BIR Ruling [DA-439-03]

December 4, 2003 BIR RULING [DA-439-03] S.27 (D); (4) 277-93 Padilla Law Office 7/F Padilla-De los Reyes Bldg. 232 Juan Luna Street, Binondo Manila Attention: Atty . Sabino Padilla, Jr . Gentlemen : This refers to your letter dated May 21, 2001 requesting for a confirmation of your opinion on the tax consequences of a declaration and payment of a property dividend. TAcCDI The facts, as you represented, are the following: On April 7, 2000, the Far East Bank and Trust Co. (FEBTC for brevity) was merged with BPI and as a consequence various subsidiaries of FEBTC became subsidiaries of BPI. One of these subsidiaries is Far East Bank Investments, Inc. (FEBII for brevity),an investment house without a quasi-banking license and a wholly owned subsidiary of FEBTC, and now BPI. Prior to the said merger and up to the present time, BPI has a wholly-owned subsidiary, BPI Capital Corp. (BPICC for brevity),which is also an investment house like FEBII. As part of its post-merger rationalization moves, BPI has decided to merge FEBII with BPICC in order to eliminate administrative duplications and to streamline its business structure so that its customers would deal with only one corporate entity for certain types of business transactions heretofore serviced by FEBII and BPICC. FEBII has certain assets that do not support BPICC's objectives and purposes, such as providing quality financial advisory services, structuring, underwriting and distributing securities, including initial public offerings and loan syndications. As of February 28, 2001, these assets and their respective book values (in thousand pesos) are: Receivables from Local Banks P 9,209.00 Trading account securities (TAS) 471,001.00 Equity investments in subsidiaries 512,309.00 Premises and equipment 659.00 Account receivable BPI 126,852.00 Accrued interest receivables (TAS related) 5,618.00 Miscellaneous assets (TAS related) 2,814.00 Prior to the merger, FEBII will declare a property dividend consisting of the foregoing assets to its sole stockholder, BPI, at their fair market value and charge the fair market value of the property dividend against the retained earnings of FEBII, which are more than enough to cover the property dividend at fair market value. It is now your opinion that the fair market value of the property dividend that will be declared by FEBII constitutes income to the recipient parent company as sole stockholder under Section 251 of the Income Tax Regulations but will not be subject to income tax pursuant to Section 27(D)(4) of the 1997 Tax Code. Moreover, since the declaration of the property dividend is not a sale and is not made for a consideration, it is not subject to documentary stamp tax under Section 176 of the 1997 Tax Code. Finally, pursuant to Section 121(b) of the 1997 Tax Code, the property dividend will be subject to 0% gross receipts tax. EcIaTA In reply, please be informed that this Office had issued several rulings that property dividends shall not be subject to tax pursuant to Section 27(D)(4) of the 1997 Tax Code. More specifically, BIR Ruling No. 277-93 dated June 28, 1993 provides that: "Your opinion to the effect that the property dividend consisting of the Robitex assets to be declared by URC to JGSHI is not subject to tax pursuant to Section 24(e) (4) of the Tax Code, as amended, is hereby confirmed. Moreover, JGSHI, the recipient-corporation is not subject to any income or capital gains tax arising from its receipt of the assets as property dividends." Accordingly, your opinion that the property dividend that will be declared by FEBII will not be subject to income tax under Section 27(D)(4) of the 1997 Tax Code is hereby confirmed. Moreover, the property dividend shall be recorded in the books of both the issuing corporation, FEBII and the recipient corporation, BPI, at book value, and FEBII will not be subject to any income or capital gains tax on the excess of the fair market value over the book value of the assets declared as property dividends because there is no realized gain. However, upon the subsequent sale or other disposition of the assets received as property dividends by BPI, the basis of the assets shall also be their book value at the time of the property dividend declaration. ( supra ; BIR Ruling No. 276-91 dated December 26, 1991) Section 121(b) of the 1997 Tax Code is quite clear in stating that: "SEC. 121. Tax on Banks and Non-bank Financial Intermediaries . There shall be collected a tax on gross receipts derived from sources within the Philippines by all banks and non-bank financial intermediaries in accordance with the following schedule: xxx xxx xxx (b) On dividends 0% xxx xxx xxx" Thus, since dividends derived by banks are subject to 0% on gross receipts, this Office hereby confirms your opinion that the property dividend that will be given to BPI shall be subject to 0% gross receipts tax. As to your assertion that since the declaration of the property dividend is not a sale and is not made for a consideration, it is not subject to documentary stamp tax (DST for brevity) under Section 176 of the 1997 Tax Code, this Office opines that the declaration of the property per se is not subject to DST. However, the transfer of the securities owned and by FEBII to its stockholders shall be subject to DST under the aforementioned Section. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group