BIR Ruling [DA-102-04]

March 8, 2004 BIR RULING [DA-102-04] 27 (D); DA-245-2003 Megaworld Corporation 28/F the World Centre 330 Sen. Gil Puyat Avenue Makati City Attention: Mr. Francis C. Canuto Treasurer Gentlemen : This refers to your letter dated October 18, 2003 requesting for an opinion whether or not the transfer of a parcel of land from the Bases Conversion Development Authority (BCDA),as the trustor to Megaworld Corporation (Megaworld for brevity),as the trustee is exempt from capital gains tax/expanded withholding tax and documentary stamp tax. The facts as represented are as follows: 1. BCDA had invited proponents to participate in the Phase 2 of its Assets Disposition Program involving the development and privatization of certain areas in the Villamor Air Base, consisting of approximately two hundred forty-five thousand nine hundred sixty-six (245,966) sq.m. known as the Villamor Gateway Center; 2. On August 8, 2003, Megaworld submitted to BCDA a proposal for the purchase of certain areas of the Villamor Gateway Center consisting of approximately seventy one thousand three hundred eight (71,308) sq.m. and the development thru a joint venture of the remaining areas consisting of one hundred seventy four thousand six hundred fifty eight (174,658) sq.m.; 3. BCDA finding Megaworld's proposal to be the best and most advantageous to the government, issued a Notice of Award dated August 15, 2003 in favor of Megaworld; 4. On October 10, 2003, BCDA and Megaworld executed a Joint Venture Agreement (JVA) for the planning, construction, development and marketing of designated areas of the Villamor Gateway Center consisting of approximately 174,658 sq.m. (Subject Property); 5. Under the JVA, BCDA shall contribute all its rights, title and interest in the Subject Property, while Megaworld shall develop the Subject Property, in consideration of the receipt of their respective allocations in the Project and/or the net proceeds thereof as a return of their respective contributions; 6. For purposes of facilitating the development and enhancing the marketability of the Project, the parties have agreed to execute a Deed of Trust whereby BCDA shall authorize the transfer of legal title to the Subject Property in favor of Megaworld and the latter shall hold title to the Subject Property in trust for the parties as owners of their respective allocations in the Project; 7. Pursuant to the Deed of Trust, BCDA expressly authorizes the conveyance and transfer to Megaworld of the legal title of the following parcels of land comprising the Subject Property, all of which are beneficially owned by BCDA by virtue of Republic Act No. 7227, as amended: Lot ID Lot Area TCT Registered (in sq. m.) Number Owner Lot 2 44,478 134264 BCDA Lot 4 9,448 134266 BCD Lot 5 16,557 1,4267 BCDA Lot 6-A 1,065 Portion of 134268 BCDA Lot 7 54,196 134269 BCDA Lot 8-A, 8-V, 8-U 6,339 Portion of 134270 BCDA Lot 9-B 8,593 Portion of 134271 BCDA Block 1 11,220 137352 to 137365 BCDA Lot 7-A 2,883 Portion of 134811 RP Lot 8-A 4,229 Portion of 134811 RP Rd. Lot 4 4,011 134278 BCDA Rd. Lot 5 1,451 134279 BCDA Rd. Lot 10-A 1,930 Portion of 134811 RP Rd. Lot 11-B, 11-D 503 Portion of 134813 RP Rd. Lot 11-E 5,942 Portion of 134813 RP Lot 6-A 1,813 Portion of 134811 RP Total Area 174,658 8. The aforestated Deed likewise stated that it is the intention of both parties that all titles to the Subject Property, as well as all titles to be derived therefrom as a result of consolidation and subdivision of all or any part of the Subject Property shall be issued and registered in the name of Megaworld in trust for BCDA, and Megaworld as owners of their respective allocation in the Project; 9. The above stipulations, among others, clearly express the intention of the parties therein that the transfer of the legal title of the Subject Property is solely for the purpose of convenience of the parties in the implementation of their JVA to develop and construct the Subject Property and that no consideration was paid by Megaworld in favor of BCDA. The trust agreement shall be revocable only upon agreement by the parties, except that said Trust shall be deemed terminated upon the termination of the JVA and in accordance with its provisions. In reply, please be informed that in BIR Ruling No. 039-97 dated April 3, 1997, the BIR ruled that: "In reply, please be informed that pursuant to Section 27(D)(5) of the Tax Code of 1997, capital gains presumed to have been realized from the sale, exchange or other disposition of lands and/or buildings which are not actually used in the business of a corporation and are treated as capital assets shall be taxed at the rate of six percent (6%) based on the gross selling price or the fair market value prevailing at the time of sale, whichever is higher. However, on several occasions, this Office has ruled that conveyance of legal title over a realty to trustees without transfer of beneficial title and without any consideration does not involve an actual transfer of ownership over such realty, hence, not subject to the capital gains tax. ( BIR Ruling Nos. 039-97, 123-93, 124-93, 125-93 127-93, 128-93 and 129-93 ) "Moreover, under Section 191 of the Documentary Stamp Tax Regulations (Revenue Regulations No. 26), the conveyance of property to a trustee is exempt from documentary stamp tax Section 191 of said Regulations provides: "Section 191. Conveyance to trustees or from trustee to cestui que trust, without consideration. Conveyances to a trustee without valuable consideration, or from a trustee to a cestui que trust without valuable consideration are not subject to tax. xxx xxx xxx" Accordingly, this Office hereby confirms your opinion that (1) the transfer of the legal title over the Subject Property from BCDA, as Trustor to Megaworld, as Trustee is not subject to capital gains tax/expanded withholding tax or income tax under Sec. 27 of the Tax Code, particularly Sec. 27(D)(5) thereof; and (2) the Deed of Trust conveying the aforementioned property to Megaworld as Trustee is not subject to documentary stamp tax imposed by Sec. 196 of the Tax Code, pursuant to Section 63 and 64 of the same Tax Code and Sec. 186, Regulations No. 26 or the Revised Documentary Stamp Tax Regulations. However, the notarial acknowledgment is subject to the documentary stamp tax rate of P15.00 imposed under Section 188 of the 1997 Tax Code. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service