ITAD Ruling No. 203-02

November 23, 2002 ITAD RULING NO. 203-02 RP-US Article 14 & Reservation Clause Sec. 176 of the 1997 Tax Code BIR Ruling No. ITAD 104-02 Sycip Salazar Hernandez & Gatmaitan Attorneys-At-Law Syciplaw-All Asia Capital Center 105 Paseo de Roxas, Makati City 1226 Metro Manila Attention: Atty. Maria Teresa D. Mercado-Ferrer Gentlemen : This refers to your letter dated February 4, 2002 on behalf of your client, Spalding & Evenflo Companies, Inc. (Spalding), requesting confirmation of your opinion that the transfer by Spalding of all of its shares in Evenflo Philippines, Inc. (Evenflo) to Evenflo Company, Inc. (EC) is exempt from the payment of capital gains tax pursuant to the provisions of the RP-US tax treaty. It is represented that Spalding is a non-resident foreign corporation organized and existing under the laws of the State of Delaware, USA, with principal office at 425 Meadow Street, Chicopee, Massachusetts 01013-2135; that Spalding is not registered either as a corporation or as a partnership and has not been licensed to do business in the Philippines per certification dated February 4, 2002 issued by the Securities and Exchange Commission; that Evenflo is a domestic corporation organized and existing under the laws of the Philippines with principal address at 4th Floor, OAC Building, Ortigas Complex, San Miguel Avenue, Pasig City; that as of May 20, 1998, Spalding owns 60,000 shares in Evenflo with par value of P100.00 each share or a total par value of P6,000,000.00 representing 100% of the total issued and outstanding shares of Evenflo; that on the same date, the members of the Board of Directors of Spalding adopted by unanimous written consent a resolution approving the immediate transfer as capital contribution of all of the capital stock of its five (5) subsidiaries (including Evenflo) to EC, a US corporation and a subsidiary of Spalding; that as shown in the Audited Financial Statements of Evenflo as of September 30, 1997 and 1998, the assets of Evenflo do not consist principally of real property interest located in the Philippines. In reply, please be informed that Article 14 of the RP-US tax treaty provides as follows: "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." On the other hand, the Reservation Clause of the RP-US tax treaty, in pertinent part, provides: ". . . notwithstanding the provisions of Article 14 relating to capital gains, both the United States and the Philippines may tax gain from the disposition of an interest in a corporation if its assets consist principally of a real property interest located in that 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;" "xxx xxx xxx" It is clear from the aforequoted provisions that any capital gains which may be derived by Spalding from the alienation of any property other than those mentioned in paragraph (1) of Article 14 (Capital Gains) or in Article 7 (Income from Real Property) of the RP-US tax treaty shall be taxable only in the State where the alienator is a resident. It is to be noted, however, that under the Reservation Clause, the Philippines may tax the gains derived from the disposition of interest in a corporation if its assets consist principally of real property interests located in the Philippines. "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 of Evenflo for the fiscal years September 1997 and 1998 disclosed that its property and equipment located in the Philippines are 1.49% and 2.90%, respectively, of its total assets, thereby making the assets of Evenflo not consisted principally of real property interest located in the Philippines up to the date of subject transfer of shares. Accordingly, this Office is of the opinion and so holds the transfer by Spalding of its shares of stock in Evenflo to EC is not subject to capital gains tax as imposed under Section 28(B)(5)(c) of the Tax Code of 1997. However, copies of the documents evidencing the transfer of shares 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 in relation to Section 173 of the same Code. ( BIR Ruling No. DA-ITAD 104-02 ) Furthermore, a certificate of authority to register the said transaction in the books of Evenflo must be secured. Thus, Spalding, being a nonresident foreign corporation, is required to file, although not required to pay the capital gains tax, a Capital Gains Tax Return (BIR Form No. 1707) accompanied by copies of the documents evidencing the transfer of shares 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 Spalding in favor of EC. 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 Evenflo shall be authorized to register the transfer of said shares from Spalding to EC in the Stock and Transfer Book of the Evenflo and to issue a new certificate in the name of EC. This ruling is issued on the basis of 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