BIR Ruling [DA-442-03]

December 4, 2003 BIR RULING [DA-442-03] Section 175 BIR Ruling No. 012-97 De Borja Medialdea Bello Guevarra & Gerodias Law Partnership 15/F, Strata 100 Building, Emerald Avenue Ortigas, Pasig City Attention: Atty . Pablo A . De Borja and Atty . Rosario C . Z . Nava Gentlemen : This refers to your letter dated November 24, 2000 requesting for reversal of the ruling of the Legal Division of Revenue Region No. 6 and waiver of all interest, surcharges and penalties assessed upon the DST on the shares proposed to be issued by Duyan Corporation out of the proposed increase of its authorized capital stock which increase has not yet been approved by the Securities and Exchange Commission (SEC), to Spouses Antony Louis Marden and Geraldine Elaine Marden in exchange for three (3) parcels of land located in Metro Manila quoted as follows: "Our client, Duyan Corporation (the "Corporation"), is a corporation duly organized and existing under Philippine laws. . . . On 17 April 1998, the Corporation resolved to amend its Articles of Incorporation to increase its authorized capital stock from Forty Thousand Pesos (P40,000.00) to Twenty-Nine Million Five Hundred Thousand Pesos (P29,500,000.00). Out of the proposed increase, Twenty-Nine Million One Hundred Sixteen Thousand Five Hundred Pesos (P29,116,500.00) worth of shares (the "Subject Shares") shall be subscribed by the spouses Antony Louis Marden and Geraldine Elaine Marden, with the former subscribing for shares worth Fourteen Million Five Hundred Fifty-Eight Thousand Three Hundred Pesos (P14,558,300.00) and the latter for Fourteen Million Five Hundred Fifty-Eight Thousand Two Hundred Pesos (P14,558,200.00), respectively. In payment of their subscriptions, the above-mentioned stockholders proposed to transfer to the Corporation three (3) parcels of land located in Metro Manila with an aggregate value of Twenty-Nine Million One Hundred Sixteen Thousand Five Hundred Pesos (P29,116,500.00). "On 21 October 1998, the Corporation filed with the SEC an application for increase in authorized capital stock as abovestated and amendment of its Articles of Incorporation. . . . As a condition for approval of said application, the SEC has required the submission of the titles of the Subject Properties in name of the Corporation, or at least, a Primary Entry in the daybook of the proper Registries of Deeds, the Deed of Exchange of Real Property for Shares of Stock. The Registries of Deeds, on the other hand, require the submission of the Certificate Authorizing Registration ("CAR") evidencing payment of all proper taxes upon the exchange of the Subject Properties for the Subject Shares, before the primary entry of said Deed of Exchange can be effected. "While the necessary action has been commenced to transfer the titles of the Subject Properties conveyed in exchange for the Subject Shares in the name of the Corporation, the Bureau of Internal Revenue (BIR) has refused to issue the CAR unless the DST on the original issuance of the Subject Shares is first paid. "The Assessment Division of the BIR Revenue Region No. 6 (Manila) issued a Pre-Assessment Notice dated 07 July 2000 to our client assessing DST on the original issuance of the Subject Shares amounting to P291,165.00 excluding increments, i.e. penalties, surcharges and interest. . . . In response to this, we filed a letter-protest dated 10 August 2000 contesting the imposition of DST, including its surcharges and penalties, on the Subject Shares. . . . The Chief of the Legal Division of the BIR Revenue Region No. 6 denied our protest in a decision dated 14 September 2000 and recommended the issuance of a Final Assessment Notice against the spouses Antony Louis Marden and Geraldine Elaine Marden reiterating the Pre-Assessment Notice dated 07 July 2000. . . . CIAcSa xxx xxx xxx "Considering that the SEC has not yet approved the Corporation's application for increase in authorized capital stock, the payment of DST on the Subject Shares at this point is clearly premature. xxx xxx xxx "In authorizing the increase in capital stock and the subscriptions made thereto, the Board of Directors was careful to include in its resolutions that " the subscription to the increase in capital stock shall not be valid and effective until the approval of the increase in capital stock by the Securities and Exchange Commission ." Attached as Annex "F" is a copy of the Minutes of the Joint Meeting of the Stockholders and the Board of Directors of Duyan Corporation dated 17 April 1998 which reflects the above-mentioned Board resolution. . . .. xxx xxx xxx "Certainly, in the absence of any valid and effective subscription for shares, there is no liability to pay DST. . . . Annex "G" is a copy of a certification from Mr. Jesus L. Ulanday, Officer-in-Charge of the Examiners and Appraisers Department of the SEC, dated 08 June 2000. The last sentence of said certification states: xxx xxx xxx " and that until the application for increase is approved by the Commission, the shares subscribed in exchange for the property are as (sic) not yet considered issued ." "In view of the BIR's assessment of DST and the Company's insistence on its position that the DST had not yet accrued at the time it was first assessed, interest, surcharges and penalties have been assessed by the BIR in addition to the basic DST. Notwithstanding and without prejudice to its arguments as stated above in opposition of the premature imposition of DST at this time, the Corporation has expressed its willingness to pay the basic DST without any interest, surcharge, or penalty. xxx xxx xxx." In reply, please be informed that the delivery of the certificates of stocks, whether actual or constructive, to the stockholders is not essential for the documentary stamp tax to be imposed. What is taxed is the privilege of issuing shares of stock and, therefore, the tax accrues at the time the shares are issued (Sec. 5, Revenue Regulations No. 9-94). Ordinarily, when a corporation issues a certificate of stock (representing the ownership of stocks in the corporation to fully paid subscription) the certificate of stock can be utilized for the exercise of the attributes of ownership over the stocks mentioned on its face. The certificates as issued by the corporation, irrespective of whether or not it is in the actual or constructive possession of the stockholder is considered issued because it is with value and therefore the documentary stamp tax must be paid as imposed by Section 175 of the Tax Code on original issue of certificate of stocks ( Commissioner of Internal Revenue vs. Construction Resources of Asia, Inc. and the CTA , 145 SCRA 671679, L-68230, Nov. 25, 1986). In this connection, under Section 65 of the Corporation Code, no certificate of stock shall be issued to a subscriber until the full amount of his subscription together with the interest and expense (in case of delinquent shares) if any, is due, has been fully paid. However, as regards those certificates of stocks temporarily subject to a suspensive condition, the stockholders shall be liable to pay the documentary stamp tax only when the certificates are released from said condition for then and only then shall the said shares truly acquire any practical value for their owners ( Philippine Consolidated Coconut Industries, Inc. vs. Collector of Internal Revenue, 70 SCRA 22 2628, March 8, 1976 cited in CIR vs. Construction Resources of Asia, Inc. & CTA supra ). [BIR Ruling No. 012-97 dated February 4, 1997] Considering that the SEC has not yet approved the Corporation's application for increase in authorized capital stock, the shares subscribed in exchange for the property are not yet considered issued as certified by Mr. Jesus L. Ulanday, Officer-in-Charge of the Examiners and Appraisers Department of the SEC, dated June 8, 2000. Such being the case, the payment of DST on the original issuance of the Duyan shares shall accrue only when the Corporation's application for increase in authorized capital stock shall have been approved by the SEC because only then shall they truly acquire any practical value for their owners, Spouses Antony Louis Marden and Geraldine Elaine Marden. 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