ITAD Ruling No. 212-02

November 28, 2002 ITAD RULING NO. 212-02 Art. 13, RP-Japan BIR Ruling No. ITAD 7-02 Bello Valdez & Caluya Attorneys & Counsellors At Law SOL Building, 112 Amorsolo St. Legaspi Village, Makati City Attention: Atty. Jenalyn R. Carabeo-Suarez Gentlemen : This refers to your request dated July 23, 2002 for confirmation of your opinion that the sale to Kyohritsu Hiparts Co. Ltd. (KHP) by Marubeni Vehicle Corporation (MAVEC) of its shares in Pilipinas Kyohritsu Inc. (PKI) is not subject to capital gains tax pursuant to Article 13 of the RP-Japan tax treaty. It is represented that MAVEC is a non-resident foreign corporation duly organized and existing under the laws of Japan with principal office at 1-2-3 Ohtemachi Chiyoda-Ku, Tokyo, Japan; 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 of Non-Registration dated June 28, 2002 issued by the Securities and Exchange Commission; that PKI is a domestic corporation organized and existing under the laws of the Philippines with principal address at Km. 75 Laurel Highway, Brgy. Inosloban, Lipa City, Batangas; that KHP is a non-resident foreign corporation duly organized and existing under the laws of Japan with principal address at 3-137 Nissin-cho Saitama City, Saitama Prefecture, Japan; that MAVEC is the beneficial owner of 25,000 shares of stock (including the one [1] qualifying share of its nominee Director, Yoshiki Takada of PKI) with a par value of P1,000.00 per share representing 100% of the total outstanding capital stock of PKI; that on June 24, 2002, by virtue of a Deed of Conveyance, MAVEC sold all of its shareholdings to KHP for and in consideration of One Hundred Fifty Seven Million Japanese Yen (Y157,000,000). In reply, please be informed that Article 13 of the RP-Japan tax treaty provides: " ARTICLE 13 1. Gains derived by a resident of a Contracting State from the alienation of immovable property as defined in paragraph (2) of Article 6 and situated in the other Contracting State may be taxed in that other Contracting State. 2. Gains from the alienation of any property, other than immovable 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 any property, other than immovable property, pertaining to a fixed base available to a resident of a Contracting State if 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 that other Contracting State. 3. Gains derived by a resident of a Contracting State from the alienation of ships or aircraft operated in international traffic and any property, other than immovable property, pertaining to the operation of such ships or aircraft shall be taxable only in that Contracting State. 4. Gains from the alienation of shares of a company, a partnership or a trust the property of which consists principally of immovable property situated in a Contracting State, may be taxed in that Contracting State. SEcTHA 5. Gains from the alienation of any property other than those referred to in paragraphs (1), (2), (3) and (4) shall be taxable only in the Contracting State of which the alienator is a resident." Based on the aforequoted provisions, the gains realized by MAVEC from the transfer of its shares of stock in PKI to KHP are taxable in Japan. However, under paragraph 4 thereof, 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 in properties enumerated in Section 3 of the 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. 2(a) and (b), Revenue Regulations No. 4-86 .] Verification of the Audited Financial Statement for December 31, 2001 of PKI disclosed that its real property interest is valued at P215,534,004 or 34.87% of its total assets. Thus, PKI's assets do not consist principally of real property interest located in the Philippines. Accordingly, this Office confirms your opinion as it hereby holds that any gain assumed to be realized by MAVEC from the transfer of its shares of stock in PKI to KHP by virtue of the Deed of Conveyance is not subject to Philippine income tax. ( BIR Ruling No. ITAD 7-02 dated January 23, 2002 ) However, the Deed of Conveyance is subject to the documentary stamp tax (DST) imposed under Section 176 of the National Internal Revenue Code of 1997. This ruling is issued on the basis of the facts as represented. However, if upon investigation it shall be discovered that the facts are different, then this ruling shall be considered 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