Baniqued & Baniqued

March 14, 2008 BIR RULING [DA-162-08] 27; 174; 175; 196 Baniqued & Baniqued 8/F Jollibee Centre, San Miguel Avenue Pasig City Attention: Atty. Terence Conrad H. Bello and Atty. Kathleen L. Saga Gentlemen : This refers to your letter dated February 14, 2008 requesting, on behalf of your client, San Miguel Corporation (SMC), confirmation of your opinion, viz.: (a) The Exchange Transaction is subject to documentary stamp tax (DST) on (i) the original issuance of shares pursuant to the application for increase of authorized capital stock in accordance with Section 174 of the National Internal Revenue Code of 1997 (the Tax Code); (ii) the transfer of shares in SMC Yamamura Fuzo Molds Corporation (SMCYFMC) pursuant to Section 175 of the Tax Code; and (iii) the transfer of the Rightpak Building pursuant to Section 196 of the Tax Code. (b) The deed of exchange transaction is subject to creditable withholding tax (CWT) on the transfer of the Rightpak Building at the rate of 6% based on the consideration for the transfer or fair market value whichever is higher pursuant to Section 2.57.2 (J) of Revenue Regulations No. 2-98, as amended. (c) The gain, if any, from the transfer of the SMCYFMC shares owned by SMC to San Miguel Packaging Specialist Inc. (SMPSI) is subject to the 5%/10% capital gains tax (CGT) pursuant to Section 27 (D) (2) of the Tax Code. aEcTDI (d) The transfer of the Rightpak Building is subject to value-added tax (VAT) pursuant to Section 105 of the Tax Code and Section 4.106-3 of Revenue Regulations No. 16-2005, as amended. (e) The transfer of the SMCYFMC shares and the receivables is not subject to VAT since they are considered as capital assets and the sale of the same is considered an isolated transaction not subject to VAT. relative to the tax consequences of the deed of exchange (Exchange Transaction) entered into between SMC and its wholly owned affiliate, SMPSI. It is represented that SMC is currently undergoing corporate restructuring in order to improve business efficiency; that in line with this corporate restructuring effort, on December 18, 2007, four deeds of exchange were executed and entered into between SMC and its wholly-owned subsidiary, SMPSI; that the Exchange Transaction involves the transfer of the following properties to SMPSI in exchange for additional SMPSI stock: (1) receivables; (2) building; (3) office equipment; and (4) shares of stock; that since SMPSI had insufficient capital to absorb all of the transferred properties, an application for increase of authorized capital stock and an application for the confirmation of the valuation of the receivables had to be secured from the Securities and Exchange Commission (SEC); that the SEC approval for the increase in authorized capital stock and the confirmation of the transfer value were issued on January 21, 2008; and that the reckoning point for the payment of the foregoing taxes is the date of approval of the application for increase in capital of capital stock by the SEC which is January 21, 2008. In reply, please be informed that the following are the tax consequences of the foregoing deed of exchange transaction: 1. Documentary Stamp Tax (DST) Section 174 of the Tax Code provides: "Section 174. Stamp Tax on Original Issue of Shares of Stock. On every original issue, whether on organization, reorganization or for any lawful purpose, of shares of stock by any association, company or corporation, there shall be collected a documentary stamp tax of One peso (P1.00) on each Two hundred pesos (P200), or fractional part thereof, of the par value, of such shares of stock: Provided, That in the case of the original issue of shares of stock without par value the amount of the documentary stamp tax herein prescribed shall be based upon the actual consideration for the issuance of such shares of stock: Provided, further, That in the case of stock dividends, on the actual value represented by each share." cTESIa Thus, the original issuance of shares pursuant to the application for increase of authorized capital stock is subject to DST of One peso (P1.00) on each Two hundred pesos (P200), or fractional part thereof, of the par value, of such shares of stock, in accordance with Section 174 of the Tax Code. Section 175 of the Tax Code provides: "SEC. 175. Stamp Tax on Sales, Agreement to Sell, Memoranda of Sales, Deliveries or Transfer of Shares or Certificates of Stock. On all sales, or agreements to sell, or memoranda of sales, or deliveries, or transfer of such securities by assignment in blank, or by delivery, or by any paper or agreement, or memorandum or other evidences of transfer or sale whether entitling the holder in any manner to the benefit of such stock, or to secure the future payment of money, or for the future transfer of any such stock, there shall be collected a documentary stamp tax of seventy-five centavos (P0.75) on each Two hundred pesos (P200), or fractional part thereof, of the par value of such stock: Provided, That only one tax shall be collected on each sale or transfer of stock from one person to another, regardless of whether or not a certificate of stock is issued, indorsed, or delivered in pursuance of such sale or transfer: and Provided, further, That in the case of stock without par value the amount of the documentary stamp tax herein prescribed shall be equivalent to twenty-five percent (25%) of the documentary stamp tax paid upon the original issue of said stock." Thus, the transfer of shares in SMCYFMC is subject to DST of seventy-five centavos (P0.75) on each Two hundred pesos (P200), or fractional part thereof, of the par value of such stock pursuant to Section 175 of the Tax Code. Section 196 of the Tax Code provides: "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: AEIHaS (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." Thus, the transfer of the Rightpak Building is subject to DST of P15.00 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 or P15.00 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, pursuant to Section 196 of the NIRC. 2. Creditable Withholding Tax (CWT) Since the Rightpak Building is being leased out by SMC to SMPSI, it is property used in business and therefore, an ordinary asset. Thus, the transfer of the Rightpak Building is subject to CWT at the rate of 6% of the sale consideration or fair market value of the building, whichever is higher, pursuant to Section 2.57.2 (J) of Revenue Regulations No. 2-98, as amended. 3. Capital Gains Tax (CGT) Section 27 (D) (2) of the Tax Code provides: "SEC. 27. Rates of Income Tax on Domestic Corporations. (A) (B) (C) (D) Rates of Tax on Certain Passive Incomes. cCSEaA (1) (2) Capital Gains from the Sale of Shares of Stock Not Traded in the Stock Exchange. A final tax at the rates prescribed below shall be imposed on net capital gains realized during the taxable year from the sale, exchange or other disposition of shares of stock in a domestic corporation except shares sold or disposed of through the stock exchange: "Not over P100,000 5% "Amount in excess of P100,000 10%" Since SMC is not a dealer in securities, the shares in SMCYFMC are considered capital assets of SMC and thus the gain, if any, from the sale of the said shares is subject to the 5%/10% CGT pursuant to Section 27 (D) (2) of the Tax Code. 4. Value Added Tax Section 105 of the Tax Code provides: "Section 105. Persons Liable. 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) imposed in Sections 106-108 of this Code. The value-added tax is an indirect tax and the amount of tax may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services. This rule shall likewise apply to existing contracts of sale or lease of goods, properties or services at the time of effectivity of Republic Act 7716. 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 non-stock, non-profit private organization (irrespective of the disposition of the net income and whether or not it sells exclusively to members or their guests), or government entity." ATcaHS Since SMC leases out the Rightpak Building to SMPSI and being a property held for lease in the ordinary course of trade or business of SMC, the transfer of the Rightpak Building is subject to VAT pursuant to Section 105 of the Tax Code and Section 4.106-3 of Revenue Regulations No. 16-2005. The transfer of SMCYFMC shares, being capital assets, is a sale not made in the course of trade or business of SMC, and thus the transfer of the same is not subject to VAT. The transferred receivables are non-trade in nature ( i.e., debt/advances), hence, considered as a capital rather than an ordinary asset. Hence, not being a sale in the ordinary course of the trade or business of SMC, the assignment of the receivables is not subject to VAT [BIR Ruling No. DA 435-2003 dated December 3, 2003]. Time for Payment As a general rule, the documentary stamp tax imposed on original issuance of shares of stock accrues at the time the shares are issued. 1 A certificate/share of stock is deemed 'issued' for the purpose of imposing the documentary stamp tax, at the time of release of the stock certificate (document as properly filled up) to the stockholder, the actual or constructive possession by the stockholder of the certificate of stock being immaterial and of no consequence. 2 The certificate as issued by the corporation, irrespective of whether or not it is in the actual or constructive possession of the stockholder, is considered issued because it is with value, meaning, the certificate of stock can be utilized for the exercise of the attributes of ownership over the stocks mentioned on its face, and thus, the stocks, can be alienated; dividends or fruits derived therefrom can be enjoyed, and they can be conveyed, pledged or encumbered. 3 The exception to the above rule is with regard to those issued certificates of stocks temporarily subject to suspensive conditions, such as, but not limited to, conditions set forth by the SEC for the protection of the general public or when the shares issued is coming from the increased authorized capital stock which needs prior approval by the SEC. These certificates shall only be liable to the documentary stamp tax only when released from said conditions or when increase of the authorized capital stock is approved by the SEC, for then and only then shall these certificates truly acquire any practical value for their owners. 4 Thus in the case of SMC and its affiliate, although the Exchange Transaction was entered into on December 18, 2007, the necessary SEC approval to complete the transaction was only issued on January 21, 2008. Therefore, for purposes of payment of the appropriate taxes, the reckoning point should be January 21, 2008. The approval of the SEC is a suspensive condition, the happening of which triggers the completion of the transaction and subsequently, the payment of taxes. CDHAcI The consideration for the properties to be transferred by SMC to SMPSI is the shares of stock which will come from the increase of capital stock of SMPSI. If the SEC does not approve the increase, a taxable event would not arise since the Exchange Transaction cannot be completed due to lack of consideration. (BIR Ruling No. 317-2004 dated June 10, 2004, Professional Service Inc. v. Commissioner of Internal Revenue, CTA Case No. 6218 dated December 4, 2002, Universal Molasses Corporation v. Commissioner of Internal Revenue, CTA Case No. 5467 dated March 26, 1999) The approval of the increase in capital stock by the SEC is considered a suspensive condition, the happening of which triggers the completion of the Exchange Transaction and subsequently, the payment of the taxes. If the SEC did not approve the application for increase in capital stock then there would be no consideration for the Exchange Transaction. Consequently, in the absence of a valid consideration, no taxable event arises upon which taxes may be imposed because the Exchange Transaction cannot be completed. In view of the foregoing, this Office confirms your opinion that the tax consequences of the deed of exchange transaction are as follows: (a) The Exchange Transaction is subject to documentary stamp tax (DST) on (i) the original issuance of shares pursuant to the application for increase of authorized capital stock in accordance with Section 174 of the National Internal Revenue Code of 1997 (the Tax Code); (ii) the transfer of shares in SMC Yamamura Fuzo Molds Corporation (SMCYFMC) pursuant to Section 175 of the Tax Code; and (iii) the transfer of the Rightpak Building pursuant to Section 196 of the Tax Code. (b) The deed of exchange transaction is subject to creditable withholding tax (CWT) on the transfer of the Rightpak Building at the rate of 6% based on the consideration for the transfer or fair market value whichever is higher pursuant to Section 2.57.2 (J) of Revenue Regulations No. 2-98, as amended. (c) The gain, if any, from the transfer of the SMCYFMC shares owned by SMC to SMPSI is subject to the 5%/10% capital gains tax (CGT) pursuant to Section 27 (D) (2) of the Tax Code. EDIHSC (d) The transfer of the Rightpak Building is subject to value-added tax (VAT) pursuant to Section 105 of the Tax Code and Section 4.106-3 of Revenue Regulations No. 16-2005, as amended. (e) The transfer of the SMCYFMC shares and the receivables is not subject to VAT since they are considered as capital assets and the sale of the same is considered an isolated transaction not subject to VAT. The reckoning point for the payment of the foregoing taxes is the date of approval of the application for increase in capital of capital stock by the SEC which is January 21, 2008. 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, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Footnotes 1. Revenue Regulations No. 9-94. 2. Phil. Consolidated Coconut Ind., Inc. v. Coll. of Int. Rev., 70 SCRA 26, 27-28. EAIaHD 3. Phil. Consolidated Coconut Ind., Inc. v. Coll. of Int. Rev, Ibid. 4. CIR v. Construction Resources of Asia Inc. et al., 145 SCRA 671.