BIR Ruling [DA-144-99]

March 9, 1999 BIR RULING [DA-144-99] Santiago & Santiago Ground Floor, Ortigas Building Ortigas Avenue cor Meralco Avenue Pasig City Attention: Atty. Amado R. Santiago III Gentlemen : This refers to your letter dated January 7, 1999 stating that your client, Sacobia Hills Development Corporation (SHDC) is a corporation duly organized and existing under and by virtue of the laws of the Republic of the Philippines; that it is also registered as a Clark Special Economic Zone (CSEZ) enterprise; that sometime in May 1997, SHDC and True North Golf and Country Club (True North), also a CSEZ enterprise, entered into a Development Agreement, where SHDC undertook to develop the property leased by True North into a first class championship golf course and country club; that in consideration thereof, True North assigned to SHDC 6,000 shares from the unissued capital stock of the said golf course and country club, consisting of 2,175 Golf Club Class "A" Members shares, 725 Golf Club Class "B" Members shares, 1,875 Country Club Class "C" Members shares and 1,225 Country Club Class "D" shares; that True North would hold in trust the said shares and release and deliver the same to SHDC in accordance with the percentage of completion of the project; that True North would deliver and release to SHDC the certificates of shares in blank; that SHDC will sell and transfer or sold and transferred said shares to individual buyers; and that in support of your request, you submitted the following documents: a) Articles of Incorporation of SHDC, together with its Certificate of Registration; b) Certificate of Registration No. 97-13 of SHDC; c) Certificate of Registration No. 98-59 of True North; and d) Development Agreement between True North and SHDC. In connection therewith, you now request confirmation of your opinion that "1. True North Golf and Country Club (True North) and SHDC shall not be liable to documentary stamp tax (DST) on the original issuance of the shares of stock of the former in favor of the latter; TcHCDE "2. SHDC shall neither be subject to capital gains tax on its gain from, nor subject to DST on the sale or transfer of its True North shares to third party transferees; and "3. The third party-transferees of the True North shares from SHDC may be subject to DST, unless the third party-transferees likewise enjoy exemption from DST. In reply, please be informed that Section 5 of Executive Order No. 80, creating the Clark Development Corporation as the implementing arm of the Bases Conversion Development Act to manage the CSEZ, pertinent portion of which reads: "Among others, the CSEZ shall have all the applicable incentives in the Subic Special Economic and Free Port Zone under R.A. 7227 and those applicable incentives granted in the Export Processing Zones, the Omnibus Investments Code of 1987, the Foreign Investments Act of 1991 and new investments laws which may hereinafter be enacted." aCHcIE Moreover, Section 12 (c) of R.A. 7227, otherwise known as the Bases Conversion Act reads "(c) The provisions of existing laws, rules and regulations to the contrary notwithstanding, no taxes, local and national, shall be imposed within the Subic Special Economic Zone. In lieu of paying taxes, three percent (3%) of the gross income earned by all businesses and enterprises within the Subic Special Economic Zone shall be remitted to the National Government one percent (1%) each to the local government units affected by the declaration of the zone in proportion to their population area, and other factors. In addition, there is hereby established a development fund of one percent (1%) of the gross income earned by all businesses and enterprises within the Subic Special Economic Zone to be utilized for the development of municipalities outside the City of Olongapo and the Municipality of Subic, and other municipalities contiguous to the base areas. xxx xxx xxx" Accordingly, your opinion is hereby confirmed as follows: 1) Under Section 175 of the Tax Code of 1997, a documentary stamp tax is imposed on every original issue of a certificate of stock and that is in the nature of an excise tax because it is levied upon the privilege, the opportunity and the facility of issuing the stock certificate. (Philippine Consolidated Coconut Industries vs. Collector of Internal Revenue, 70 Phil. 24) Accordingly, the payment of documentary stamp tax in this instant case, is a direct liability of the issuing corporation, True North, on the original issue of certificates of stock to SHDC. However, since True North and SHDC are liable to the preferential tax rate of 5% based on the gross income earned which shall be in lieu of local and national taxes pursuant to Section 12 (c) of R.A. No. 7227, otherwise known as the Bases Conversion and Development Act of 1992, both True North, the issuing corporation and SHDC, the party secondarily liable under Section 173 of the Tax Code of 1997 are exempt from the payment of documentary stamp tax on the original issue of stock certificates by True North to SHDC. IEaATD 2. Considering further that SHDC is subject only to the preferential tax rate of 5% on gross income earned/derived from business operations within the Secured Area or from foreign sources, [Section 4 (A) (d), Revenue Regulations No. 1-95, implementing R.A. No. 7227] the gain to be derived by SHDC from the sale of True North shares of stock to third parties shall not be subject to the capital gains tax and documentary stamp tax imposed under Section 27 (D) (2) and Section 176, both of the Tax Code of 1997. (BIR Ruling No. 129-96 dated November 26, 1996) 3. Finally, since SHDC is subject only to the preferential tax rate of 5% based on its gross income earned which shall be in lieu of local and national taxes pursuant to Section 12 (c) of R.A. No. 7227, it is exempt from the payment of documentary stamp tax imposed under Section 176 of the Tax Code of 1997, on the sale by SHDC of its True North shares of stock to third parties. On the other hand, Section 173 of the Tax Code of 1997, provides 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." Such being the case, the third party-transferees are the ones directly liable for the documentary stamp tax, unless the third party-transferees are also enjoying exemption from documentary stamp tax. 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. DAHEaT Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal & Enforcement Group)