BIR Ruling [DA-162-06]

March 27, 2006 BIR RULING [DA-162-06] Secs. 27 & 196 Tax Code; DA-488-99; DA-295-03 Aranas Consunji & Barleta Law Office Unit 106 G/F Le Metropole Condominium Tordesillas Corner Dela Costa Sts. Salcedo Village, Makati City Attention: Atty. Ma. Louella M. Aranas Gentlemen : This refers to your letter requesting on behalf of your client, Pan Pacific Industrial Sales Co., Inc., (hereinafter PANPISCO) confirmation of your opinion on the tax implications of property dividends. It is represented that PANPISCO is a domestic corporation duly organized and existing under Philippine laws; that it has an authorized capital stock of Fifty Million Pesos (P50,000,000) consisting of 5,000,000 no. of shares with a par value of P10.00 per share; that the current stockholders of record of PANPISCO include the following stockholders, hereinafter referred to as "The Stockholders": GATEWAYONE CORPORATION, GREENPACIFIC CORPORATION, CENTURYPACIFIC CORPORATION, VENTUREPACIFIC CORPORATION, FAITHMAN RESOURCES INC., JATRINA PRIME INC., FULLDOME VENTURES INC., MACH 1 INC., ELLEBERN INC., ELANICOLE INC., RINARESE INC., DRMILLES INC., TRES ALUMNOS CORPORATION, ALTIMALL CORPORATION, ROSMATIM CORPORATION, ALROSTIM CORPORATION, CREATIVE DYTECH INC., MYRANICA INC., DYWORLD INC., DYDURAN INC., KNOWLEDGE FINDS DISTRIBUTION INC., KNOWN FACTS DISTRIBUTORS INC., KINSHIP & FRIENDSHIP DISTRIBUTION INC., KOOPER & FELDMAN DISTRIBUTION INC., GMNK MULTI-RESOURCES INC., GMNK GLOBAL VENTURES INC., 2 GO GLOBAL INTERNATIONAL CORPORATION, GIMINIKKO CORPORATION. That PANPISCO owns several parcels of land with the following specifications: Location TCT No. Book Value Alvarado Street, 74799 P1,399,562.40 Legaspi Village 7244 Angono, Rizal 418771/ 15,000.00 418772 Bo. Canumay, 7018 17,419.00 Valenzuela B-4921 TOTAL P1,431,981.40 That at present, PANPISCO has accumulated retained earnings in the total amount of P17,936,425.93; that out of the said retained earnings, PANPISCO will declare property dividends, in the form of parcel of land enumerated above; that the declaration will be made at book value of the properties. DIETcC You requested for confirmation of your opinion that: 1. The property dividend which will be received by "The Stockholders" is exempt from income tax pursuant to Section 27 (D)(4) of the Tax Code of 1997; 2. The property dividend shall be recorded in both the issuing corporation's and the recipient stockholder's records at the book value of the real property at the time of the dividend distribution and shall not give rise to income tax; 3. That the Deed of Conveyance to be executed by PANPISCO and its recipient stockholders covering the real property, not being a sale and without monetary consideration, shall not be subject to documentary stamp tax under section 196 of the Tax Code of 1997. However, said deed of conveyance is subject to the documentary stamp tax of P15.00 pursuant to Section 188 of the same Code. 4. That the declaration of real property as property dividend shall not be subject to the value-added tax the same not being stocks in trade or properties primarily held for sale or lease in the regular course of trade or business. In reply, please be informed that under Section 27 (D)(4) of the Tax Code of 1997 provides as follows: " Intercorporate Dividends . Dividends received by a domestic corporation from another domestic corporation shall not be subject to tax." Considering that The Stockholders are all domestic corporations duly registered and existing under and by virtue of Philippine laws, then dividends derived by it from PANPISCO shall not be subject to tax as intercorporate dividends. Moreover, the property dividends declared and distributed by PANPISCO to The Stockholders shall be recorded at their book value in the books of both the issuing corporation and the recipient stockholders. (DA-583-99 dated October 6, 1999) Section 196 of the Tax Code of 1997 provides as follows: SEC. 196. Stamp Tax on Deeds of Sale and Conveyances of Real Property. On all conveyances, deeds, instruments, or writings, other than grants, patents or original certificates of adjudication issued by the Government, whereby any land, tenement or other realty sold shall be granted, assigned, transferred or otherwise conveyed to the purchaser, or purchasers, or to any other person or persons designated by such purchaser or purchasers, there shall be collected a documentary stamp tax, at the rates herein below prescribed, based on the consideration contracted to be paid for such realty or on its fair market value determined in accordance with Section 6(E) of this Code, whichever is higher: Provided, That when one of the contracting parties is the Government, the tax herein imposed shall be based on the actual consideration: HCTDIS (a) When the consideration, or value received or contracted to be paid for such realty, after making proper allowance of any encumbrance, does not exceed One thousand pesos (P1,000), Fifteen pesos (P15.00). (b) For each additional One thousand pesos (P1,000), or fractional part thereof in excess of One thousand pesos (P1,000) of such consideration or value, Fifteen pesos (P15.00). When it appears that the amount of the documentary stamp tax payable hereunder has been reduced by an incorrect statement of the consideration in any conveyance, deed, instrument or writing subject to such tax the Commissioner, provincial or city Treasurer, or other revenue officer shall, from the assessment rolls or other reliable source of information, assess the property of its true market value and collect the proper tax thereon. Accordingly, the sale or any other mode of conveyance of real property shall be subject to a documentary stamp tax of P15.00 on every P1,000 consideration. Clearly, the law requires that there should be monetary consideration involved in the transfer of real property for the documentary stamp tax to apply. In cases where there is no monetary consideration as such, then there is basis to argue that no documentary stamp tax should attach. In the case of dividend declaration, there is no monetary consideration unlike in a regular conveyance or disposition of real property. In BIR Ruling DA-488-99, the BIR ruled as follows: "Considering that the declaration by Program of a property dividends consisting of shares of stock of Tondo Realty Co. is not in connection with a sale and the same is without any monetary consideration, it is not subject to documentary stamp tax imposed under Section 196 of the Tax Code of 1997" Accordingly, the Deed of Conveyance to be executed between PANPISCO and its recipient stockholders covering the real property, not being a sale and without monetary consideration, shall not be subject to documentary stamp tax under section 196 of the Tax Code of 1997. However, said deed of conveyance is subject to the documentary stamp tax of P15.00 pursuant to Section 188 of the same Code. (BIR Ruling DA-488-99) In BIR Ruling No. DA-295-03 dated September 4, 2003, the BIR ruled as follows: "While the declaration of the subject real properties as property dividend is exempt from income tax, the transfer thereof to its stockholder, BPI, shall be subject to 10% value-added tax inasmuch as the real estate properties distributed as property dividend is primarily held for sale to customers or held for lease in the ordinary course of trade or business of SLDC, pursuant to Sections 106(B)(1) or 106(B)(2)(a) of the Tax Code of 1997. (BIR Ruling No. DA 075-97 dated February 24, 1997)" Accordingly, properties that are not primarily held for sale or lease in the regular course of trade or business, when declared as property dividend, is not subject to the value-added tax. IHCESD In addition, in BIR Ruling No. DA-488-99 the BIR ruled as follows: "Considering that the declaration by Program of a property dividends consisting of shares of stock of Tondo Realty Co. is not in connection with a sale and the same is without any monetary consideration, it is not subject to documentary stamp tax imposed under Section 196 of the Tax Code of 1997. Moreover, the declaration by program of the property dividend consisting of shares of stock of Tondo Realty Co . is not subject to value-added tax inasmuch as the shares of stock distributed as property dividend was not primarily held for sale to customers or held for lease in the ordinary course of business of Program . (Section 109 (w) of the Tax Code of 1997) ." Note that while the object of the property dividend above quoted are shares of stocks, the underlying asset of the said company involved real property. As such, the BIR ruled that there is neither a documentary stamp tax on the transfer of real property as well as a value-added tax on the declaration of the dividends. On the basis of the foregoing, it is hereby confirmed that the declaration of property dividends by PANPISCO to The Stockholders of real properties not primarily held for sale or lease in the regular course of trade or business shall not be subject to the value-added tax. This ruling is being issued on the basis of the foregoing facts as represented. If upon investigation it is disclosed that the facts are different from that represented, then this ruling shall be null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service