BIR Ruling [DA-486-04]

September 10, 2004 BIR RULING [DA-486-04] S.34 (J) SGV & Co. 6760 Ayala Avenue Makati City Attention: Atty. J. A. Osana Tax Division Gentlemen : This refers to your letter dated June 24, 2004 requesting on behalf your client, The Philippine American Life and General Insurance Company (Philamlife for brevity), a domestic corporation with office address in 4th Floor, Philamlife Building, UN Avenue, Ermita, Manila, confirmation of your opinion that the transfer of certain properties by Philamlife to its employees' duly qualified retirement fund shall not be subject to creditable withholding tax or donor's tax. The facts, as you represent, are as follows: Philamlife is a domestic corporation duly authorized to transact both life and non-life insurance business in the Philippines. Insofar as employee benefits is concerned, Philamlife maintains a trusteed retirement plan, Philamlife Employees Retirement Fund (PERF for brevity). PERF is a duly qualified employees retirement plan within the purview of Section 32(B)(6)(a) of the Tax Code of 1997. As of January 1, 2003, the actuarial valuation report indicated that total past service costs and current liabilities to the retirement plan ("Actuarial Accrued Liability") amounts to P679,579,500. In order to fund the retirement plan, Philamlife will contribute to PERF 4 1/2 floors in the Philamlife Tower, an office building located in the City of Makati. The 4 1/2 floors, hereinafter referred to as the Property, have an estimated book value and appraised value of P400M and P700M, respectively. In reply, please be informed of the following: As to the creditable withholding tax : The 1997 Tax Code or any other law does not qualify the term "contribution" to employees' retirement fund as to refer solely to monetary contributions. Thus, nothing should preclude the employer from making property contributions to the employees' retirement fund for as long as no part of the corpus or income of the fund shall be used for, or be diverted to, any purpose other than for the exclusive benefit of the said official and employees. As proposed, the Property with a book value of P400M will be contributed to PERF to cover portion of its past service cost liability to the extent of P400M. It must be emphasized that the Property will not be contributed to cover past service cost liability equivalent to the market value of the said property, which is P700M. Philamlife's contributions to the fund to cover past service liability should be apportioned in equal parts over a period of ten (10) consecutive years beginning with the year in which the transfer or payment is made pursuant to Section 34(J) of the 1997 Tax Code. Moreover, the transfer of Property (which is classified as ordinary asset) by Philamlife to PERF by way of contribution is not considered a sale, hence, not subject to creditable withholding tax. Article 458 of the New Civil Code defines a contract of sale as: ART. 458. By the contract of sale one of the contracting parties obligates himself to transfer the ownership of and to deliver a determinate thing, and the other to pay therefor a price certain in money or its equivalent. Applying the above principles, there is no obligation on the part of PERF " to pay therefor a price certain in money or its equivalent ." There is no " price paid or promised ." Further, PERF is not liable to Philamlife " as a debtor for the agreed price ." Thus, there is no sale to speak of in this case that shall give rise to withholding tax obligation on the part of PERF. Revenue Regulations No. 2-98, imposing creditable withholding tax on the "sale, exchange or transfer or real property classified as ordinary asset", provides: Section 2.5.71. Income Payments Subject to Final Withholding Tax . The following forms of income shall be subject to final withholding tax at the rates herein specified: (A) Income payments to a citizen or to a resident alien individual xxx xxx xxx (J) Gross selling price or total amount of consideration or its equivalent paid to the seller/owner for the sale, exchange or transfer of real property classified as ordinary asset A creditable withholding tax based on the gross selling price/total amount of consideration or the fair market value determined in accordance with Section 6(E) of the Code, whichever is higher, paid to the seller/owner for the sale, transfer or exchange or real property, other than capital asset, shall be imposed upon the withholding agent/buyer, in accordance with the following schedule: xxx xxx xxx B. Upon the following values of real property, where the seller/transferor is habitually engaged in the real estate business Exempt With a selling price of Five Hundred Thousand Pesos (P500,000.00) or less 1.5% With a selling price of more than Five Hundred Thousand Pesos (P500,000.00) but not more than Two Million Pesos (P2,000,000.00) 3.0% With a selling price of more than Two Million Pesos (P2,000,000.00) 5.0% C. Where the seller/transferor is not habitually engaged in the real estate business 6.0% Gross selling price shall mean the consideration stated in the sales document or the fair market value determined in accordance with Section 6 (E) of the Code, whichever is higher. In an exchange, the fair market value of the property received in exchange shall be considered as the consideration. The said Regulations clearly speak of gross selling price paid to the seller/owner for the sale, transfer or exchange of property. The definition of gross selling price clearly points to consideration stated in the sale document or fair market value, whichever is higher. Even in the case of an exchange, the fair market value of the property received in exchange shall be considered as the consideration. Based on the foregoing, it can be concluded that what the law contemplates as an occasion for the application of the creditable withholding tax is a sale, transfer or exchange where cash or valuable consideration is paid to the transferor in consideration for the sale or transfer of property. The contribution by Philamlife of property to PERF to answer for its past service liability does not result in PERF paying valuable consideration to Philamlife in exchange for such property. PERF does not part with anything of value to Philamlife which may warrant the application of withholding tax. CAaDSI While not entirely analogous, the contribution or transfer of real property to a retirement fund may be likened to a distribution by a corporation of real property to its shareholders by way of property dividends. The shareholders receiving the real property does not in return give or part with a valuable consideration to the corporation and does not subject the receipt of the real property to expanded or creditable withholding tax. This is because the distribution of property dividends, like the contribution of property to a retirement fund, is not considered as a sale or exchange. As to the donor's tax : The transfer, while without consideration, also cannot be considered as a donation subject to donor's tax. Under Article 725 of the Civil Code, a "(d)onation is an act of liberality whereby a person disposes gratuitously of a thing or right in favor of another, who accepts it." Well-settled in our jurisprudence is the fact that the essential elements of a valid donation are: (1) the reduction of the patrimony of the donor, (2) the increase in the patrimony of the donee; and (3) the intent to do an act of liberality ( animus donandi ). (BIR Ruling [DA-075-03] March 11, 2003) Since the contribution by Philamlife to the employees' retirement fund is in compliance with its legal obligation to contribute therein, there is no act of liberality to speak of in this case. Thus, no donor's tax is due. EISCaD 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, and/or any of the requirements imposed in this letter are not complied with, 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