BIR Ruling [DA-343-04]

June 25, 2004 BIR RULING [DA-343-04] 27 (D) (5); 196 RR 2-98; Regs. No. 26 S-20-047-99; DA 345-2003 MWSS-Corporate Office Multi-Purpose Cooperative Katipunan Road, Balara, Quezon City Attention: Vicente A. Elefante Chairman Gentlemen : This refers to your letter dated June 10, 2004 requesting for a ruling on the following: 1. Is the sale from Metropolitan Waterworks and Sewerage System (MWSS) to MWSS-Corporate Office Multi-Purpose Cooperative (MCMC) subject to capital gains tax or creditable withholding tax, if applicable, and to documentary stamp tax notwithstanding the fact that MWSS is a government owned and controlled corporation? What would be the basis for valuation on the transfer of the same? 2. Is the subsequent transfer from MCMC to its member-beneficiaries again subject to the capital gains tax or creditable withholding tax and documentary stamp tax? It is represented that MWSS is a government owned corporation duly organized and existing pursuant to Republic Act 6234. It is engaged in the business of providing public utility services. In a Board Resolution No. 296-2002 dated October 25, 2002, the Board has approved and confirmed the authority of the management to sell a parcel of land with Transfer Certificate of Title No. RT-17971 of the Register of Deeds of Quezon City, which has been allocated for housing project to its employees. The sale would be through MCMC on behalf its member-beneficiaries as the entity officially designated to handle the housing project. Thereafter, the land will be distributed to the member-beneficiaries in accordance with the subdivision plan. Based on these representations you now seek for a ruling on the foregoing queries. In reply, please be informed as follows: 1. In BIR Ruling No. DA-088-2001 the Bureau ruled that MWSS is exempt from income tax on its income from its operation as a public utility pursuant to Section 32(B)(7)(b). Incidentally, the intended sale of the parcel of land to MCMC should not be considered as part of MWSS' operation as a public utility. Therefore, the same is subject to tax. The tax, however, would now depend on the nature of the property to be sold. If the property is an ordinary asset, the sale would be subject to creditable withholding tax and to the value-added tax. On the other hand, if the property is a capital asset, the sale would be subject to capital gains tax. As negatively defined in Section 39 of the Tax Code of 1997, capital asset means property held by the taxpayer (whether or not connected with his trade or business) but does not include: a) stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year; or b) property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business; or c) property used in the trade or business of a character which is subject to the allowance for depreciation provided in subsection (F) of Sec. 34 of the Code; or d) real property used in trade or business of the taxpayer. Moreover, the valuation of the property will be based on the gross selling price, or current fair market value as determined in accordance with Section 6(E) of the Tax Code of 1997, whichever is higher. In addition, the sale from MWSS to MCMC would also be subject to the documentary stamp tax pursuant to Section 196 of the same Code. 2. Under Section 27(D)(5) of the Tax Code of 1997, a final tax of six percent (6%) is imposed on the gain presumed to have been realized on the sale, exchange or disposition of lands and/or buildings which are not actually used in the business of the corporation and are treated as capital assets based on the gross selling price or fair market value as determined in accordance with Section 6(E) of the Code, whichever is higher, of such lands and/or buildings. The transfer of titles from MCMC to its individual members is not a barter, exchange or other disposition of realty that would warrant the imposition of the capital gains tax imposed in the abovementioned provision of law nor to the creditable withholding tax imposed under Revenue Regulations No. 2-98, as amended by Revenue Regulations No. 6-2001, considering that the said transfer/transaction is merely a formality to finally effect transfer of titles of the real properties to the member-beneficiaries who actually bought the same. Such lack of consideration does not, likewise, render the transfer subject to the donor's tax imposed under Section 99 of the Tax Code of 1997, since there is no intention on the part of the association to donate said properties to said members considering that the members of the association could not donate properties the ownership of which belong to themselves (member-beneficiaries). Furthermore, Section 185 of the Revised Documentary Stamp Tax Regulations (Regulation No. 26) provides that "conveyances of realties not in connection with a sale, to trustees or other persons without consideration are not taxable." Accordingly, the deed to be executed by MCMC to effect the aforesaid transfer in favor of its individual members are not subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997. However, the notarial acknowledgement to said deed of conveyance is subject to the documentary stamp tax of P15.00 pursuant to Section 188 of the same Code. ( BIR Ruling Nos. S-20-047-99 dated March 26, 1999 & DA-345-2003 ) 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. AaEcHC Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service