BIR Ruling [DA-280-99]

May 13, 1999 BIR RULING [DA-280-99] SGV & Co. 6760 Ayala Avenue 1226 Makati City Attention: Atty. C.P. Noel Tax Division Gentlemen : This refers to your letter dated April 22, 1998 requesting for a ruling that the declaration and distribution of property dividends by your client, Graphic Arts Service, Inc. (Graphic Arts), to its stockholders of records as of August 31, 1996 out of its unrestricted retained earnings as of December 31, 1995 is not subject to income and value added tax. Documents submitted to this Office disclosed that Graphic Arts is a domestic corporation organized and existing under Philippine laws; that as of December 31, 1995, it had total stockholders' equity of Ninety Two Million Two Hundred Thousand One Hundred Seventy Four Pesos and 23/100 (P92,200,174.23), which includes unrestricted retained earnings in the amount of Forty Nine Million Seven Hundred Thirty Eight Thousand One Hundred Seventy Four Pesos & 23/100 (P49,738,174.23); that a resolution was adopted at the special Joint Meeting of the Board of Directors and Stockholders on August 31, 1996, for the declaration and distribution of dividends consisting of (a) properties classified as capital assets of the company since these are not used in business and are not generating income, and (b) cash, out of the unrestricted retained earnings as of December 31, 1995 payable to all stockholders of record as of the date of the special Joint Meeting; that the majority stockholders are to receive property dividend with book value of Twelve Million Seven Hundred Ninety Five Thousand Two hundred Seventy Eight Pesos & 31/100 (P12,795,278.31 representing 8.9189% of the company's total assets, while the minority stockholders will receive 30% cash dividend as follows: No. of Proportionate Interest Stockholders Shares Held In Property Dividend Elena R. de Guerrero 211,044 0.498490668 Alfredo R. Guerrero 106,445 0.251425480 Xavier R. Guerrero 105,877 0.250083852 Sub-Total 423,366 1.000000000 ====== ========== Amount of Cash Dividend Luisita P. Guerrero 119 P3,570.00 Enrico M. Santiago 30 900.00 Fernando R. Pimentel, Jr. 13 390.00 Jaime R. Blanco 6 180.00 Cresenciana P. Paguio 1 30.00 Francisco C. Zamora 1 30.00 Sub-Total 170 P5,100.00 === ======== Description/Location of Properties Book Value TCT No. 120862 A parcel of land (Lot 3) situated in Bo. Alabang, Muntinlupa, with an area of 1,000 sq. meters P300,000.00 TCT No. 120853 A parcel of land (Lot 4) situated in Bo. Alabang, Muntinlupa, with an area of 1,000 sq. meters P300,000.00 TCT No. 139277 A parcel of land (Lot 8) situated in Bo. Alabang, Muntinlupa, with an area of 810 sq. meters 307,800.00 TCT No. 118908 A parcel of land (Lot 7) situated in Bo. Alabang, Muntinlupa, with an area of 450 sq. meters 36,297.98 TCT No. PT-89666 A parcel of land (Lot 8) situated in Bo. Bagong Ilog, Pasig, with an area of 1,066 sq. meters 903,069.47 TCT No. PT-89667 A parcel of land (Lot 7-C) situated in Bo. Bagong Ilog, Pasig, with an area of 172 sq. meters 5,596,930.53 Buildings and Improvements 5,351,180.33 Total Book Value P12,795,278.31 =========== that considering that the declaration of the 30% dividend to the minority stockholders on August 31, 1996 was based on the book values of the properties and not on the prevailing market/zonal values as required by the Rules Regulating the Issuance of property Dividends by the Securities and Exchange Commission, a resolution was adopted during the Special Joint Meeting of the Board of Directors and Stockholders on September 28, 1996 increasing the distribution of cash dividends to the minority stockholder to 130% computed as follows: No. of Amount of Stockholders Shares Held Cash Dividend Luisita P. Guerrero 119 P15,470.00 Enrico M. Santiago 30 3,900.00 Fernando R. Pimentel, Jr. 13 1,690.00 Jaime R. Blanco 6 780.00 Cresenciana P. Paguio 1 130.00 Francisco C. Zamora 1 130.00 Sub-Total 170 P22,100.00 ==== ========= that the SEC in its letter dated March 4, 1998 through the office of Director Otilio C. San Diego approved the foregoing declaration and distribution of property and cash dividends. In connection therewith, you now request for a ruling on the following: 1. The property dividend declaration consisting of real estate properties can be recorded at their book value in the books of Graphic Arts and the stockholders can record the dividends thus received at Graphic Arts' book value; 2. The property dividend received by the stockholders shall be subject to a final withholding tax at zero percent (0%), and the receiving stockholders shall not be subject to any income, capital gains tax, or VAT arising from their receipt of these real estate properties as property dividend; 3. Upon subsequent sale or other disposition of the real estate properties received as property dividend by the stockholders, the basis of the taxation of the subsequent sale or other disposition shall also be its book value at the time of the dividend distribution; and 4. The Deed of Conveyance to be executed between Graphic Arts and the recipient stockholders covering the real estate properties shall not be subject to the documentary stamp tax at the rate of Fifteen Pesos (P15.00) for every One Thousand Pesos (P1,000.00), or a fractional part thereof, of the book value of the real properties declared as dividends (Section 196 of the Tax Code, as amended by R.A. No. 7660). The documentary stamp tax shall be due and payable on the date of execution of the Deed Conveyance (Section 173 of the Tax Code, as amended by R.A. 7660). In reply thereto, please be informed as follows: 1. That the property dividends shall be recorded at book value in the books of both the issuing corporation and the recipient stockholders (BIR Ruling No. 156-94 dated November 16, 1994). The book value should be understood to mean historical cost and should not include any revaluation increment on the property. 2. That the property dividend received by the majority stockholders of Graphic Arts shall be subject to a final withholding tax of zero percent (0%), said property dividends having been declared out of the unrestricted retained earnings of the corporation as of December 31, 1995, and the receiving stockholders shall not be subject to any income or capital gains tax arising from their receipt of these real estate properties as property dividend (BIR Ruling No. 156-94 dated November 16, 1994). Furthermore, the property dividends distributed by the company to its stockholders shall not be subject to VAT inasmuch as the real estate properties distributed as property dividends were not primarily held for sale to customers or held for lease in the ordinary course of Graphic Arts' business (Section 103[s], NIRC, now Section 109[w], Tax Code of 1997). 3. That the subsequent sale or other disposition of the real estate properties received as property dividends by the individual stockholders of Graphic Arts shall be subject to the 6% capital gains tax based on the gross selling price of fair market value prevailing at the time of the sale, pursuant to Section 24(D)(1) of the Tax Code of 1997 if the said property qualifies as a capital asset as of the time of sale, otherwise, the gain measured pursuant to Section 40 shall be subject to the regular income tax rates on individuals. 4. That the Deed of Conveyance to be executed between Graphic Arts and the recipient stockholders covering the real estate properties declared as property dividends, not being a sale and without monetary consideration, shall not be subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997, but only to the documentary stamp tax of P15.00 pursuant to Section 188 of the Tax Code, as amended (BIR Ruling Nos. 108-93 dated March 16, 1993; 498-94 dated December 20, 1993; 156-94 dated November 16, 1994). 5. That the book value of the property dividend (real property) must be annotated at the back of the Transfer Certificate of Title of the real property which shall serve as the basis of the computation of the tax upon its subsequent disposition. 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.) BEETHOVEN L. RUALO Commissioner of Internal Revenue