BIR Ruling [DA-061-01]

April 10, 2001 BIR RULING [DA-061-01] Sec. 24 (B) (2) DA-583-99 & 203-99 DA-77-98 Transunion Corporation 3rd Floor, Union Ajinomoto Building 331 Sen. Gil J. Puyat Avenue Makati City, Metro Manila Attention: Atty . Miguel B . Varela President Gentlemen : This refers to your letter dated December 19, 2000 requesting for a ruling that cash or property dividends coming from retained earnings as of December 31, 1997 which are declared pursuant to a Board Resolution specifying this arrangement, and distributed by Transunion Corporation (Transunion), to its individual stockholders who are residents of the Philippines shall not be subject to income tax, withholding tax and documentary stamp tax. It is represented that Transunion is a corporation duly organized and existing under the laws of the Republic of the Philippines and all of its stockholders are residents of the Philippines; that it is engaged in the business of importing, exporting, buying and selling, marketing or dealing in all kinds of merchandise and that the properties to be distributed as dividends were initially intended for industrial purposes; that ever since Transunion acquired the subject properties, no improvements have been introduced thereon and have remained idle; that the said properties have been used in the trade or business of Transunion, and the same do not form part of its inventory, that the subject properties were not acquired nor held for speculative purposes and they are not subject to depreciation; that the subject lands to be distributed as property dividends are capital assets; that its balance sheet as audited by the independent auditor Fabian E. Sta. Ana, for the year ending December 31, 1997, shows that Transunion has an appropriated retained earnings of P120,000,000.00; that pursuant to a Board Resolution dated August 15, 2000, the Board of directors of Transunion decided that P20,000,000.00 out of the P120,000,000.00 retained earnings appropriated for corporate expansion be freed up and declared as appropriated; that subsequently, on October 9, 2000, the Board of Directors of Transunion decided that out of the P20,000,000.00 that was freed up and declared unappropriated retained earnings for the year 1997, the amount of P9,541,587.23 be declared as dividends to its respective stockholders as of September 30, 2000, broken down as follows: P7,357,301.23 cash dividends and P2,184,286.00 property dividends; that said dividends were distributed among the stockholders in the following manner: declared unappropriated retained earnings for the year 1997, the amount of P9,541,587.23 be declared as dividends to its respective stockholders as of September 30, 2000, broken down as follows: P7,357,301.23 cash dividends and P2,184,286.00 property dividends; that said dividends were distributed among the stockholders in the following means: Stockholder Property Cash TOTAL Carlos Ty 1,306,710.83 1,306,710.83 George Ty 1,306,710.83 1,306,710.83 Alexander Ty Cavite 229,690 sqm 605,926.00 700,784.83 1,306,710.83 Lawrence Ty QC 11,274 sqm 1,578,360.00 1,363,511.72 2,941,871.72 Erlinda Ty 1,008,450.36 1,008,450.36 Luisa Cheng 328,421.43 328,421.43 Ofelia Reyes 328,421.43 328,421.43 Cristina Say 328,421.43 328,421.43 Mina Lim 328,421.43 328,421.43 Benita Lim 328,421.43 328,421.43 Victoria Delos Reyes 76.33 76.33 Miguel Varela 9,732.42 9,732.42 Diana Ty 19,216.76 19,216.76 TOTAL 2,184,286.00 7,357,301.23 9,541,587.23 =========== ========== ========== It is your belief that notwithstanding Section 73 of the Tax Code, the provision in Section 24(B)(2) of the same Tax Code (pertinent portions of both Sections you quoted below) shall still apply on the declaration and distribution of cash or property dividends by Transunion to its individual stockholders who are resident of the Philippines where such declaration is covered by a Board Resolution dated October 9, 2000, providing that the dividends to be distributed shall come from retained earnings as of December 31, 1997. Hence, under this circumstance, dividends coming from retained earnings as of December 31, 1997 shall not be subject to income tax if paid by Transunion to individuals residing in the Philippines. Section 24 (B)(2) of the Tax Code provides as follows: "(2) Cash and/or Property Dividends . A final tax at the following rates shall be imposed upon the cash and/or property dividends actually or constructively received by an individual from a domestic corporation or from a joint stock company, insurance or mutual fund companies and regional operating headquarters of multinational companies, or on the share of an individual in the distributable net income after tax of a partnership (except a general professional partnership) of which he is a partner, or on the share of an individual in the net income after tax of an association, a joint account, or a joint venture or consortium taxable as a corporation of which he is a member or co-venturer: Six percent (6%) beginning January 1, 1998; Eight percent (8%) beginning January 1, 1999; Ten percent (10%) beginning January 1, 2000. Provided, however, That the tax on dividends shall apply only on income earned on or after January 1, 1998. Income forming part of retained earnings as of December 31, 1997 shall not, even if declared or distributed on or after January 1, 1998, be subject to this tax." IAcTaC On the other hand. Section 73(C) of the same Code provides: "Any distribution made to the shareholders or members of a corporation shall be deemed to have been made from the most recently accumulated profits or surplus, and shall constitute a part of the annual income of the distributee for the year in which received." In the light of the foregoing, you would like us to confirm the following: 1. Section 73 (C) of the Tax Code of 1997 shall not yet apply to the declaration of dividends of Transunion. 2. Cash and property dividends declared and distributed by Transunion on or after January 1, 1998, but forming part of retained earnings as of December 31, 1997, as shown by a Board Resolution stating said dividends as such as established by the corporation's books of account, shall not be subject to income tax, pursuant to Section 24 (B)(2) of the same Tax Code. 3. That the property dividends to be declared shall be recorded at their book value in the books of both Transunion and the recipient stockholders of Transunion. 4. That distribution by Transunion of cash and property dividends to all its existing stockholders shall not be subject to any withholding tax. 5. That the Deed of Conveyance to be executed by Transunion and the recipient stockholders covering the real properties, not being a sale and without monetary consideration, shall not be subject to documentary stamp tax under Section 196 of the Tax Code of 1997. In reply, please note that prior to the amendments introduced into the Tax Code by RA. 8424, which became effective on January 1, 1998, corporate dividend distribution was, in general, exempt from income tax. Beginning on the said date, dividend became subject to final withholding tax provided, however, "that the tax on dividends shall apply on income earned on or after January 1, 1998 . Income forming part of retained earnings as of December 31, 1997 shall not, even if declared or distributed on or after January 1, 1998, be subject to this tax . " (Sec. 24 (B)(2), NIRC, as amended by RA. 8424). The provision of the NIRC on source of dividend distribution provides that "Any distribution made to the shareholders or members of a corporation shall be deemed to have been made from the most recently accumulated profits or surplus, and shall constitute a part of the annual income of the distributee for the year in which received." (Sec. 73(C), NIRC) This proviso originated from the original Tax Code of 1939 (C.A. No. 466), during which time, dividend was taxable. Hence, to reconcile the existing law on source of the dividend distribution with that of the proviso of Sec. 24 (B)(2) of the Tax Code of 1997, this Office is of the opinion that if a corporation had accumulated profits as of December 31, 1997, its distribution of dividends beginning 1998 and that after must come from the most recently accumulated profits unless a board resolution by the Board of Directors has been issued stating that said dividends declared forms part of the Retained Earnings as of December 31, 1997. Accordingly, cash and property dividends declared and distributed by Transunion to its stockholders who are residents of the Philippines on or after January 1, 1998, but forming part of retained earnings as of December 31, 1997, as shown by its Board Resolution dated October 9, 2000, stating said dividends as such and as established by the corporation's books of account, shall not be subject to income tax pursuant to Section 24 (B)(2) of the 1997 Tax Code. Consequently, the subject cash and property dividends shall not be subject to any withholding tax. In addition, the property dividends shall be recorded at their book value in the books of both the issuing corporation and the recipient stockholders. (DA-583-99 dated October 6, 1999) Finally, the transfer of said real properties to your stockholders, not being in connection with a sale and the same is without monetary consideration, this Office is of the opinion that the proposed deed of conveyance to effect the transfer of such property dividends to your stockholders is not subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997. However, said deed of conveyance is subject to the documentary stamp tax of P15.00 pursuant to Section 188 of the same Code. (DA-77-98 dated March 12, 1998) 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, Commissioner of Internal Revenue By: (SGD.) EDMUNDO P. GUEVARA Deputy Commissioner Legal and Inspection Group