BIR Ruling [DA-013-00]

January 5, 2000 BIR RULING [DA-013-00] Picazo Buyco Tan Fider & Santos Law Offices 8th, 6th and 4th Floors, Singapore Airlines Building 108 H.V. dela Costa St., Salcedo Village Makati City Attention: Atty . Gemma M . Santos Gentlemen : This refers to your letter dated November 26, 1999 requesting for a ruling that the partial rescission of the asset-for-share swap involving a portion of the Fort Bonifacio property that was privatized is not subject to income/withholding tax, capital gains tax, donor's tax, and documentary stamp tax. The facts of the case, as represented by you are as follows: 1. The Government of the Philippines ("GOP"), through the Bases Conversion Development Authority ("BCDA") bid out the Fort Bonifacio development project which was won by the Metro Pacific-led consortium; 2. That on February 10, 1995, BCDA and the consortium (which later organized and became shareholders of Bonifacio Land Corporation ("BLC") entered into a Joint Venture Contract (the "JV Contract") on the basis of which Fort Bonifacio Development Corporation ("FBDC") was organized as the joint venture corporation for the purpose of developing the 214-hectare Phase I of the Fort Bonifacio Development Project; 3. That Phase I of Fort Bonifacio would have been developed pursuant to a Master Development Plan (the "Original MDP") for the entire 440-hectare Fort Bonifacio-Villamor Air Base area; 4. That consistent with the original MDP, the GOP sold to FBDC title to 214 hectares of Fort Bonifacio in exchange for a promissory note with total face amount of P71.2 billion which is equal to the winning bid price of P33,283.88 per square meter or P71.2 billion for the entire 214 hectares; 5. The GOP then assigned the promissory note to BCDA, and BCDA used the promissory note to pay for 100% of the outstanding share capital of FBDC; 6. BCDA also assumed the obligation of the GOP to deliver full vacant possession of the 214 hectare to FBDC; 7. The transaction was effectively an asset-for-share swap between BCDA (as assignee of the rights and obligations of the GOP) and FBDC; 8. Consistent with the JV Contract, and the terms and conditions of the bid documents, BCDA subsequently sold to BLC 55% of the share capital of FBDC, thereby achieving a 55:45 ownership of FBDC between BLC and BCDA; 9. In 1995, the Original MDP was updated, and by virtue of Administrative Order No. 269 issued on April 1996, that former President Fidel V. Ramos confirmed the adoption of the updated Original MDP; 10. Under the updated Original MDP, a Sports and Recreation Area ("SRA") consisting of 64 hectares out of the 214 hectares subject of the JV Contract between BCDA and BLC would have been developed into a world-class championship golf course; 11. On October 1, 1998, President Joseph Estrada issued AO No. 25 directing BCDA to review and update and if necessary, modify or revise the existing MDPs for the former Metro Manila camps transferred to BCDA to ensure that such MDPs promote national development and are supportive of the economic and social reform policies of the Estrada Administration; 12. On February 19, 1999, President Estrada issued AO 25 directing BCDA to study the partial novation of the JV Contact, so as to allow BCDA to be released from its obligation to deliver the 64 hectares, and to plan the same in accordance with the priorities of the government. 13. On September 17, 1999 and November 26, 1999, BCDA, BLC and FBDC entered into an Agreement and an Amendatory Agreement whereby: a) The asset-for-share swap will be partially rescinded such that 64 hectares out of the total 214 hectares, valued at the winning bid price or a total of P21.3 billion will revert to BCDA; b) In partial substitution of the 64 hectares, BCDA will transfer to FBDC: (i) four (4) parcels of land. namely: (1) the CitiCenter Lot covered by TCT No. 29505 of the Registry of Deeds of Taguig, Metro Manila; (2) the Cathedral Site; (3) the Hospital Site; and (4) the Water Filtration Plant Site; and (ii) Heritage Park Certificates, consisting of 78 Garden Lots and 2,384 Lawn Lots; the aggregate value of which is estimated at P3.2 billion; c) As a result of (a) and (b), the net deduction from the asset-for-share swap will be around P18.1 billion; accordingly, the asset-for-share swap shall only be for P53.1 billion; d) As a result of the reduction of the asset-for-share swap, 9,048,282,847 FBDC shares with a total issued-value of P18.1 billion will be surrendered to, and redeemed or canceled/retired by, FBDC; the shares will come 55:45 from BLC and BCDA. Based on the foregoing you are requesting this Office for a confirmatory ruling to the effect that: "a) The return of the 64 hectares to BCDA is not subject to income/withholding tax, capital gains tax, donor's tax, and documentary stamp tax; "b) The partial substitution of the 64 hectares with the four (4) parcels of land and the Heritage Park Certificates is not subject to income/withholding tax, capital gains tax, donor's tax and documentary stamp tax; and "c) The redemption and cancellation/retirement of the 9,048,282,847 FBDC shares is not subject to income/withholding tax, capital gains tax, donor's tax and documentary stamp tax." In reply, please be informed as follows: (1) Partial rescission of a contract does not give rise to a taxable event for two reasons: (a) the result of partial rescission is that with respect to the rescinded portion, it is as if there was no sale, transfer, or exchange, and, hence, no income is realized; and (b) the return of the object of the rescinded contract is not for monetary consideration and is merely an acknowledgment or confirmation of the title and ownership of the original owner of the property. Thus, in BIR Ruling No. 059-92 dated February 18, 1992, citing Article 1191 of the Civil Code on contract rescission, it was ruled that no gain shall be recognized on the return of the real property upon the rescission of a deed of absolute sale resorted to by the buyer due to the seller's non-compliance with his obligation to deliver the realty sold. It was also ruled that the deed of rescission shall likewise be not subject to documentary stamp tax, but to the P15.00 acknowledgment receipt under Section 188 of the Tax Code. llcd Again, in BIR Ruling No. 178-94 dated December 14, 1994, it was held that a Deed of Reconveyance executed to transfer a lot to its rightful owner is not subject to tax as the same is without monetary consideration. The Deed of Reconveyance is subject only to the acknowledgment receipt of P15.00 under Section 188 of the Tax Code. And finally, in BIR Ruling No. 115-94 dated July 1, 1994, we ruled that conveyance of property to be affected through Deed of Conveyance is not subject to income tax or creditable withholding tax since the conveyance is not for monetary consideration and merely acknowledges and confirms the title and ownership of the assignee of the property transferred. It was further ruled that neither is donor's tax due because of the absence of donative intent. And, since there is no monetary consideration for the conveyance, the Deed is not subject to documentary stamp tax under Section 196 but to the acknowledgment receipt of P15.00 under Section 188 of the Tax Code. (2) In BIR Ruling No. 079-93 dated March 1, 1993, it was ruled that an Agreement to Rescind Sale with Substitution to replace the subject of the sale is not subject to capital gains tax nor to documentary stamp tax since the agreement is nothing more than a rescission of the original contract of conveyance and the substitution of the subject of the sale with another property of the same nature. Again, no donor's tax was found due because of the absence of donative intent. Accordingly, the 64 hectares of land that will be partially substituted with the four (4) lots located in the Bonifacio Global City, which are of the same nature and the Heritage Park Certificates representing title to memorial plots in Heritage Park in the Fort Bonifacio-Villamor Air Base area are likewise not subject to income/withholding tax, capital gains tax, donor's tax and documentary stamp tax. (3) The surrender to FBDC for redemption and cancellation/retirement of 9,048,282,847 FBDC shares is necessary because they have become watered stocks or without consideration in view of the reversion of the 64 hectares to BCDA. In other words, a partial rescission of the subscription to FBDC shares is a necessary consequence of the partial rescission of the asset-for-share swap. Accordingly, following the principles stated above, the reversion of FBDC shares to FBDC is not taxable since it is a mere reconveyance of the object of the rescinded contract and is not for monetary consideration. Moreover, under Section 73 of the Tax Code, only distributions made by a corporation to its shareholders out of its earnings or profits, whether in money or property are taxable. (A. Soriano Corporation v. Commissioner of Internal Revenue, CTA Case No. 3710, July 04, 1991, affirmed in Commissioner v. A Soriano Corporation and CTA, CA-G.R. SP NO. 26017, January 15, 1993; Commissioner v. Brown, CA (7) 69 F.d. 602). Under the Agreement among BCDA, BLC and FBDC, no corporate earnings or profits will be distributed by FBDC, as the redemption and cancellation./retirement of the shares is resorted merely to retire shares which have been issued without consideration, and are therefore void. Finally, BCDA and BLC will not realize any taxable gain from the redemption and cancellation/retirement of the FBDC shares. They will not receive any "net beneficial income" nor any "realized income" which is required by the Tax Code for redemption of shares to be a taxable event. 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, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue