BIR Ruling [DA-369-03]

October 15, 2003 BIR RULING [DA-369-03] 27, 98 & 196; DA 136-00 & 8-95 Isla Communications Co., Inc. 22/F, Trafalgar Plaza HV dela Costa St., Salcedo Village Makati City Attention: Atty. Melchor S. Latina Gentlemen : This refers to your letter dated June 5, 2001 requesting for confirmation of your opinion that the reconveyance from the trustee, Pajaro Development Corporation (Pajaro) to the beneficial owner, I sla Communications Co., Inc. (ISLACOM), without monetary consideration of a parcel of land located in the City of Iloilo and covered by Transfer Certificate of Title (TCT) No. T-110107 is not subject to capital gains tax and the documentary stamp tax, the transfer being a mere formality of restoring the title to the true and beneficial owner. It is represented that ISLACOM is a domestic corporation enfranchised to provide telecommunication services under Republic Act (RA) No. 7372; that by virtue of RA 7372, the National Telecommunication Commission (NTC) granted ISLACOM the Provisional Authorities (PAs) mandating the latter to provide telecommunication services in the Visayas area; that in pursuance of the mandate of the NTC, the Board of Directors of ISLACOM approved on March 17, 1995, among others, the purchase of the above described property for its business center and switching sites; that with this end in view, ISLACOM, through an authorized agent negotiated for the purchase of the said property which was then owned by the Maravillas ; that ISLACOM raised, funded and financed the acquisition cost of the subject property consisting of the purchase price, the capital gains and documentary stamp taxes and other consequential expenses; that payments were effected through purchase of managers checks by charging the united Coconut Planters Bank (UCPB) peso savings accounts of ISLACOM, and evidenced by the following: a. Purchase Price of Php15,000,000.00 ISLACOM's Disbursement Voucher No. 01333 (Annex "A"); b. Capital Gains Tax amounting to Php822,150.00 ISLACOM's Disbursement Voucher No. 01334, BIR Form NO. 2319A Authority to Accept Payment No. 2356552, and UCPB Application to Purchase (Annexes "A-1," "A-2," and "A-3); c. Documentary Stamp Tax ISLACOM's Disbursement Voucher No. 01338, BIR Form No. 2319A, Authority to Accept Payment No. 2356551 and UCPB Application to Purchase (Annexes "A-4," "A-5," and "A-6") d. Other Transfer Charges ISLACOM's Disbursement Voucher No. 01339, UCPB Application to Purchase and Official Receipt (OR) No. 014601 as well as OR Nos. 6859436 and 6117411 (Annexes "A-7," "A-8," "A-9," "A-10," and "A-11 ") that notwithstanding the foregoing intention and payments made by ISLACOM, the Deed of Absolute Sale (Annex "B") executed was between Pajaro as the vendee and the Maravillas as the vendor; that consequently, the Certificate Authorizing Registration (Annex "C") was issued in favor of and the title to the subject property transferred to Pajaro under TCT No. 110107 (Annex "D"); that the assessed real property taxes were paid by ISLACOM (Annexes "E" up to "E-8"); that upon discovery by ISLACOM of the error and its subsequent demand, Pajaro, represented by its President, Cesar P. Macuja, executed a Declaration of Trust (Annex "F") in favor of the true owner, ISLACOM, wherein it acknowledged the existence of trust and that Pajaro holds the subject property as trustee for ISLACOM; that on the same day, Pajaro likewise executed a Deed of Reconveyance (Annex "G") in favor of ISLACOM ceding, assigning and transferring the subject property, without monetary consideration, thereby, affirming that ISLACOM is indeed the true and beneficial owner of the subject property. In reply, please be informed that under Section 27(D)(5) of the Tax Code of 1997, a final tax of six percent (6%) is hereby 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 a 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 this Code, whichever is higher, of such lands and/or buildings. DCcTHa In the instant case, it is clear that the conveyance by Pajaro of subject property to ISLACOM under the Deed of Reconveyance is without consideration because the latter is the real owner of the said property and which provided the funds for the payment thereof. Thus, an implied trust was created between ISLACOM and Pajaro pursuant to Articles 1448 and 1453 of the New Civil Code. Such being the case, and considering that the reconveyance is not a sale, exchange or other disposition of the said property but merely surrendering the property to its rightful owner, the same is not subject to the capital gains tax prescribed under Section 27(D)(5) of the Tax Code of 1997. This finds support in BIR Ruling No. 147-92 dated May 8, 1992 wherein this Office held: ". . . the transfer of the Q.C. property effected by the heirs of the estate of Edward M. Grimm in the Deed of Partition in favor of GP and company is not subject to capital gains tax imposed under Section 21(e) of the Tax Code, since the transfer of the title in favor of GP and Company is merely a formality of transferring to the beneficial owner thereof the title to the same and in order that the title to the said property may be registered in the name of its rightful owner without any monetary consideration. " Moreover, conveyances of realty not in connection with a sale, to trustees or other persons without consideration is not taxable pursuant to Section 185 of Regulations No. 26, otherwise known as the Documentary Stamp Tax Regulations. It is settled that a Deed of Transfer of Real Property executed by a trustee in favor of the real owner without consideration is not subject to the documentary stamp tax on conveyance of real property under Section 196 of the Tax Code of 1997. However, the notarial acknowledgment to the said Deed is subject to the documentary stamp tax of P15.00 pursuant to Section 188 of same Code. (BIR Ruling No. DA-136-2000 dated March 6, 2000 citing BIR Rulings Nos. 21-98 dated February 19, 1998; 116-91 dated June 21, 1991; and 118-87 dated April 24, 1987) Accordingly, this serves as authority for the Revenue District Officer concerned to issue the Certificate Authorizing Registration in favor of ISLACOM, the real owner of subject property situated in the City of Iloilo covered by TCT No. T-110107. 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 as null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group