BIR Ruling [DA-145-05]

April 12, 2005 BIR RULING [DA-145-05] DA 486-04 Romulo Mabanta Buenaventura Sayoc & De Los Angeles 30th Floor CITIBank Plaza 8741 Paseo de Roxas Makati City Attention: Atty. Jacqueline Romero-Laurel and Atty. Victorina E. Calma Gentlemen : This refers to your letter dated November 24, 2004 stating that your client, Dynamic Synergy Corporation (DSC) is a domestic corporation with office address at 105 EDSA, Mandaluyong City; that it is incorporated on November 24, 1998 and is to exist for a term of 50 years from its incorporation; that it is authorized to engage in the business of trading goods such as all types of products including hardware and other general merchandise on wholesale/retail basis and shall have all the express powers of a corporation as provided for under Section 36 of the Corporation Code of the Philippines; that DSC maintains a trusteed retirement plan, the Dynamic Synergy Corporation Employees' Retirement Plan (the Plan), a duly qualified employees retirement plan within the purview of Section 32(B)(6)(a) of the Tax Code of 1997: that to cover past service costs and current liabilities, DSC intends to contribute to the trust plan three (3) parcels of land located at Barangay Saimsim, Calamba, Laguna with an aggregate book value of P3,746,340.00: TCT No. Area 509449 12,200 sq. m. 509448 242 sq. m. 509450 370 sq. m. and that the properties will be contributed at book value. Based on the foregoing representations, you now request confirmation of your opinion that the transfer of real property by DSC to its employees' duly qualified retirement plan shall not be subject to creditable withholding tax or donor's tax. In reply thereto, please be informed that in BIR Ruling No. DA486-04 dated September 10, 2004 ,this Office had already the occasion to rule on the matter when it said that "Based on the foregoing, it can be concluded that what the law contemplates as an occasion for the application of the creditable withholding tax is a sale, transfer or exchange where cash or valuable consideration is paid to the transferor in consideration for the sale or transfer of property. "The contribution by Philamlife of property to PERF to answer for its past service liability does not result in PERF paying valuable consideration to Philamlife in exchange for such property. PERF does not part with anything of value to Philamlife which may warrant the application of withholding tax. "xxx xxx xxx "The transfer, while without consideration, also cannot be considered as a donation subject to donor's tax. Under Article 725 of the Civil Code, a "(d)onation is an act of liberality whereby a person disposes gratuitously of a thing or right in favor of another, who accepts it. "xxx xxx xxx "Since the contribution by Philamlife to the employees' retirement fund is in compliance with its legal obligation to contribute therein, there is no act of liberality to speak of in this case. Thus, no donor's tax is due." Considering that the above-cited case is in all fours similar to the case at bar, this Office holds that the transfer of real property by DSC to its employees' retirement plan is not subject to the creditable withholding tax prescribed in Revenue Regulations No. 2-98, as amended, and to the donor's tax imposed under Section 98 of the Tax Code of 1997. However, in BIR Ruling No. DA436-03 dated December 3, 2003 ,this Office ruled "...while generally the contributions to an employees' trust are usually made in cash, the contribution to be made by MERALCO in the form of real property to the MERALCO Pension Fund falls under the phrase "other disposition",as contemplated in the afore-cited section, as ownership of the said property will be transferred to the MERALCO Pension Fund. Thus, a gain is presumed to have been realized the moment MERALCO transfers the aforesaid property to its Pension Fund. "IN THE LIGHT OF ALL THE FOREGOING, this Office holds that the contribution in the form of real property by MERALCO to the MERALCO Pension Fund is subject to capital gains tax and the corresponding documentary stamp tax respectively imposed under Sections 27(D)(5) and 196 of the Tax Code of 1997." SUCH BEING THE CASE, while the aforesaid transfer of real property by DSC to its employees' retirement plan is not subject to the creditable withholding tax prescribed in Revenue Regulations No. 2-98, as amended, and to the donor's tax imposed under Section 98 of the Tax Code of 1997, it is nevertheless subject to the capital gains tax and the corresponding documentary stamp tax respectively imposed under Sections 27(D)(5) and 196 of the said Code. 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.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group