Garden of Memories Memorial Park and Chapels, Inc.

July 30, 2008 BIR RULING [DA-(C-017) 088-08] 24 (C); 175; 004-07; DA-236-05 Garden of Memories Memorial Park and Chapels, Inc. Calzadang Bago, Pateros Metro Manila Attention: Engr. Tomas S. Sanchez, Jr. President Gentlemen : This refers to your letter dated June 23, 2008 requesting on behalf of Garden of Memories Memorial Park and Chapels, Inc. ("GMMPCI" or the "company" for brevity), confirmation that the transaction involving the buyback of GMMPCI shares from the stockholders has the following tax implications: 1. The stockholders' sale of shares of stock in GMMPCI to the latter is subject to the 5%/10% final tax on the net capital gains from sale of shares imposed under Section 24 (C) of the 1997 Tax Code; 2. The revaluation increment on property and the revaluation reserve for available-for-sale-financial assets of GMMPCI shall be excluded in the determination of the book value of its shares for purposes of the 5%/10% final tax on the net capital gains from the sale of said shares; and 3. The stockholders' sale of shares of stock in GMMPCI to the latter is subject to a documentary stamp tax of P0.75 for every P200 of the par value of the GMMPCI stocks sold pursuant to Section 175 of the 1997 Tax Code, as amended by Republic Act No. 9243. The facts as represented are as follows: GMMPCI is a corporation duly organized and existing under Philippine law, and duly registered as such with the Philippine Securities and Exchange Commission. GMMPCI's principal business address is at Calzadang Bago, Pateros, Metro Manila. GMMPCI is primarily engaged in the business of developing and selling memorial lots and organizing, developing and selling funeral plans and arrangements for funeral or memorial services. HCEISc GMMPCI has an authorized capital stock of P30,000,000.00 divided into 3,000,000 common shares with a par value of P10.00 per share. Based on the 2007 audited financial statements, GMMPCI has retained earnings amounting to P24,452,049.00 and stockholder's equity amounting to P212,401,065.00, which includes revaluation increment on property and revaluation reserve for available-for-sale financial assets in the amount of P51,877,884.00 and P1,329,961.00, respectively. The shares of GMMPCI are not listed nor traded in the local stock exchange. Taking into consideration legitimate business reasons, the company's Board of Directors unanimously approved on April 19, 2008 the buyback of GMMPCI shares scheduled as follows: ten percent (10%) of the outstanding shares as soon as possible and five to ten percent (5-10%) of the outstanding shares by December 2008. The stockholders approved and ratified the Board of Directors' Resolution for the buyback of GMMPCI shares during the annual stockholders' meeting on April 26, 2008 and reiterated during the stockholders special meeting on May 31, 2008. The consideration for the buyback of the GMMPCI shares shall be its fair market value at the time of sale but in no case shall it be lower than P20.00 per share. HDATCc In reply, please be informed as follows: 1. The buyback by GMMPC of its own shares from its stockholders is subject to the 5%/10% final tax on the net capital gains from sale of shares imposed under Section 24 (C) of the 1997 Tax Code. The so-called buyback of shares transaction between GMMPCI and its stockholders is clearly a straight sale of shares of stock from the stockholders, as sellers, and the company, as buyer (BIR Ruling No. 193-89 dated September 7, 1989) . Section 24 (C) of the 1997 Tax Code governs the taxation of a sale, except through the stock exchange, by an individual stockholder of shares of stock in a domestic corporation, viz. : "SEC. 24. Income Tax Rates . (C) Capital Gains from Sale of Shares of Stock not Traded in the Stock Exchange. The provisions of Section 39(B) notwithstanding, a final tax at the rates prescribed below is hereby imposed upon the net capital gains realized during the taxable year from the sale, barter, exchange or other disposition of shares of stock in a domestic corporation, except shares sold, or disposed of through the stock exchange. Not over P100,000.00 5% On any amount in excess of P100,000.00 10%" Under Section 24 (C) of the 1997 Tax Code, there is a capital gains tax (CGT) imposed on net capital gains derived by a seller of shares of stock of a domestic corporation not sold and traded in the local stock exchange, at the rate of 5% on the first P100,000 of gain and 10% on the excess gain. The net capital gain is the difference between the gross selling price or fair market value (FMV) of the shares, whichever is higher, and the acquisition cost of the shares. Gross selling price, for this purpose, is defined as "the total amount of money or its equivalent which the purchaser pays the vendor to receive or get the goods." On the other hand, the FMV of shares is the book value nearest the valuation date (BIR Ruling No. 004-07 dated February 19, 2007 citing BIR Ruling No. 146-98 dated October 14, 1998) . Accordingly, the sale of the shares of stock of the stockholders of GMMPCI to the latter, as a consequence of the implementation of the proposed buyback of shares, is subject to 5%/10% final tax on the net capital gains pursuant to Section 24 (C) of the 1997 Tax Code, as amended. HSAcaE 2. The revaluation increment on property and revaluation reserve for available-for-sale financial assets of GMMPC shall be excluded in the determination of the book value of its shares for purposes of the 5%/10% final tax on the net capital gains from the sale of said shares. In BIR Ruling No. 117-89 dated June 5, 1989, the BIR in response to the query, 'whether or not the 'accumulated and current equity in the investees net earnings', i.e. , the imputation but without dividend declaration of the earnings of the subsidiary or sister corporation to the parent or stockholder corporation, and the 'share in revaluation increment', i.e. , increase in value of property because of reappraisal thereof at current value without sale or exchange, should be treated as part of gross income and therefore should be included in the computation of the book value of the shares sold for purposes of the capital gains tax on the sale of said shares, ruled as follows: "In reply thereto, I have the honor to inform you that appreciation in value of property is not even an accrual of income to a taxpayer prior to the realization of such appreciation through sale or conversion of the property (Sec. 38, Revenue Regulations No. 2). Such being the case, the "accumulated and current equity in the investee's net earnings" i.e. , the imputation but without dividend declaration of the earnings of the subsidiary or sister corporation to the parent or stockholder corporation in the amount of P117,562,844.00 and the "share in revaluation increment" i.e. , increase in value of property because of reappraisal thereof at current value without sale or exchange in the amount of P114,004,128.00 are not considered as income and should not therefore be included in the determination of the book value of the PHINMA shares for purposes of the capital gains tax on the sale of said shares." Similarly, in BIR Ruling [UN-402-95] dated November 15, 1995, the BIR ruled as follows: HEcIDa "Moreover, appreciation in value of property is not an accrual of income to a taxpayer prior to the realization of such appreciation through sale or conversion of the property (Sec. 38, Revenue Regulations No. 2). Such being the case, the "accumulated and current equity in the investees net earnings" i.e. , the imputation but without dividend declaration of the earnings of the subsidiary or sister corporation to the parent or stockholder corporation, and the "share in revaluation increment" (appraisal surplus) i.e. , increase in value of property because of reappraisal thereof at current value without sale or exchange are not considered as income and should not therefore be included in the determination of the book value of the ELI shares for purposes of the capital gains tax on the sale or other disposition of said shares. Thus, your opinion that the accumulated and current equity, as well as the appraisal surplus, in ELI's net earnings are not income and therefore, should not be included in the determination of the book value of the ELI shares for purposes of the capital gains tax on the sale or other disposition of said shares is also hereby confirmed. [ Pangilinan et al. vs. Commissioner of Internal Revenue, C.T.A. Case No. 4826 promulgated August 23, 1994; BIR Ruling No. 117-89 dated June 5, 1989.]" Essentially, the revaluation increment on property and revaluation reserve for available-for-sale financial assets are mere appreciation in value of property and not even an accrual of income prior to the realization of such appreciation through sale or conversion. Accordingly, they are not considered as income and should not therefore be included in the determination of the book value of the shares for purposes of computation of the net capital gains derived on the sale of shares of stock. (BIR Ruling No. 117-89 dated June 5, 1989]; BIR Ruling No. 106-91 dated June 17, 1991, BIR Ruling No. 375-92 dated December 28, 1992, and BIR Ruling [DA-236-05] dated May 31, 2005) Based on the foregoing, this Office confirms your opinion that the revaluation increment on property and revaluation reserve for available-for-sale financial assets of GMMPCI, amounting to P51,877,884.00 and P1,329,961.00, respectively, shall be excluded in the determination of the book value of its shares for purposes of the 5%/10% final tax on the net capital gains from the sale of said shares. 3 . The buyback by GMMPC of its own shares from its stockholders is subject to a documentary stamp tax of P0.75 for every P200 of the par value of the stocks sold pursuant to Section 175 of the 1997 Tax Code, as amended by Republic Act No. 9243. HEacAS Section 175 of the 1997 Tax Code, as amended by R.A. No. 9243, imposes documentary stamp tax (DST) on all sales or transfer of shares of stock in any association, company, or corporation, viz. : "SEC. 175. Stamp Tax on Sales, Agreements to Sell, Memoranda of Sales, Deliveries or Transfer of Shares or Certificates of Stock. On all sales, or agreements to sell, or memoranda of sales, or deliveries, or transfer of shares or certificates of stock in any association, company, or corporation, or transfer of such securities by assignment in blank, or by delivery, or by any paper or agreement, or memorandum or other evidences of transfer or sale whether entitling the holder in any manner to the benefit of such stock, or to secure the future payment of money, or for the future transfer of any stock, there shall be collected a documentary stamp tax of Seventy-five-centavos (P0.75) on each Two hundred pesos (P200), or fractional part thereof, of the par value of such stock: . . ." Based on the foregoing, the buyback by GMMPCI of its own shares from its stockholders is subject to DST at the rate of P0.75 for every P200 of the par value of the said shares. (BIR Ruling [DA-236-05] dated May 31, 2005) 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, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service