BIR Ruling [DA-045-03]

February 20, 2003 BIR RULING [DA-045-03] 27 (D) (2); 27 (D) (4) 039-97 dated April 3, 1997; 218-85 dated December 20, 1985 Laya Mananghaya & Co. 22/F Philamlife Tower 8767 Paseo de Roxas Makati City Attention: Atty. Francisco G. Tagao Principal, Tax & Corporate Services Gentlemen : This refers to your letter dated November 13, 2002 stating that your client, Ayala Infrastructure Ventures, Inc. (AIVI) is a domestic corporation organized and existing under Philippine laws; that AIVI owns 18.6% of MRTHI, which is a holding company; that MRTHI in turn, owns 84.9% of MRTHI2, another holding company that owns 100% of MRTC; that MRTC is the company that entered into a 25-year Build-Lease-Transfer Agreement with the Department of Transportation and Communications for the construction and commissioning of a light rail transport system along EDSA, otherwise known as the Metro Rail Transport System (MRT); that AIVI intends to sell its beneficial ownership in a portion of its stockholdings in MRTHI to an unrelated domestic corporation (Buyer); that the beneficial interest that will be transferred will consist of the rights to vote and receive dividends for the remaining period of the BLT Agreement; that the sale of the beneficial ownership will not involve a transfer of legal title over the MRTHI shares to the Buyer; that AIVI will cede only all its rights as shareholder on the MRTHI shares in favor of the Buyer, although the certificates of stock shall remain in AIVI's name; and that in consideration for the above transfer, the Buyer will issue bonds to AIVI. In your supplemental letter dated December 11, 2002, you clarified the rationale for the transfer of beneficial ownership by AIVI of its shareholdings in MRTHI; that pursuant to the Principal Credit Agreement entered into by MRTC, AIVI cannot dispose of its MRTHI shares due to the negative provisions therein, which provides that the Core Stockholders of MRTC, which includes AIVI, through its ownership of MRTHI shares, are required to maintain their ownership of at least 51% of the voting stock of MRTC shares; that in order to effect the transfer of the shares in exchange for the bonds without violating the negative covenant, AIVI proposes to sell only its rights to receive dividends and to vote on the shares to another company without transferring its legal title to the shares; that consistent with the position that the transfer of beneficial ownership is equivalent to a transfer of shares, the buyer will acquire all rights to residual income that a stockholder is entitled to at the end of the BLT period; and that the buyer will be entitled to any liquidating dividend that MRTHI may declare should the entity be dissolved at the end of the project. In connection therewith, you now request for ruling on the following: "1. The transfer by AIVI of its right to vote on shares of stock held in MRTHI coupled with the transfer of its rights to receive future dividends on such shares for a consideration, is a transfer of beneficial ownership over shares of stock; 2. The net gain of AIVI, if any, arising from the transfer of its beneficial ownership over the MRTHI shares, in exchange for bonds that the unrelated domestic corporation buyer will issue, will be subject to the capital gains tax of 5/10% under Section 27(D)(2) of the Tax Code of 1997; 3. For purposes of computing the net gain subject to the 5/10% capital gains tax rates, the allocable original cost of MRTHI shares to AIVI is deductible from the total consideration paid for the transfer of beneficial ownership of such shares; and' 4. Dividends that MRTHI will declare are considered as intercorporate dividends in the hands of the Buyer of the beneficial ownership, of the MRTHI shares, a domestic corporation, hence, exempt from income tax pursuant to Section 27(D)(4) of the Tax Code of 1997." In reply thereto, please be informed as follows: 1. The transfer of voting rights coupled with the right to receive future dividends in MRTHI shares is equivalent to the transfer of beneficial ownership of such shares to the buyer. Accordingly, it shall be subject to the corresponding taxes applicable to the sale of shares of stock. 2. In BIR Ruling No. 039-97 dated April 3, 1997, this Office ruled that "In reply, please be informed that the conveyance of the legal title over the shares to a trustee or nominee without transfer of beneficial title and without any consideration does not involve an actual transfer of ownership over the shares, hence, not subject to the capital gains tax and documentary stamp tax. Thus, your opinion that the transfer of legal title over the shares from the lodging stockholders to PCD Nominee Corp., or from PCD Nominee Corp. to the uplifting stockholders, is not subject to capital gains tax or stock transaction tax and documentary stamp tax because there is no actual transfer of ownership over the aforementioned shares of stock is hereby confirmed. (BIR Ruling Nos. UN-258-95, 123-93, 124-93, 125-93, 127-93, 128-93 and 129-93) However, the transfers of beneficial ownership over the lodged shares shall be subject to capital gains tax or stock transaction tax, as the case may be, and to documentary stamp tax." Such being the case, the proposed transfer by AIVI's beneficial ownership of the MRTHI shares shall partake of the nature of a sale of shares of stock subject to capital gains tax and the corresponding documentary stamp, tax. Accordingly, any gain, realized by AIVI from the sale of its beneficial ownership in MRTHI shares shall be subject to the applicable capital gains tax of 5% or 10% pursuant to Section 27(D)(2) of the Tax Code of 1997. Likewise, it is subject to the documentary stamp tax prescribed in Section 176 of the said Code. ISHaTA 3. Section 6(b)(1) of Revenue Regulations No. 2-82, as amended, provides that "(b) Determination of cost. The cost basis for determining the capital gains or losses shall be the basis as determined in accordance with the provisions of Section 35 of the National Internal Revenue Code, as amended, and its implementing regulations applied in the following manner: (1) If the stocks can be identified, then the cost shall be the actual purchase price plus all costs of acquisition such as commission, documentary tax, transfer fees, etc." In applying the above-cited regulations, for purposes of computing the net gain under Section 27(D)(2) of the Tax Code of 1997, the allocable original cost corresponding to the portion of the beneficial interest in the MRTHI shares shall be allowed as a deduction from the selling price. Thus, the allocable cost in the sale of beneficial ownership over the MRTHI shares shall be equivalent to the allocable portion of the acquisition cost of the MRTHI shares in the books of AIVI. Since the booked cost of the MRTHI shares is equivalent to the incurred costs in the MRT project, the amount of such cost allocable to each MRTHI share shall also be the corresponding cost allocable to the disposition of the beneficial ownership over such shares. This follows the treatment of such disposition as equivalent to a sale of shares, considering that nothing remains in AIVI after its transfer of its beneficial ownership over the MRTHI shares, other than the fact that legal title over the certificates of stock shall remain in AIVI's name. 4. Finally, any dividend that MRTHI will declare and which the beneficial owner of the shares will receive in lieu of AIVI by reason of the aforesaid transfer, shall be treated as intercorporate dividends exempt from income tax under Section 27(D)(4) 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 will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group