Amendments to Rule 114 of 1985 Rules on Criminal Procedure As Amended

February 13, 2003 ITAD RULING NO. 033-03 Article 12 RP-US tax treaty BIR Ruling No. 102-01 & 011-02 Section 34, 105 of the Tax Code of 1997 Revenue Regulations No. 14-2001 Sycip Salazar Hernandez & Gatmaitan Attorneys-at-Law Syciplaw-All Asia Capital Center 105 Paseo de Roxas, City of Makati 1226 Metro Manila Attention: Atty. Victorio H. Macasaet, Jr. Gentlemen : This refers to your letter dated March 22, 2001, requesting confirmation of your opinion on the tax implications of the proposed transfer of shares of stock in ING Baring Securities (Philippines), Inc. (ING-Phils.) initially by Barsec (International) Ltd. (Barsec) to ING Baring UK Holdings Limited (ING-UK) [the Initial Transfer], and subsequently, by ING-UK to ING Baring International Holdings Limited (ING-International) [the Subsequent Transfer]. It is represented that Barsec is a holding company incorporated in the Cayman Islands but a resident of the United Kingdom with principal address at 60 London Wall, London EC2M 5TQ, the United Kingdom, per certification issued by the United Kingdom Tax Authority dated March 9, 2001; 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 January 7, 2002; that Barsec owns 299,990 shares of stock of ING-Phils; that ING-Phils is a corporation organized and existing under the laws of the Philippines with principal office at 20th Floor, Ayala Tower 1, Ayala Avenue, Makati City; that ING-UK and ING-International are foreign corporations organized and existing under the laws of the United Kingdom; that they are not registered either as corporations or as partnerships and have not been licensed to do business in the Philippines per certification issued by the Securities and Exchange Commission dated April 15, 2002; that each of the abovementioned entities is an indirect, wholly-owned subsidiary of ING Group NV; that with a view towards establishing a simple yet effective dividend repatriation structure for all affiliates and subsidiaries, the ING Group is currently undertaking a group restructuring scheme with the intention of eliminating the current chain of intermediate holding companies in order to establish a more streamlined holding structure; that in line with the restructuring, ING-UK and ING-International were incorporated in December 2000; that in accordance with the restructuring, the shares in ING-Phils shall initially be transferred by Barsec to ING-UK, which shall subsequently transfer the same to ING-International; that the initial transfer will be approved by the Board of Directors of both Barsec and ING-UK, and the subsequent transfer will also be approved by the Board of Directors of both ING-UK and ING-International; that according to the proposed Share Sale Agreement I (Initial Transfer), Barsec agrees to transfer to ING-UK all of its rights and title to and interest in the shares, and ING-UK agrees to pay Barsec in cash and the consideration payable in respect of the remaining subsidiaries shall be left outstanding on inter-company loan account; and as to the Agreement II (Subsequent Transfer), ING-UK agrees to transfer to ING-International all of its rights and title to and interest in the shares; that in consideration of the transfer, ING-International shall issue its own shares having a value equal to the sterling equivalent of the total aggregate transfer value of all of the ING-UK shares. In view of all the above, you are of the opinion that: 1. The Initial Transfer and the Subsequent Transfer shall not be subject to capital gains tax in the Philippines; 2. The transactions entered into by both Barsec and ING-UK are outside the course of their trade or business, and both the Initial Transfer and Subsequent Transfer are, pursuant to Section 105 of the NIRC of 1997, not subject to Value Added Tax; 3. The transfer of the shares, initially by Barsec to ING-UK, and subsequently by ING-UK to ING-International, will be subject to the documentary stamp tax under Section 176 of the NIRC of 1997; 4. ING-Phils may continue to carry over the net operating losses, not previously offset, and claim as a deduction from its gross income for the next consecutive taxable years, pursuant to Section 34(D)(3) of the Tax Code, in view of the fact that: (i) the transferor in the Initial Transfer is ultimately wholly-owned by the parent company of the transferee therein and, thus, the Subject Shares are actually held by or on behalf of the same persons both before and after the Initial Transfer, and (ii) the transferee in the Subsequent Transfer is wholly owned by the transferor therein and, thus, the Subject Shares are actually held by or on behalf of the same persons both before and after the Subsequent Transfer. In reply, please be informed that Article 12 of the RP-UK tax treaty provides as follows: "Article 12 "Gains from Alienation of Property "1. Capital gains from the alienation of immovable property, as defined in paragraph 2 of Article 6, may be taxed in the Contracting State in which such property is situated. "2. Capital gains from the alienation of movable 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 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 professional 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. "3. Notwithstanding the provisions of paragraph 2 of this Article, capital gains derived by a resident of a Contracting State from the alienation of ships and aircraft operated in international traffic and movable property pertaining to the operation of such ships and aircraft shall be taxable only in that Contracting State. "4. Capital gains from the alienation of any property other than those mentioned in paragraphs 1, 2 and 3 of this Article shall be taxable only in the Contracting State of which the alienator is a resident. "5. The provisions of paragraph 4 of this Article shall not affect the right of a Contracting State to levy according to its own law a tax on capital gains from the alienation of movable property derived by an individual who is a resident of the other Contracting State and has been a resident of the first-mentioned Contracting State at any time during the six years immediately preceding the alienation of the property." It is clear from the aforequoted provisions that the capital gains from the alienation of any property other than those mentioned in paragraphs 1, 2 and 3 of Article 12 shall be taxable only in the State where the alienator is a resident. Inasmuch as the assignment for transfer of shares of stock is not among those mentioned in said paragraphs 1, 2 and 3, the gains derived by Barsec and ING-UK, both residents of UK, from the sale/transfer of their shares of stock in ING-Phils to ING-International are not subject to the capital gains tax imposed under Section 28(B)(5)(c) of the Tax Code of 1997, but are subject to tax only in UK. (BIR Ruling No. DA-ITAD 102-01 dated October 26, 2001) As regards the second issue, please be informed that Section 105 of the Tax Code of 1997 states as follows: Sec. 105. Persons Liable. Any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to the value-added tax (VAT) . . . The value-added tax is an indirect tax and the amount of tax may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services. This rule shall likewise apply to existing contracts of sale or lease of goods, properties or services at the time of the effectivity of Republic Act No. 7716. The phrase 'in the course of trade or business' means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto,. by any person regardless of whether or not the person engaged therein is a non-stock, non-profit private organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members or their guests), or government entity. xxx xxx xxx Considering that the transactions entered into by both Barsec and ING-UK are not in the regular conduct or pursuit of commercial or an economic activity and therefore outside the phrase "in the course of their trade or business", then, both the Initial Transfer and the Subsequent Transfer are not subject to VAT. Moreover, a certificate of authority to register the said transaction in the books of ING Phils must be secured. Thus, Barsec and ING-UK, being non-resident foreign corporations, are 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 said Agreement and this ruling with Revenue District Office No. 39-South Quezon City (RDO 39), in order for the latter to issue a Certificate Authorizing Registration (CAR) of the said shares of stock of Barsec, first in favor of ING-UK and then in favor of ING-International. (BIR Ruling No. 44-00) Upon presentation of the aforesaid Capital Gains Tax Return as filed, the CAR, as well as the proof of payment of the documentary stamp tax due thereon, the corporate secretary of ING-Phils. shall be authorized to register the transfer of said shares from Barsec to ING-UK and subsequently from ING-UK to ING-International in the Stock and Transfer Book of the ING-Phils. and issue a new certificate in the name of ING-International. As regards the issue whether the net operating losses of ING-Phils may still be carried over and claimed as a deduction from its gross income even after the initial and subsequent transfers of its issued shares of stock, please be informed that Section 34(D)(3) of the Tax Code provides: cDIaAS "Sec. 34. Deductions from gross income. . . . (D) Losses. (3) Net operating loss carry-over. (NOLCO) The net operating loss of the business or any enterprise for any taxable year immediately preceding the taxable year, which had not been previously offset as deduction from gross income, shall be carried over as a deduction from gross income for the next three (3) consecutive taxable years immediately following the year of such loss; Provided, however, That any net loss incurred in a taxable year during which the taxpayer was exempt from income tax shall not be allowed as a deduction under this subsection; provided, further, that a net operating loss carry-over shall be allowed only if there has been no substantial change in the ownership of the business in that (i) Not less than seventy-five percent (75%) in nominal value of outstanding issued shares, if the business is in the name of a corporation, is held by or on behalf of the same persons; or (ii) Not less than seventy-five percent (75%) of the paid-up capital of the corporation, if the business is in the name of a corporation, is held by or on behalf of the same persons. For purposes of this subsection, the term "net operating loss" shall mean the excess of allowable deduction over gross income of the business in a taxable year; . . ." The above provision is clarified by Revenue Regulations No. 14-2001, pertinent portions of which provide: "SEC 2. General Principles and Policies. 2.1 For purposes of these Regulations, the allowance for deduction of NOLCO shall be limited only to net operating losses accumulated beginning January 1, 1998. 2.2 In general, NOLCO-shall be allowed as a deduction from the gross income of the same taxpayer who sustained and accumulated the net operating losses regardless of the change in its ownership. This rule shall also apply in the case of a merger where the taxpayer is the surviving entity. xxx xxx xxx 2.4 NOLCO shall also be allowed if there has been no substantial change in the ownership of the business or enterprise in that not less than 75% in nominal value of outstanding issued shares or not less than, 75% of the paid up capital of the corporation, if the business is in the name of corporation, is held by or on behalf of the same persons. The 75% equity, ownership or interest rule prescribed in these Regulations shall only apply to a transfer or assignment of the taxpayer's net operating losses as a result of or arising from the said taxpayer's merger or consolidation or business combination with another person . . . xxx xxx xxx SEC. 3. Definition of Terms. For purposes of these Regulations, the words and phrases herein provided shall mean as follows: xxx xxx xxx 3.8 Substantial Change in the Ownership of the Business or Enterprise. The term "Substantial Change in the Ownership of the Business or Enterprise" shall refer to a change in ownership of the business or enterprise as a result of or arising from its merger or consolidation or combination with another person in the manner as provided in subsection 2.4 of these Regulations. Any change in ownership as a result of or arising thereunder shall not be treated as a substantial change for as long as the stockholders of the party thereto, to whom the net operating loss is attributable, gains or retains 75% or more interest after such merger or consolidation or combination. xxx xxx xxx SEC. 5. Determination of Substantial Change in Ownership of the Business . xxx xxx xxx 5.2 When Change Occurs . A change in the ownership of the business occurs when the person who sustained net operating losses enters into a merger, or consolidation or combination with another person, thereby resulting to the transfer or conveyance of the said net operating losses, to another person, in the course of the said merger or consolidation or combination. DCIEac xxx xxx xxx In view thereof, the transfer of shares by the previous stockholders of ING-Phils. were through straight purchase and sale and not through merger, consolidation or business combination. As such, the transfer of shares did not cause a substantial change in ownership as a result of or arising from merger, consolidation or combination with another person as defined in subsection 3.8 of Revenue Regulations No. 14-2001. Accordingly, we hereby confirm your opinion that the NOLCO of ING-Phils. is preserved even after the purchase from the existing stockholders of one hundred percent (100%) of its outstanding and issued shares by ING-UK and subsequently by ING-International as the transfer of shares did not result in a substantial change in ownership. However, due to the factual nature of the issue as to whether the net operating losses of ING-Phils. in particular may be carried over and claimed as a deduction from its gross income for the next three (3) consecutive taxable years immediately following the year of such loss, please be informed that this Office declines to issue a categorical ruling inasmuch as the presence of the conditions required per RR 14-2001 shall only be properly and accurately determined upon investigation/audit by the proper office. (BIR Ruling No. 011-02 dated March 27, 2002) This ruling is issued on the basis of the foregoing facts as represented. However, if upon investigation it will 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