BIR Ruling [DA-250-98]

June 19, 1998 BIR RULING [DA-250-98] Piedras Petroleum Co., Inc. IRC Building 82 EDSA Mandaluyong City Attention: Mr . Reynaldo Guiao Gentlemen : This refers to your letter dated May 27, 1998 requesting for opinion as to whether or not the declaration by Piedras Petroleum Co., Inc. (PIEDRAS) of cash and property dividends in favor of stockholders pursuant to Board Resolution No. 3-13-94 dated September 13, 1994 is exempt from the payment of income, withholding, value-added tax (VAT) and documentary stamp taxes. llcd It is represented that PIEDRAS is a corporation duly existing and organized in accordance with the laws of the Philippines primarily engaged in the exploration, exploitation, mining, purchase and sale of petroleum products, gas, oil, minerals and other volatile substances with an authorized capital stock of Twenty Million Pesos (P20,000,000.00) divided into Two Billion (2,000,000,000) shares with a par value of One Centavo (P0.01) per share; that of the amount of capital stock. Ten Million Pesos (P10,000,000.00) worth of shares is issued and outstanding and Five Million Pesos (P5,000,000.00) is paid up, as follows: Government P4,287,500.00 (6/7) Rodolfo T. Arambulo P712,500.00 (1/7) that on September 13, 1994, PIEDRAS, in Board Resolution No. 3-13-94, declared cash and property dividends out of surplus profits to stockholders of record as of September 13, 1994 and approved the same for implementation on October 11, 1994; that of the total dividend declaration, the amount of One Hundred Forty Four Million One Hundred Twenty Four Thousand Five Hundred Eighteen Pesos (P144,124,518.00) is due and payable to Mr. Rodolfo T. Arambulo; and that, however, the dividends due to Mr. Arambulo were not paid and delivered to him in 1994 pursuant to Board Resolution No. 3-13-94 because questions on the ownership by Mr. Arambulo of his PIEDRAS shares were raised by the Philippine Commission on Good Government (PCGG). It is also represented that on July 4, 1997 and February 3, 1998, the Sandiganbayan, in two final and executory Resolutions in Civil Case No. 0034, held that Mr. Arambulo is the subscriber-owner of One Hundred Forty Five Million (145,000,000) shares issued by PIEDRAS and, accordingly, ordered the PCGG, as sequestrator of the said shares and/or as holder of the great majority of stock in PIEDRAS acting through its Board of PCGG nominated directors (1) to release in favor of Rodolfo T. Arambulo all the dividends corresponding to his PIEDRAS shares; and (2) to cease from interfering with and/or obstructing the peaceful exercise of his rights of ownership over the PIEDRAS shares, including the right to vote and be voted for; that accordingly, the PIEDRAS Board passed Board Resolution No. 1-SM-3-27-98 directing the release and delivery of the dividends due to Mr. Arambulo pursuant to its Board Resolution No. 3-13-94, out of its unrestricted retained earnings amounting to Nine Hundred Ninety Nine Million Four Hundred Seventy Three Thousand Three Hundred Seventy Six and Sixty Seven Centavos (P999,473,376.67) as of December 31, 1994. It appears that in view of the PCGG's manifestation and admission in its Opposition (to Motion for Issuance of Writ of Execution) dated March 12, 1998 and filed with the Sandiganbayan, "the PCGG does not hold dividends declared by PIEDRAS, PIEDRAS has never been sequestered by PCGG and the said Corporation is a private corporation with a personality of its own"; that Mr. Arambulo should demand payment of his dividends from PIEDRAS and not from the PCGG; and that PIEDRAS Board of Directors is left alone and held responsible for compliance with the Court Resolutions, Orders and the Writ of Execution. prcd Accordingly, for the purpose of complying/satisfying with the Writ of Execution in Sandiganbayan Civil Case No. 0034 dated March 26, 1998, PIEDRAS Board Resolution No. 1-SM-3-27-98 authorized the implementation of the previous Board Resolution No. 3-13-94, by conveying parcels of land located in Mariveles, Bataan and covered by Transfer Certificates of Title Nos. 81834, 81835, 81837, 81838, 81839 and 163207 as property dividends due to Mr. Arambulo. In reply, please be informed as follows: 1. The declared property dividends which shall be received by Mr. Rodolfo T. Arambulo from PIEDRAS shall be subject to a final withholding tax of zero percent (0%), and the receiving stockholders shall not be subject to any income or capital gains tax arising from his receipt of the real properties as property dividends pursuant to then Section 21(c)(2) of the Tax Code, as amended by Executive Order No. 37, and consequently to the withholding tax under Revenue Regulations No. 1-90, implementing then Section 50(b) of the Tax Code, as amended, considering that the same was declared out of the surplus profits to stockholders of record as of September 13, 1994 and the same was approved for implementation on October 11, 1994 under PIEDRAS Board Resolution No. 3-13-94 and finally reiterated in PIEDRAS Board Resolution No. 1-SM-3-27-98 in compliance with the Writ of Execution in Sandiganbayan Civil Case No. 0034 dated March 26, 1998. Furthermore, PIEDRAS shall not be subject to any income or capital gains tax on the difference between the fair market value and the book value of the property dividends. This is because there is no realized gain, considering the fact that the value used at the time of distribution is the book value. The property dividends shall be recorded at book value in the books of both the issuing corporation and the recipient stockholder. BIR Ruling No. 21(c)(2)-028-89-130-89, applying Sections 250 and 251 Revenue Regulations No. 2, stating that dividends paid in securities or other property (other than its own stock) in which the earnings of a corporation have been invested, are income to the recipients to the amount of the full market value of such property when received by individual stockholders has already been modified, having been rendered obsolete by Executive Order No. 37 (effective August 1, 1986), subjecting to income tax at 0% effective January 1, 1989 dividends received from a domestic corporation and the share of an individual partner in a partnership subject to tax under Section 24(a) of the Tax Code, as amended (BIR Ruling No. 276-91 dated December 26, 1991). 2. Pursuant to Section 4.100-4 of Revenue Regulations No. 7-85 dated December 9, 1995, property dividends which constitute stocks in trade or properties primarily held for sale or for lease declared out of retained earnings on or after January 1, 1996 and distributed by the company to its shareholders shall be subject to VAT. Considering that the subject real properties declared as property dividends do not constitute stocks in trade or properties which are not primarily held for sale or for lease in the ordinary course of business, PIEDRAS shall not be subject to the value added tax (VAT) on its distribution of property dividends in favor of its stockholder. (VAT Ruling No. 55-97 and BIR Ruling Nos. 263-97 dated August 6, 1997 and DA-401-97 dated December 1, 1997) 3. Finally, considering that the transfer of the real properties to the stockholder, Mr. Rodolfo T. Arambulo, is not in connection with a sale but as property dividends and the same is without monetary consideration, the Deed of Conveyance to be executed to effect the transfer of such property dividends to the said stockholder of PIEDRAS is not subject to the documentary stamp tax imposed under then Section 196 of the Tax Code, as amended. The acknowledgment, however, of said Deed of Conveyance is subject to the documentary stamp tax of P15.00 pursuant to then Section 186 of the Tax Code, as amended. (BIR Ruling No. DA-263-97 dated August 6, 1997). 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.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal and Enforcement Group)