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-
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 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

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 "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
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 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
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 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
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 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:

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 (SGD.) MILAGROS V. REGALADO
Assistant Commissioner
Legal Service

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