BIR Ruling [DA-436-03]

December 3, 2003 BIR RULING [DA-436-03] Meralco Ortigas Avenue Pasig City Attention: G.S. San Diego Vice President & Head Legal Service Gentlemen : This refers to your letter dated February 19, 2003 requesting for a ruling as to whether or not the property which Meralco intends to contribute to the fund is not subject to donor's tax and/or capital gains tax and the corresponding documentary stamp tax. It is represented that Meralco established and created a fund known as the Meralco Pension Fund by virtue of a Trust Agreement dated March 14, 1968; that on March 7, 1969, the BIR declared that the Retirement Plan created thereby meets substantially the requirements prescribed by law and regulations for a qualified plan; that pursuant thereto, the Plan qualifies as a reasonable benefit plan within the contemplation of R.A. No. 4917 and therefore, entitled to all the benefits provided for in the said Act; that on June 18, 1969, the BIR opined that the Pension Fund is exempt from income tax under then Section 56(b) of the Tax Code, as amended [now Section 60(B) of the Tax Code of 1997] and that Meralco's contributions to the Trust Fund may also be allowed as a deduction for income tax purposes under then Section 30(j) of the said Code; that Meralco has been paying from time to time to the Meralco Pension Fund, through its Board, the contributions required under accepted actuarial principles to maintain the Plan in a sound condition; that for the same purpose, Meralco is contemplating to contribute to the Meralco Pension Fund a parcel of land together with the improvements thereon located at Antipolo City; that the conveyance may appear like a donation; that in order to qualify as such, the same should be considered as an act of liberality on the part of the donor which is not in this case; that however, it is the intention of Meralco in contributing the said property to the Meralco Pension Fund to improve the pension fund for the benefit of its retirees; and that Meralco believes that the said intended contribution to the Meralco Pension Fund is not subject to any kind of tax. In reply thereto, please be informed that Section 27(D)(5) of the Tax Code of 1997 provides that a final tax of six percent (6%) shall be imposed on the capital gains presumed to have been realized from 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 the said Code, whichever is higher, of such lands and/or buildings. acIASE A meticulous study of the purpose and spirit of the above-cited section of the Tax Code demands that the 6% capital gains tax shall be imposed on the sale, exchange, or other disposition of real property classified as capital assets, based on the gross selling price or current fair market value as determined by the Commissioner or the fair market value as shown in the schedule of values of the Provincial and City Assessors, whichever is higher. (see Section 6(E) of the Tax Code, Ibid) In the instant case, while generally the contributions to an employees' trust are usually made in cash, the contribution to be made by Meralco in the form of real property to the Meralco Pension Fund falls under the phrase "other disposition", as contemplated in the afore-cited section, as ownership of the said property will be transferred to the Meralco Pension Fund. Thus, a gain is presumed to have been realized the moment Meralco transfers the aforesaid property to its Pension Fund. IN THE LIGHT OF ALL THE FOREGOING, this Office holds that the contribution in the form of real property by Meralco to the Meralco Pension Fund is subject to capital gains tax and the corresponding documentary stamp tax respectively imposed under Sections 27(D)(5) and 196 of the Tax Code of 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.) MILAGROS V. REGALADO Assistant Commissioner Legal Service