February 9, 2007

DA ITAD BIR RULING NO. 022-07

Articles 2 & 13 Philippines-Singapore

tax treaty; Section 127, NIRC of 1997;
BIR Ruling No. 118-80

Sycip Gorres Velayo & Co.

6760 Ayala Avenue
1226 Makati City

Attention: A.C. Tionko

Tax Service

Gentlemen :

This refers to your application for relief from double taxation dated March 1,
2005, on behalf of your client, Singapore Telecom International Pte. Ltd. (Singtel),
requesting confirmation of your opinion that the disposition of shares of stock in a
domestic company, whose shares are listed and traded in the Philippine stock
exchange shall be exempt from the stock transaction tax, pursuant to the
Philippines-Singapore tax treaty.

It is represented that Singtel is a foreign corporation organized and existing

under the laws of Singapore with address at 31 Exeter Road, Comcentre, Singapore;
that it has a branch office in the Philippines; that Singtel owns 4,202,401 shares of
Globe Telecom, Inc. (Globe), a domestic corporation organized and existing under the
laws of the Philippines; and that Singtel's investment in Globe common shares was
made directly with Globe, without intervention, participation or benefit of its
Philippine branch; that Singtel intends to accept Globe's offer to buy back its
4,202,401 common shares, which are listed and traded with the Philippine Stock
Exchange (PSE); that the shares shall be traded through the facilities of the PSE.

BASIC FACTS AND REQUEST FOR RULING

It is your opinion that normally, the disposition of shares listed and traded

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through the local stock exchange shall be subject to the applicable stock transaction
tax at the rate of 1/2 of 1% of the gross selling price or gross value in money under
Section 127 of the National Internal Revenue Code (Tax Code) of 1997; that under
Article 13 of the Philippines-Singapore tax treaty, gains from the disposition of shares
in a company whose assets do not consist principally of immovable property (i.e., not
more than 50% of the total assets as appearing in the audited financial statements of
the company), are exempt from income tax including stock transaction tax; that
Article 2(4) of the same tax treaty states that the said Article 13 applies also to any
identical or similar taxes in addition or, in place of, the existing taxes. In support of
your position, you cited BIR Ruling No. 139-98 dated September 28, 1998 where this
Bureau held that the exemption provided under the tax treaties includes exemption
from the stock transaction tax.

DISCUSSION

Article 13 and Article 2

of the Philippines-Singapore tax treaty

In reply, please be informed that Article 13 of the Philippines-Singapore tax

treaty provides as follows, viz.:

"Article 13

GAINS FROM THE ALIENATION OF PROPERTY

xxx xxx xxx

3. Gains from the alienation of shares of a company, the property of

which consists principally of immovable property situated in a
Contracting State, may be taxed in that State. Gains from the
alienation of an interest in a partnership or a trust, the property of
which consists principally of immovable property situated in a
Contracting State, may be taxed in that State.

xxx xxx xxx

It should be emphasized that Article 13 should be read in consonance with

Article 2 of the same tax treaty, which provides:

"Article 2

TAXES COVERED

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 1. This Convention shall apply to taxes on income imposed on behalf of
each Contracting State, irrespective of the manner in which they are
levied.

2. There shall be regarded as taxes on income all taxes imposed on total

income or on elements of income, including taxes on gains from the
alienation of movable or immovable property and taxes on the total
amounts of wages or salaries paid by enterprises. ScAIaT

3. The existing taxes to which the Convention shall apply are in

particular:

(a) in the case of the Philippines:

the income taxes imposed by the Government of the

Republic of the Philippines, (hereinafter referred to as
'Philippine tax');

(b) in the case of Singapore:

the income tax (hereinafter referred to as 'Singapore

tax').

4. The Convention shall apply also to any identical or substantially

similar taxes on income which are imposed after the date of signature
of this Convention in addition to, or in place of, the existing taxes. The
Competent Authorities of the Contracting States shall notify each other
of the changes which have been made to their respective taxation laws.
(Emphasis supplied)

xxx xxx xxx

The Philippines-Singapore tax treaty

applies to taxes on income only

It is clear from the foregoing that the Philippine-Singapore tax treaty covers, or
is applicable, only to "taxes on income" or "income taxes".

Income tax is referred to as tax on all yearly profits arising from property,
professions, trades or offices, or as a tax on a person's income, emoluments, profits
and the like (61 C.J.S. 1559). It may be succinctly defined as a tax on income,
whether gross or net (67 Am. Jur. 308).

Income in tax law is an amount of money coming to a person within a specified

Copyright 1994-2019 CD Technologies Asia, Inc. Taxation 2019 3
time, whether as payment for services, interest, or profit from investment. It means
cash or its equivalent, or the flow of wealth. It is gain derived and severed from
capital, from labor or from both combined. The determining factor for the imposition
of income tax is whether any gain or profit was derived from a transaction
(Commissioner of Internal Revenue vs. Court of Appeals, et al., G.R. No. 108576,
January 20, 1999, 102 SCAD 119).

The above quoted paragraph 4 of Article 2 of the Philippines-Singapore tax

treaty may be broken down as follows: (1) the Philippines-Singapore tax treaty shall
also be applicable to any identical or substantially similar taxes on income, (2) such
taxes on income are imposed after the date of signature of the said tax treaty (i.e., on
August 1, 1977), and (3) such taxes on income are in addition to, or in place of, the
existing taxes referred to in paragraphs 2 and 3 of the same Article 2 of the
Philippines-Singapore tax treaty.

Unlike the Philippines-Singapore tax treaty, the Organization for Economic

Cooperation and Development (OECD) and United Nations (UN) Model Conventions
and some of the existing tax treaties do not qualify the phrase "any identical or
substantial similar taxes" as referring only to income taxes. Thus, in applying Article
13 vis-a-vis paragraph 4 of Article 2 of the Philippines-Singapore tax treaty, it must
be recognized that the intention of the Contracting States is that the additional tax or
the tax intended to replace existing taxes on gains from the alienation of property
should only be a tax "on income". And such intention is clearly expressed in the
language used in the said tax treaty.

History of Section 127

of the Tax Code of 1997

On the other hand, Section 127 (A) (under Title V-Other Percentage Taxes) of
the National Internal Revenue Code (Tax Code) of 1997 provides as follows, viz.:

"SEC. 127. Tax on Sale, Barter or Exchange of Shares of Stock Listed

and Traded through the Local Stock Exchange. — There shall be levied, and
assessed and collected on every sale, barter, exchange or other disposition of
shares of stock listed and traded through the local stock exchange other than the
sale by a dealer in securities, a tax at the rate of one-half of one percent (1/2 of
1%) of the gross selling price or gross value in money of the shares of stock
sold, bartered, exchange or otherwise disposed which shall be paid by the seller
or transferor."

The tax imposed by the foregoing provision is known as the "stock transaction

Copyright 1994-2019 CD Technologies Asia, Inc. Taxation 2019 4

tax". Such tax is not a tax on the earnings derived from the sale of stocks but is an
excise tax imposed on the privilege to sell shares of stocks (BIR Ruling No. 118-80).

In enacting Republic Act No. (RA) 7717, 1(1) Congress has considered the view
that the stock transaction tax is not a tax on income as it explicitly provided under its
Section 3, to wit:

"SEC. 3. Sections 21(d)(2), 24(e)(2)(B), 25(a)(6)(C)(ii), and

25(b)(5)(C)(ii) of the National Internal Revenue Code, as amended, (i.e., the
Tax Code of 1993) are hereby repealed" (Emphasis supplied)

Such repealed provisions of the Tax Code of 1993 pertaining to foreign

corporations are as follows, viz.:

"SEC. 25. Rates of tax on foreign corporations. —

"(a) Tax on resident foreign corporations. — . . .

"(6) Tax on certain incomes received by resident foreign corporations. . . .

"(C) Capital gains from sales of shares of stocks. — Capital gains realized
from sale, exchange or disposition of shares of stocks in any domestic
corporation shall be taxed as follows:

xxx xxx xxx

"(ii) Capital gains presumed to have been realized from the sale, exchange or
disposition of shares of stock listed and traded through a local stock exchange
— 1/4 of 1% based on the gross selling price of the shares or shares of stock.

xxx xxx xxx

"(b) Tax on non-resident foreign corporations. — . . .

"(5) Tax on certain incomes realized by non-resident foreign corporations. . .

.

"(C) Capital gains realized from sale, exchange or disposition of shares of

stocks in any domestic corporation shall be subject to tax as follows:CDcaSA

xxx xxx xxx

"(ii) Capital gains presumed to have been realized from the sale, exchange or
disposition of shares of stock listed and traded through a local stock exchange
— 1/4 of 1% based on the gross selling price of the shares or shares of stock."
Copyright 1994-2019 CD Technologies Asia, Inc. Taxation 2019 5
 (Emphasis supplied)

In place of the foregoing provisions, Section 1 of RA 7717 inserted a new

section [which was reenacted as Section 127(A) of the Tax Code of 1997 as
above-cited] under the Title V (on Other Percentage Taxes), to wit:

"Sec. 124-A. Tax on Sale, Barter or Exchange of Shares of Stock

Listed and Traded through the Local Stock Exchange or through Initial Public
Offering. — (a) Tax on sale, barter or exchange of shares of stock listed and
traded through the local stock exchange. — There shall be levied, assessed, and
collected on every sale, barter, exchange, or other disposition of shares of stock
listed and traded through the local exchange other than the sale by a dealer in
securities, a tax at the rate of one-half of one percent (1/2 of 1%) of the gross
selling price or gross value in money of the shares of stock sold, bartered
exchanged, or otherwise disposed which shall be paid by the seller of
transferor."

In repealing Section 25 under the Tax Code of 1993 and replacing the same
with Section 124-A above, Congress removed the stock transaction tax from the
classification of income taxes and considered the same as a percentage tax. It is noted
that the tax base in the former law, i.e., "(c)apital gains presumed to have been
realized" was not retained. Instead, the tax base was changed to "gross selling price
or gross value in money", making manifest the intent to change the stock transaction
tax to a percentage tax.

A percentage tax is a business tax which is based on a given ratio between the
gross sales or receipts and the burden imposed upon the taxpayer (City of Manila vs.
Inter-Island Gas, 99 Phil. 847). The percentage tax on sales is based on a set ratio
between the volume of sales and the amount of the tax (Pepsi Cola Bottling Co., Inc.
vs. Municipality of Tanauan, L-31156, February 27, 1976).

Congressional Deliberations

It is well-established that opinions expressed in the debates and proceedings of

the Legislature, steps taken in the enactment of a law, or the history of the passage of
the law through the Legislature, may be resorted to as aids in the interpretation of a
statute with a doubtful meaning (Esso Standard Eastern, Inc. vs. Commissioner of
Internal Revenue, G.R. No. 28508-9, July 7, 1989).

Thus in relation to the foregoing, relevant portions in the Committee

Deliberations (Committee on Ways and Means, May 26, 1993) of the House of
Representatives on House Bill No. 9187 (later to become RA 7717) are hereunder
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reproduced:

xxx xxx xxx

THE CHAIRMAN.

Because the one fourth (1/4) of one percent (1%) right now is not really an
income tax. It is out of place in Title 2 of the Internal Revenue Code because
it is based on gross selling price. That's why we are transferring it and putting
it in its proper place under Title 5 of the Internal Revenue Code. Because it is
a gross selling price.

MR. FRIENZA (DOF).

It might be that the present provision or the taxation of shares of stock is

based on expediency and that is why the provision reads that presumably the
capital gains have been taxed at one fourth (1/4) of one percent (1%). Now,
the rate . . .

MS. GUEVARA (DOF).

Sir, except that we just have to interpret it in the light of policy context
because for all intents and purposes, it is really supposed to be a tax on capital
gains except that . . . because of administrative reasons and also for purposes
of developing the stock market, it was based on the value and the rate was
lowered.

THE CHAIRMAN.

It does not detract from the fact that it is a business tax which is being
characterized as an income tax.

xxx xxx xxx

MS. SERASPI (NTRC).

Good morning, Mr. Chairman. I am Aurora Seraspi of the National Tax

Research Center. We also support the increase of the rate of tax from
one-fourth of one percent to one-half of one percent, however, on the part of
the transfer of the tax from the income tax to the percentage tax, the NTRC
has also a reservation. As my other colleagues have stated, we subscribed to
them, and then one issue that we would like to point out is that the transfer of
the tax from the income tax to the percentage tax has a serious implication on
the over all tax structure particularly on the progressivity of the tax system
because you will be eroding your direct taxes, it will be transferred to the
Copyright 1994-2019 CD Technologies Asia, Inc. Taxation 2019 7
 indirect taxes and the Philippine tax system will be again be said as a
regressive tax system.

THE CHAIRMAN.

I don't think it will affect the progressivity of the system. Because right now,
under the present provisions of the Internal Revenue Code, this is already an
indirect tax. This is already an indirect tax.

MS. SERASPI (NTRC).

The capital gains?

THE CHAIRMAN.

No, this is not a capital gains tax, this is a transaction tax under the present
provisions of the Internal Revenue Code, but it's out place. It's also an indirect
tax.

MS. SERASPI (NTRC).

Before it was an indirect tax under, earlier . . .

THE CHAIRMAN.

No! Because it can be passed on to the buyer.

MS. SERASPI (NTRC).

But what was taxed under the . . . one fourth of one percent is the presumed
gains realized from the sale.

THE CHAIRMAN.

There is no such thing as a presumed gain.

MS. SERASPI (NTRC).

Yeah, And then

THE CHAIRMAN.

How can you presume gain when you, for example, sell the shares of stock at
a loss?

MS. SERASPI (NTRC).

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 I think the one fourth of one percent is not imposed if there is a loss. Because
we are imposing . . .

THE CHAIRMAN.

No.! It is imposed even if there is a loss.

VOICE.

Transaction tax iyan, eh.

THE CHAIRMAN.

So, it is really an indirect tax. There is no problem putting this indirect tax in
its proper place and really characterizing it as an indirect tax, rather than
putting it, making it appear as an income tax. AEHTIC

xxx xxx xxx

THE CHAIRMAN.

So I said, this is not a direct tax, as presently worded in the Internal Revenue
Code. It is really an indirect tax which is disguised as a direct tax.

HON. ALMARIO.

Or would you just . . . what you call it a direct tax because of the criticism that
the Philippine tax system is regressive.

MS. SERASPI (NTRC).

The dependence of the Philippine tax system is on indirect taxes. So, if that
will be transferred again, it will be . . . the tax system will become more
regressive.

THE CHAIRMAN.

Yeah. Whatever tax system you will go, if you look at the present provisions
of the Internal Revenue Code imposing the one fourth of one percent on stock
transaction, it's really not a direct tax, it's an indirect tax. Because it can be
even shifted to the seller. Because the tax is based on gross selling price not
on gain. It's the same as in the VAT. The VAT is based on gross selling price
which can be shifted to the buyer.

xxx xxx xxx

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 In the Congressional Floor Deliberations (held on September 2, 1993)
regarding the same Bill, Honorable Exequiel B. Javier of Antique delivered a
sponsorship speech, a part of which is stated as follows:

MR. JAVIER.

xxx xxx xxx

Finally, the proposed measure, Mr. Speaker, seeks to correct the present
characterization of the tax on sale of shares of stock listed in the stock
exchange. Under the National Internal Revenue Code, the tax is characterized as
a tax on income. This is a misnomer, Mr. Speaker. The tax is in essence a tax on
transaction since it is imposed regardless of whether the gain or loss is derived
from the sale of shares of stock. Historically, Mr. Speaker, when this tax was
introduced in 1970, it was likewise characterized as a tax on the transaction.
P.D. No. 779, however, erroneously change that characterization to a tax on
income. This measure, Mr. Speaker, merely seeks to restore the characterization
of this tax — a tax on transaction.

As shown above, there was a very clear intent on the part of our legislators to
clarify the treatment of the stock transaction tax under the Section 124-A [now
Section 127(A) of the Tax Code of 1997] as one which is not in the nature of an
income tax.

RULING

In view of all the foregoing, the stock transaction tax cannot be considered as
an identical or substantially similar tax on income in place of the capital gains tax
imposed under the former law on the sale or transfer of shares of stock listed and
traded through the local stock exchange.

Consequently, Singtel may not avail of the benefits of Article 13 of the

Philippine-Singapore tax treaty on its sale to Globe of its 4,202,401 common shares,
which are listed and traded through the facilities of the PSE.

Such being the case, your request for confirmation of opinion that the
disposition of shares of stock in a domestic company, whose shares are listed and
traded on the Philippine stock exchange shall be exempt from the stock transaction
tax, pursuant to the Philippines-Singapore tax treaty, is hereby denied for lack of legal
basis.

BIR Ruling No. 139-98 is therefore modified. All other rulings or issuance
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inconsistent herewith are hereby revoked.

Please be guided accordingly.

Very truly yours,

(SGD.) JOSE MARIO C. BUÑAG

Commissioner of Internal Revenue
Footnotes
1. Entitled: "AN ACT IMPOSING A TAX ON THE SALE, BARTER OR
EXCHANGE OF SHARES OF STOCK LISTED AND TRADED THROUGH THE
LOCAL STOCK EXCHANGE OR THROUGH INITIAL PUBLIC OFFERING,
AMENDING FOR THE PURPOSE THE NATIONAL INTERNAL REVENUE
CODE, AS AMENDED, BY INSERTING A NEW SECTION AND REPEALING
CERTAIN SUBSECTIONS THEREOF" (Emphasis supplied).

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 Endnotes

1 (Popup - Popup)
1. Entitled: "AN ACT IMPOSING A TAX ON THE SALE, BARTER OR
EXCHANGE OF SHARES OF STOCK LISTED AND TRADED THROUGH THE
LOCAL STOCK EXCHANGE OR THROUGH INITIAL PUBLIC OFFERING,
AMENDING FOR THE PURPOSE THE NATIONAL INTERNAL REVENUE
CODE, AS AMENDED, BY INSERTING A NEW SECTION AND REPEALING
CERTAIN SUBSECTIONS THEREOF" (Emphasis supplied).

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