BIR Ruling [DA-246-03]

July 25, 2003 BIR RULING [DA-246-03] BIR Ruling DA-061-01; Sec. 24 (B) (2) J. C. Enterprises, Inc. JCS Building 119 Dela Rosa corner Carlos Palanca Street Legaspi Village, Makati City Attention: Mr. Fernando C. Cojuangco Corporate Secretary Gentlemen : This refers to your letter dated July 4, 2003, requesting confirmation of your opinion that cash or property dividends derived from retained earnings as of 31 December 1997 which are declared pursuant to a board resolution stipulating this arrangement, and distributed by your company, J.C. Enterprises, Incorporated (JCE), to its individual stockholders who are residents of the Philippine shall not be subject to income tax, withholding tax and documentary stamp tax, to wit: "1. Cash and property dividends declared and distributed by JCE on or after 1 January 1998, but forming part of retained earnings as of 31 December 1997, as evidenced by a Board of Resolution stating said dividends as such and as established by the corporation's book of account, shall not be subject to income tax, pursuant to section 24(B)(2) of the National Internal Revenue Code of 1997. 2. Section 73(C) of the aforementioned Tax Code which specifies that "any distribution made to the shareholders or members of a corporation shall be deemed to have been made from the most recently accumulated profits or surplus, and shall constitute a part of the annual income of the distributee for the year in which received" shall not yet apply to the declaration of the dividends of JCE. 3. That the property dividends to be declared shall be recorded at their book value in the books of both JCE and the recipient stockholders of JCE, and shall not give rise to income or capital gains tax. 4. That the distribution by JCE of cash and property dividend to all its existing stockholders shall not be subjected to any withholding tax: 5. That the Deed of Conveyance to be executed by JCE 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. It is represented that JCE is a corporation duly organized and existing under the laws of the Philippines; that it is engaged in the business of production, processing, purchase, sale, barter or exchange of all kinds of agricultural products; that JCE's balance sheet as audited by independent auditors Sycip, Gorres and Velayo for the year ending 31 December 1997, shows that JCE had appropriated retained earnings of P57,021,117.00; that pursuant to the Board Resolution dated 8 February 2003, the Board of Directors of JCE decided that for the year 1997, P1,112,514.26 out of P57,021,117.00 retained earnings be released and declared unappropriated retained earnings for distribution as dividends to its stockholders of record as of 31 January 2003, broken down as follows: P1,826.26 as cash dividends and P1,110,688.00 as property dividends; that the real property to be distributed as property dividends is located in Aurora Boulevard, San Juan, Metro, Manila, with a total land area of 6,135 square meters; that the aforementioned property is a capital asset of the corporation and the same does not form part of its inventory; and that said property was recorded in the books of the corporation at its book value of P1,110,688.00. Further, that the dividends will be distributed to the stockholders in proportion to their respective shareholdings in the corporation as follows: Stockholder Shares Property Cash TOTAL Subscribed Dividends Dividends Pedro Cojuanco 129,658 185,114.67 296.27 185,410.94 Josephine C. Reyes 129,664 185,114.67 304.85 185,419.52 Teresita C. Lopa 129,660 185,114.67 299.13 185,413.80 Corazon C. Aquino 129,663 185,114.67 303.42 185,418.09 Jose Cojuanco, Jr. 129,664 185,114.66 304.86 185,419.52 Paz C. Teopaco 129,661 185,114.66 300.57 185,415.23 Ernesto G. Teopaco 3 - 4.29 4.29 Nereo C. Mendoza 3 - 4.29 4.29 Ma. Elena A. Cruz 3 - 4.29 4.29 Estate of Ricardo A. Lopa 3 - 4.29 4.29 TOTAL 77,982 1,110,688.00 1,826.26 1,112,514.26 ======= ========= ======= ========= and that the property will be distributed at book value and the book values of the cash and property dividends will be charged against retained earnings of JCE as of 31 December 1997, which is more than sufficient to cover such property dividend declaration at book value. In reply, please be informed that prior to the amendments introduced into the Tax Code by R.A. 8424, which became effective on January 1, 1998, corporate dividend distribution was, in general, exempt from income tax. Beginning on the said date, dividend became subject to final withholding tax provided, however, "that the tax on dividends shall apply on income earned on or after January 1, 1998. Income forming part of retained earnings as of December 31, 1997 shall not, even if declared or distributed after January 1, 1998, be subject to this tax" (Sec. 24(B)(2), NIRC, as amended by R.A. No. 8424). The provision of Section 73(C) of the Tax Code of 1997 on source of dividend distributions provides that "any distribution made to the shareholders or members of a corporation shall be deemed to have been made from the most recently accumulated profits or surplus, and shall constitute a part of the annual income of the distributee for the year in which received." This proviso originated from the original Tax Code of 1939 (C.A. No. 466), during which time, dividend was taxable. Hence, to reconcile the existing law on source of the dividend distribution with that of the proviso of Section 24(B)(2) of the Tax Code of 1997, this Office, in BIR Ruling DA-061-01 dated April 10, 2001, opines that if a corporation had accumulated profits as of December 31, 1997, its distribution of dividends beginning 1998 and thereafter must come from the most recently accumulated profits unless a board resolution by the Board of Directors has been issued stating that the said dividends declared forms part of the Retained Earnings as of December 31, 1997. Accordingly, cash and property dividends declared and distributed by J.C. Enterprises, Inc. to its stockholders who are residents of the Philippines on or after January 1, 1998, and forming part of retained earnings as of December 31, 1997, as disclosed in JCE's Board Resolution dated October 9, 2000, stating said dividends as such and as recorded and established in the corporation's books of accounts, shall not be subject to income tax pursuant to Section 24(B)(2) of the Tax Code of 1997. Consequently, the subject cash and property dividends in the amount of P1,826.26 and P1,110,688.00, respectively, shall not be subject to any withholding tax. In addition, the property dividends 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) DTEAHI Finally, the transfer of said real property covered by TCT Nos. 40747, 39484 and 39485 to the abovenamed stockholders, not being in connection with a sale and the same is without monetary consideration, shall therefore, not subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997. However, the deed of conveyance on the said transfer shall be subject to the documentary stamp tax of P15.00 pursuant to Section 188 of the same Code. (BIR Ruling DA-061-01 dated April 10, 2001) 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