BIR Ruling [DA-139-04]

March 26, 2004 BIR RULING [DA-139-04] Laya Mananghaya & Co. 22/F Philamlife Tower 8767 Paseo de Roxas Makati City Attention: Atty. Francisco G. Tagao Principal, Tax & Corporate Service and Atty. Ronald L. Carreon Director, Tax & Corporate Service Gentlemen : This refers to your letter dated March 8, 2004 stating that on September 20, 2002, Delta P., Inc. (DPI), was incorporated with an initial capitalization of Ten Million One Hundred Thousand (10,100,000) shares; that except for the qualifying shares, it is a wholly owned subsidiary of Wartsila Technology Finland Oy Ab (WTOA); that the DPI was incorporated with the primary purpose: "To subscribe for, purchase or otherwise acquire, obtain interests in, own, hold, pledge, hypothecate, assign, sell at wholesale, exchange or otherwise dispose of and generally deal in and with real and personal properties and securities of every kind and description of any government, municipality or other political subdivision or agency, corporation, association or entity including, but not limited to, stocks, bonds, voting trust paper, certificates of interest or evidences of indebtedness and other securities of any nature; to exercise any and all rights, powers and privileges of ownership or interest in respect of any such securities, including the right to vote thereon or otherwise act with respect thereto; and to promote, manage, participate in and act as agent for any purchasing or selling syndicate or group of investors and otherwise take part in and assist, in any legal matter for the purchase and sale of any securities as may be allowed by law, without acting as or engaging in the business of an investment house, mutual fund, or broker dealer in securities." that WTOA, on the other hand, is a corporation organized and existing under the laws of Finland; that it is a non-resident foreign corporation; that WTOA owns certain land improvements located in Puerto Princesa, Palawan; that these land improvements are not held by if primarily for sale or held for lease in the ordinary course of trade or business; that on May 27, 2003, WTOA and DPI executed a Deed of Assignment whereby WTOA contributed these land improvements as additional paid in capital in DPI, to put the land improvements to productive use; that these land improvements include: 1. Administrative/Canteen Building; 2. Maintenance Shop and Washing Area; 3. Pump house; 4. Guardhouse; 5. Comfort room; 6. Wartsila office; 7. Comfort room; 8. Safety office and locker room; 9. Fence and gate; 10. Driveway/walkway/parking area; 11. Water storage tank; 12. Tanks consisting of LFO Tank, BFO Tank, Underground sludge tank, HFO and LFO tank foundation and pavement that the effect of the Deed of Assignment dated May 27, 2003 are: 1. WTOA is to convey and transfer all its rights, interests and title to the said land improvements valued at Three Hundred Sixty Nine Thousand Dollars (USD369,000.00) as listed in the Appraiser's Report; 2. For the transfer of the said land improvements, WTOA is to increase its investment in DPI in the form of additional paid in capital equivalent to the fair market value stated in the Independent Appraiser's Report. DPI shall not be issuing any shares of stock for such additional paid in capital. that the fair market value stated in the Independent Appraiser's Report is USD369,000.00, which is approximately Nineteen Million Five Hundred Eighty Thousand Nine Hundred Eighty Five Pesos (P19,580,985.00) calculated at the exchange rate of P53.065. Based on the foregoing representations, you now request confirmation of your opinion that the transfer of land improvements by WTOA as additional paid in capital in DPI shall have the following tax implications: "1. No income tax shall be imposed on either party as what occurred is a capital contribution not subject to income tax; "2. The transaction shall not be subject to donor's tax as there is lack of donative intent between the parties; "3. The transfer of land improvements as additional paid in capital in DPI will not be subject to documentary stamp tax (DST) under Section 196 of the Tax Code of 1997, as it is a transfer without consideration; and "4. The transfer of WTOA's land improvements to DPI will not be subject to VAT at the rate of 10% since these are real properties not held primarily for sale or held for lease in the ordinary course of trade or business pursuant to Section 109(w) of the Tax Code of 1997." In reply thereto, please be informed that your opinion is hereby confirmed as follows: 1&2. Section 56 of Revenue Regulation No. 2, otherwise known as the "Income Tax Regulations" reads "Sec. 56. Contributions by shareholders . Where a corporation requires additional funds for conducting its business and obtains such needed money through voluntary process payments by its shareholders, the amounts so received being credited to its surplus account or to a special capital account, will not be considered income, although there is no increase in the outstanding shares of stock of the corporation. The payments in such circumstances are in the nature of voluntary assessments upon, and represent an additional price paid for, in shares of stock held by the individual shareholders, and will be treated as an addition to and as part of the operating capital of the company." Consequently, the fair market value of the land improvements, as so appraised, being credited to its surplus account or to a special capital account ( i.e. , additional paid-in capital), being a capital investment, is not within the purview of the term "taxable income" as defined in Section 32 of the Tax Code of 1997. Consequently, WTOA's contribution consisting of land improvements will not be subject to income tax. In BIR Ruling No. DA221-02 dated November 25, 2002, and later reiterated in BIR Ruling No. DA117-03 dated April 14, 2003, this Office had the occasion to rule on the matter, when it said that ". . . that the additional contribution in the form of donated surplus without the necessity of issuing additional shares of stock is deemed capital investment which is not included within the purview of the term "taxable income" and is not subject to income tax. In another occasion, it was also ruled that the additional capital contribution without necessarily issuing additional shares of stock, which merely increase the basis of the stockholders' stock but not their proportionate equity in the corporation, is a transaction not subject to income or gift taxes. "Accordingly, the infusion of APIC by US Filter into Vivendi-Phils. is in the nature of additional funds which will be used as, and forms part of, the latter's working capital for which no corresponding shares of stock will be issued. As such, the APIC does not constitute an income on the part of Vivendi-Phils." Such being the case, the transfer by WTOA of its land improvements for the purpose of increasing its investment in DPI in the form of additional paid in capital, without the latter issuing any shares of stock, is not subject to income tax and donor's tax. 3. Section 285 of Revenue Regulations No. 26, otherwise known as the Documentary Stamp Tax Regulations provides that "Sec. 185. Conveyances without consideration . Conveyances of realty not in connection with a sale, to trustees or other persons without consideration are not taxable. Considering that WTOA is transferring the land improvements without the corresponding issuance of additional shares of stock, the investment will be considered a contribution of additional paid in capital, not subject to documentary stamp tax as this is a conveyance of realty without any consideration and not made in connection with a sale. ( BIR Ruling No. DA150-03 dated May 7, 2003 ) 4. Section 105 of the. Tax Code of 1997 provides that any person, who in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to the value-added tax (VAT). The phrase "in the course of trade or business" means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a nonstock, nonprofit private organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members or their guests), or government entity. Since the subject land improvements being transferred are not held primarily for sale or lease in the ordinary course of trade or business of WTOA, and the said properties had remained idle and unproductive, the transfer of the aforesaid properties to DPI is considered a transaction not subject to the 10% VAT. 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. TCcIaA Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group