ITAD Ruling No. 225-02

December 27, 2002 ITAD RULING NO. 225-02 Article 13 RP-Japan Section 27 (D) (2), 176 of the Tax Code of 1997 BIR Ruling No. ITAD-72-02 Sycip Salazar Hernandez & Gatmaitan Attorneys-At-Law Syciplaw-All Asia Capital Center 105 Paseo de Roxas City of Makati 1226 Attention: Ernesto S. Taio, Jr . June Vee D . Monteclaro Gentlemen : This refers to your application for relief from double taxation dated August 8, 2002 on behalf of your client, Denshi Tech, Ltd. (Denshi), requesting confirmation of your opinion that the gains to be realized from the transfer of its shares of stocks in Luzon Electronics Technology, Inc. (LETI) to Hitachi Metals Ltd. (Hitachi) shall not be subject to Philippine income tax pursuant to Article 13 of the RP-Japan tax treaty. It is represented that Denshi is a corporation duly organized and existing under the laws of Japan with principal address at Matsuyama-cho 18, Moka-shi, Tochigi-ken 321-4346, 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 issued by the Securities and Exchange Commission dated July 29, 2002; that Hitachi is a corporation also organized and existing under the laws of Japan; that Denshi is the absolute and beneficial owner of 8,000,000 common shares of stock (referred to as "Subject Shares") in LETI valued at P13.75 per share; that LETI is a corporation duly organized and existing under the laws of the Philippines, with business address at Special Export Processing Zone, Gateway Business Park, Brgy. Javalera, General Trias, Cavite; that on June 20, 2002, a Deed of Assignment was entered into by and between Denshi and Hitachi, whereby Denshi assigned, transferred and conveyed to Hitachi all of Denshi's right, title and interests in and to the Subject Shares; and that for and in consideration of the said transfer, Hitachi agreed to pay Denshi the amount of One Billion Four Hundred Seventy-Six Million Japanese Yen (1,476,000,000). In reply, please be informed that Article 13 of the RP-Japan tax treaty provides that: "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 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 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. "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." In the instant case, the gains realized by Denshi from the transfer of its shares of stock in LETI to Hitachi are taxable in Japan. However, based on paragraph 4 of 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. 2(a) and (b), Revenue Regulations No. 4-86]. Verification of the audited financial statement as of March 31, 2002 and the interim financial statement as of June 20, 2002 of LETI disclosed that its real property interest located in the Philippines represents approximately 19% and 17% of its total assets of P723,185,778 and P711,825,507, respectively, thereby making the assets of LETI not consisted principally of real property interest located in the Philippines. Accordingly, this Office is of the opinion and so holds that the transfer by Denshi of its shares of stock in LETI to Hitachi is exempt from capital gains tax imposed under Section 27(D)(2) of the Tax Code of 1997 pursuant to Article 13(4) and (5) of the RP-Japan tax treaty. However, the Deed of Assignment executed by and between them for the sale of shares of stocks shall be subject to the documentary stamp tax imposed under Section 176 of the Tax Code of 1997. ( BIR Ruling DA-ITAD 72-02 ) Furthermore, a certificate of authority to register the said transaction in the books of LETI must be secured. Thus, Denshi, although not required to pay the capital gains tax, is required to file a Capital Gains Tax Return (BIR Form No. 1707) accompanied by copies of the Deed of Assignment 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 stocks of Denshi in favor of Hitachi. Upon presentation of the CAR and proof of payment of documentary stamp tax due thereon, the corporate secretary of LETI shall be authorized to register in its Stock and Transfer Book the transfer of the shares from Denshi to Hitachi and issue a new certificate in the name of Hitachi. This ruling is issued on the basis of the foregoing representations. However, if upon investigation it shall be disclosed or discovered that the facts are different, then this ruling shall be without force and effect insofar as the parties herein are concerned. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service