BIR Ruling [DA-086-06]

March 6, 2006 BIR RULING [DA-086-06] 175; RR 26; 261-89 Bernaldo Mirador & Directo Law Offices Unit 1807 Cityland Condominium 10 Tower 1 6815 Ayala Ave. corner H. V. dela Costa Street Makati City Attention: Perfecto E. Mirador, Jr . Partner Gentlemen : This refers to your letter dated March 4, 2005 requesting on behalf of your client Wacker Machinery Philippines, Inc. (WMPI), for confirmation of your opinion that the sale/transfer of shares in WMPI by Interwac Holding AG to Wacker Construction Equipment AG is subject to the new rate of documentary stamp tax on the transfer of shares of stock which is P0.75 for every P200.00 and not the old rate of P1.50 for every P200.00. It is represented that WMPI is a domestic corporation duly organized and existing under the laws of the Republic of the Philippines. It is duly registered with the Philippine Economic Zone Authority (PEZA) with pioneer status. Furthermore, Interwac Holdings AG (Interwac for brevity) and Wacker Construction Equipment AG (Wacker) are both foreign corporations duly organized and existing under and by virtue of the laws of Switzerland and Germany, respectively. Originally, Interwac wholly owned WPMI until it sold/transferred its stockholdings of 1,995,995 shares to Wacker on February 3, 2004. WPMI was notified of the transaction between Interwac and Wacker sometime in April 2004 only. Since there are two rates of documentary stamp tax (DST) affecting the aforementioned dates, you posit that the rate of DST which is effective on the latter date should be used in the determination of the DST. In other words, the rate of DST to be imposed on the said transaction should be the effective rate at the time in which WPMI have had knowledge of the transaction. In reply, please be informed of the provision of Section 175 of the Tax Code of 1997, as amended, which provides: "Sec. 175. Stamp Taxes Upon Documents, Loan Agreements, Instruments and papers . Upon documents, loan agreements and papers, and upon acceptances, assignments, sales, and transfers of the obligation, right or property incident thereto, there shall be levied, collected and paid for, and in respect to the transaction so had or accomplished, the corresponding documentary stamp taxes prescribed in the following Sections of this Title, by the person making, signing, issuing, accepting, or transferring the same wherever the document is trade, signed issued, accepted, or transferred when the obligation or right arises in the Philippine sources or the property is situated in the Philippines, and at the same time such act is done or transaction had: Provided , That whenever one party to the taxable document enjoys exemption from the tax herein imposed, the other party thereto who is not exempt shall be the one directly liable for the tax." cTACIa In relation to this, it is worth mentioning the provision of Section 20 of Revenue Regulations (RR) No. 26 (Documentary Stamp Tax Regulations) which provides: "Sec. 20. Transfers of Share of Stock . Transfers of shares of stock in a corporation organized under the laws of the Philippine Islands (now Philippines) even though affected and recorded in a foreign country or beyond the territorial limits of the Philippine Islands (now Philippines), are nevertheless subject to the stamp tax, so long as transfers have actually been made and are recorded in the books of the corporation ." (emphasis supplied) It is a settled rule in our jurisprudence that the transfer of shares of stock in a domestic corporation which is owned by a foreign corporation to another foreign corporation is subject to the documentary stamp tax imposed under the Tax Code even if the transfer is effected abroad. ( BIR Ruling No. 261-89 dated December 15, 1989 ) However, this Office believes that before the DST can be imposed on the aforesaid transfer, it is necessary that the transfer should have been made known to the corporation on which shares have been affected by the transaction and also recorded in its books pursuant to Section 20 of RR No. 26. EcTCAD Since it was only in April 2004 that the transfer of the shareholdings executed on February 3, 2004 between Interwac and Wacker was made known to WMPI, the rate effective as of April 2004 should be used as basis in the determination of the DST. Previously, the rate of DST on the transfer of shares of stocks pursuant to Section 176 (now Section 175) of the 1997 Tax Code, as amended, was P1.50 on each P200.00 of the par value of such shares. With the advent of R.A. No. 9243 which took effect on March 20, 2004, the rate was reduced to P0.75 on each P200.00. Thus, it is evident that the new rate of P0.75 should be used in the determination of the DST due on the aforesaid transaction considering that the new rate was already effective during the time when the transfer of the shareholdings was made known to WMPI and the time also within which the same (sale/transfer) was recorded in the books of WMPI in consonance with Section 20 of RR No. 26. TcSaHC 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service