" means more than 50% of the entire assets in terms of value ( Sec. 2, Revenue Regulations No. 4-86 ). Verification of the audited financial statements ending December 1999 and 2000 of Upjohn Phils disclosed that it has no real property interest located in the Philippines, thereby making the assets of Upjohn Phils not principally consisted of real property interest located in the Philippines. Accordingly, this Office is of the opinion and so holds that any gain that may be realized as a result of distributing its liquidating dividends to its stockholders is not subject to the capital gains tax imposed under Section 28(B)(5)(c) of the National Internal Revenue Code (Tax Code) of 1997. However, this transaction is subject to documentary stamp tax pursuant to Sections 173 and 176 of the same Code. ( BIR Ruling No. DA-ITAD 15-02 dated January 31, 2002 ) This ruling is issued based on the 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