BIR Ruling [DA-325-04]

June 16, 2004 BIR RULING [DA-325-04] Trust 108-98; DA-146-2000 Sycip Salazar Hernandez & Gatmaitan SSHG Law Center, 105 Paseo de Roxas Makati City Attention: Attys. Luisito V. Liban Anna Cristina V. Collantes Gentlemen : This refers to your letter dated August 21, 2003 requesting for a confirmation of your opinion that no income tax, donor's tax, value-added tax and documentary stamp tax will result from the transfer of legal title to a trustor-beneficiary in an implied trust. It is represented that your client, Gran Calypso Resources, Inc. ("GCR"), is a corporation duly organized and existing under the laws of the Philippines; that GCR entered into an agreement with Corporate Alternative Philippines, Inc. ("CAPI") for the latter to provide security services to some of GCR's clients and properties, assets and premises owned or occupied by GCR and/or its clients; that pursuant to said agreement, forty-three (43) security personnel were assigned by CAPI to GCR to carry out and implement its contractual obligations; that in a supplemental agreement, GCR undertook to provide these security personnel housing benefits on the condition that the said security personnel complete the term of service stipulated in the agreement; that GCR provided CAPI with funds for the purchase of several house and lots intended for the security personnel; that CAPI instructed some of its stockholders to purchase specified properties using the funds given by GCR; that these stockholders indeed purchased the property as directed, however, they registered the subject properties to another corporation of which they are also stockholders, the Automatic Response Incorporated ("ARI"), a domestic corporation duly organized and existing under the laws of the Philippines, engaged in the business of providing personal and private security services for the protection of persons and property; that at present, titles over the house and lots that were supposed to be given by GCR to the security personnel are in the name of ARI; that the services of the security personnel were terminated before the completion of the term of service as stipulated in the agreement, hence, they were not entitled to the housing benefits as mentioned in the supplemental agreement; that since the house and lots were not distributed to the security personnel, GCR wanted that the titles over the same shall be transferred to its name by ARI; that a proposed Deed of Conveyance is executed by ARI in favor of GCR whereby ARI will transfer to the latter the following real properties, together with the improvements thereon, viz .: Transfer Certificate of Titles Nos. T-333571, T-333572, T-333573, T-333574, T-333575, T-333576, T-333577, T-333578, T-333932, T-333933, T-333934, T-333935, T-333936, T-333937, T-333938, T-334014, T-334015, T-334016, T-334017 and T-334018, all of the Registry of Deeds of Calamba; and that based on the foregoing, you are requesting for confirmation of your opinion that 1. The conveyance by ARI of the legal title over the aforesaid properties to GCR is not subject to ordinary corporate income tax; 2. The conveyance of the subject real properties is not subject to the capital gains tax provided in Section 27(D)(5) of the NIRC; 3. The conveyance of the subject real properties is not subject to donor's tax under Section 98 of the NIRC; 4. The conveyance of the subject real properties is not subject to the 10% value-added tax (VAT); 5. The conveyance of the subject real properties is not subject to documentary stamp tax under Section 196 of the NIRC. In reply, please be informed that your above opinion is hereby confirmed as follows: 1. Under Section 27(D)(5) of the Tax Code of 1997, as amended, capital gains presumed to have been realized from the sale, exchange, or other disposition of lands and/or buildings which are not actually used in the business of a corporation and are treated as capital assets, shall be taxed at the rate of 5% based on the gross selling price or the fair market value prevailing at the time of sale, whichever is higher. In the instant case, however, there is no sale, exchange or disposition of real property involved, since GCR is the real owner of the aforesaid twenty (20) parcels of the land, with improvements thereon, while ARI acted merely as trustee. Accordingly, the transfer of titles over the said lots from ARI, the trustee, to GCR, the real owner thereof, without monetary consideration under and by virtue of the Deed of Conveyance, which effectively acknowledges the existence of an implied trust by and between GCR and ARI, is not subject to the capital gains tax nor to the creditable withholding tax prescribed by Revenue Regulations No. 2-98, as amended, implementing Section 57(B) of the Tax Code of 1997, as amended. ( BIR Ruling No. 108-98 dated June 29, 1998 ). 2. The transfer of the above-mentioned properties is exempt from the donor's tax imposed under Section 98 of the same Code due to lack of donative intent on the part of ARI. ( BIR Ruling DA-146-2000 dated March 10, 2000 ) 3. Under Section 105 of the 1997 Tax Code, as amended, 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 to 108 of the Tax Code. However, since ARI is not engaged in the business of selling or leasing real property to customers in the ordinary course of business, the conveyance of the above-mentioned real properties by ARI to GCR is not, therefore, subject to the 10% VAT. 4. Under Section 191 of Revenue Regulations No. 26, otherwise known as the "Documentary Stamp Tax Regulations", conveyances to a trust without valuable consideration, or from a trustee to a cestui que trust without valuable consideration are not subject to tax. From the foregoing and since the conveyance of the above-mentioned real properties by ARI, the trustee, to GCR; the trustor, is in connection and in recognition of an implied trust, the said transfer, therefore, is not subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997, as amended. However, the notarial acknowledgement to the said Deed of Conveyance is subject to the documentary stamp tax of P15.00 only pursuant to Section 188 of the same Code. ( BIR Ruling No. 027-93 dated January 15, 1993 and BIR Ruling No. 080-02 dated April 29, 2002 ). IcESDA 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.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group