(1)

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.

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 BASIC FACTS AND REQUEST FOR RULING

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

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 In enacting Republic Act No. (RA) 7717, 1(2) 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." (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
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 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
reproduced:

xxx xxx xxx

THE CHAIRMAN.

Because the one fourth (1/4) of one percent (1%) right now is not really an
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 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 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.

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 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).

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.

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 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

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

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 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
inconsistent herewith are hereby revoked.

Please be guided accordingly.

Very truly yours,

(SGD.) JOSE MARIO C. BUÑAG

Commissioner
Bureau of Internal Revenue
Footnotes
1. Entitled: "AN ACT IMPOSING A TAX ON THE SALE, BARTER OR
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 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)
BIR Ruling No. 139-98

2 (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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