BIR Ruling [DA-599-04]

November 25, 2004 BIR RULING [DA-599-04] 27 (D) (2); RR 20-02; R.A. 7227; 129-96 Bernaldo Mirador & Directo Law Offices Unit 1807 Cityland Condominium 10-Tower 1 6815 Ayala Ave. Cor. H.V. dela Costa St. Makati City Attention: Rosario S. Bernaldo Managing Partner Gentlemen : This refers to your letter dated November 11, 2004 requesting, in effect, for confirmation of your opinion that the intended sale by your client, BELLAGIO HOLDINGS, INC., of its shares of stock in Fontana Development Corporation, in favor of CLARK INTERNATIONAL RECREATION HOLDINGS CORPORATION is exempt from the payment of capital gains tax (CGT), and that the gains derived therefrom, is, instead, subject to the preferential income tax rate of 5% pursuant to the provisions of Republic Act No. 7227, otherwise known as Bases Conversion and Development Act of 1992, particularly, Section 15 thereof. The facts as borne out by the records and as represented by your Office are as follows: Bellagio Holdings, Inc., is a domestic corporation duly registered with the Securities and Exchange Commission (SEC) with principal address at Fontana Leisure Park, Clark Special Economic Zone, Clark Field, Pampanga. It is engaged in the business of investing in, purchasing, subscribing for, or otherwise acquire and own, hold, use, develop, sell, assign, transfer, mortgage, pledge, exchange, or otherwise dispose of real and personal property of every kind and description, including but not limited to shares of stock, bonds, and debentures of any corporation. In addition, it is duly registered with the Clark Special Economic Zone (CSEZ) under Certificate of Registration No. 2002-022 issued on March 14, 2002 by the Clark Development Corporation. Being a registered enterprise, it is entitled to all incentives available to CSEZ-registered locator, including but not limited to the following: 1. Exemption from customs and import duties and national and internal revenue taxes on importation of capital goods, equipment, raw materials, supplies and other articles including household and personal items; and TAIcaD 2. Exemption from all local and national taxes in lieu of paying five percent (5) preferential tax rate on the gross income. Bellagio Holdings, Inc. is a stockholder of Fontana Development Corporation (formerly RN Development Corporation ) which is likewise a domestic corporation duly registered with the SEC, with principal address at Fontana Leisure Park, Clark Special Economic Zone, Clark Field, Pampanga and a CSEZ-registered enterprise, owning 50,875 common shares of the latter. It now intends to sell approximately 90% of the said shareholdings in favor of Clark International Recreation Holdings Corporation, a domestic corporation duly registered with the SEC, with business address at Clark Special Economic Zone, Clark Field, Pampanga. With the foregoing as factual backdrop you filed this instant request citing as main justification your client's tax exemption privileges under Republic Act 7227, particularly, Section 15 thereof. In reply, please be informed that Revenue Regulations No. 20-2002 issued on October 14, 2002, clarifying the tax treatment of income earned from unregistered activities by enterprises registered under the Bases Conversion Development Act of 1992 and the Philippine Economic Zone Act of 1995 provides as follows: "Section 1. Tax Treatment. Income derived by an enterprise registered with the Subic Bay Metropolitan Authority (SBMA), the Clark Development Authority, or the Philippine Economic Zone Authority (PEZA) from its registered activity/ies shall be subject to such tax treatment as may be specified in its terms of registration ( i.e., the 5% preferential tax rate, the income tax holiday, or the regular income tax rate, as the case may be). Nonetheless, whatever the tax treatment of said enterprise with respect to its registered activity/ies, income realized by such registered enterprise that is not related to its registered activity/ies shall be subject to the regular internal revenue taxes, such as the 20% final income tax on interest from Philippine Currency bank deposits and yield or any other monetary benefit from deposit substitutes, and from trust funds and similar arrangements, 7.5% tax on foreign currency deposits and the 5%/10% capital gains tax or 1/2% stock transaction tax, as the case may be, on the sale of shares of stock." TIHDAa "xxx xxx xxx" This Office, therefore, finds merit in your contention that the aforesaid intended sale by your client of its shareholdings in Fontana Development Corporation in favor of Clark International Recreation Holdings Corporation is exempt from the payment of capital gains tax imposed under Section 27 (D) (2) of the 1997 Tax Code, as amended. It is our considered opinion that the said planned activity, while not included as part of the registered activities in the Certificate of Registration and Tax Exemption as a Clark Special Economic Zone Enterprise issued to your client on March 14, 2002 by the Clark Development Corporation, it is, nonetheless, an essential and integral component of your client's registered business activity, the same being in total accord with its primary business objectives/purposes as clearly emphasized in its Articles of Incorporation. However, while the intended sale is not subject to capital gains tax under the aforecited Section of the Tax Code of 1997, the same is subject to the 5% preferential rate of income tax pursuant to Section 15 of Republic Act 7227 as interpreted and clarified by Revenue Regulations No. 20-2002 dated October 14, 2002. (BIR Ruling No. 129-96 dated November 26, 1996) 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. EATcHD Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group