BIR Ruling [DA-002-00]

January 3, 2000 BIR RULING [DA-002-00] United Asia Commercial & Industrial Corporation 3993 Magsaysay Boulevard Sta. Mesa, Manila Attention: Atty . Jose W . Yap Chairman of the Board Gentlemen : This refers to your letter dated October 11, 1999 stating that United Asia Commercial & Industrial Corporation (United) for the first time since its incorporation was on the negative side for the years 1997 and 1998 due to the Asian Economic crisis; that as projected, it would also be bad for 1999; that United has an inventory consisting of various trucks, heavy equipment in its dilapidated and unserviceable conditions in the total amount of P8,668,935.23; that United is likewise the registered owner of three (3) parcels of land more particularly described as follows: TCT No. Area (sq. m.) Location 120976 765.20 sq. m. 3993 Ramon Magsaysay Blvd., Sta. Mesa, Manila 46928 2,273 sq. m. 755 Aurora Blvd., Quezon City 280492 10,270 sq. m. Bacoor, Cavite that there is a total aggregate advances by its directors in the amount of Eleven Million Ninety Four Thousand Three Hundred Eighteen and 77/100 Pesos (P11,094,318.77); that on July 28, 1999 at a special meeting duly held, to discuss the problem considering that the business condition and the Asian economic financial crisis of 1997 up to the present have dealt a devastating blow in the business community most especially in real estate and construction industry, the Board of Directors of United, in line with its previous resolution as reported to the Securities and Exchange Commission (SEC) dated January 5, 1998, had decided to liquidate and wind up its affairs; that the total inventory of P8,668,935.23 consisting of various trucks and heavy equipment in its dilapidated and unserviceable conditions was reassessed and agreed to be at P3,000,000.00 to be assigned to the existing stockholders in the following proportion: 1) Pedro H. Yap P1,125,000.00 2) Victoria Lim Yap 450,000.00 3) Victoria Lao 450,000.00 4) Jose W. Yap 375,000.00 5) Anita K. Sy 375,000.00 6) Ma. Editha N. Young 225.000.00 P3,000,000.00 ========== that the Board of Directors approved and assigned to the existing stockholders based on the equity held by each, the reduction of the advances of P11,094,318.77 by P3,000,000.00, thus leaving advances of P8,094,318.77 in its books; that it was further reported that the above-mentioned parcels of land be likewise conveyed and assigned to the existing stockholders based on the percentage of the equity held by each with the corporation; and finally, it was resolved that after liquidation of the advances of the stockholders converted to inventory and considering that the corporation is solvent and has no outstanding debts and no creditors will be affected by its dissolution, it is thereby decided that this corporation shall forthwith be dissolved by shortening its corporate term to December 31, 1999. cdll In connection therewith, you now request for a ruling as to whether or not the assignment of the above-mentioned inventories consisting of trucks, heavy equipment and three (3) parcels of land, to the existing stockholders in the form of liquidating dividends, is subject to value-added tax, capital gains tax and other applicable taxes. In reply thereto, please be informed as follows: 1. The retirement from or cessation of business with respect to all goods on hand, whether capital goods, stock-in-trade, supplies or materials as of the date of such retirement or cessation shall be deemed sale pursuant to Section 106(B)(4) of the Tax Code of 1997. Consequently, the assignment by United of its inventories consisting of trucks and heavy equipment in the form of liquidating dividends to its existing stockholders existing as of such retirement or cessation of business shall be subject to VAT. 2. The stockholders of United shall realize capital gain or loss when United distributes to them its asset as liquidating dividends; and that the capital gain, if any, shall be subject to the final capital gains tax imposed under Sections 24(C) and 27(1)(2) of the Tax Code of 1997. (BIR Ruling No. 015-82, dated 20 January 1982; BIR Ruling No. 19-80, dated 6 October 1980.); 3. The conveyance of the above-mentioned parcels of land together with the improvements thereon of United in the form of liquidating dividends shall be subject to documentary stamp tax (DST) imposed under Section 196 of the Tax Code of 1997. (BIR Ruling No. 270-91, dated 23 September 1991); In all cases involving sale, exchange or any disposition of real property as in this case, where real properties are distributed, by the corporation to its stockholders as liquidating dividends, the tax base for DST purposes is the fair market value or zonal value of the real property, whichever is higher. (RMO No. 41-91) After payment of the corresponding DST, the said parcels of land together with the improvements thereon conveyed by United in the form of liquidating dividends may be registered by the Register of Deeds concerned in the name of the stockholders. LexLib 4. The conveyance of the said parcels of land together with the improvements thereon in the form of liquidating dividends shall not be subject to the creditable withholding tax on sales, exchanges or transfers of real property under Revenue Regulation 2-98. (BIR Ruling No. 270-91, dated 23 December 1991.); and 5. The sale by the stockholders of United of the distributed assets received by them as liquidating dividends immediately after title thereto is transferred to their names shall be subject to the final capital gains tax of 6% imposed under Sections 24(D)(1) and 27(D)(5) of the Tax Code of 1997 depending on whether the seller is a resident individual or a corporation. The said sale shall also be subject to the documentary stamp tax imposed under Sec. 196 of the Tax Code of 1997. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation it shall be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal and Enforcement Group