Dario Reyes Hocson & Viado Law Firm

August 8, 2008 BIR RULING [DA-(C-034) 126-08] P.D. 1264; S-30-027-2003 Dario Reyes Hocson & Viado Law Firm 902-A West Tower, Philippine Stock Exchange Centre Exchange Road, Ortigas Center Pasig City Attention: Atty. Rodolfo O. Reyes Partner Gentlemen : This refers to your letter dated June 25, 2008 requesting in behalf of your client, the Philippine National Red Cross (PNRC), for a tax exemption on the basis of its disposition of a parcel of land. It is represented that the PNRC is the premiere humanitarian organization in the country and of the entire world; that its main objective is to alleviate human suffering wherever and whenever such situation occur; that the PNRC was chartered and organized in 1947 through Republic Act No. 95, which was amended by Republic Act Nos. 885 and 6373 and later on by Presidential Decree Nos. 1264 and 1643; that the PNRC is imbued with an international character because it was created by virtue of the Philippines' commitment under the Geneva Red Cross Convention; that a Deed of Absolute Sale was executed by and between the Philippine National Red Cross (Seller) and Vicsal Development Corporation (Buyer) on a parcel of land with an area of 7,368 square meters, together with all the improvements, covered by Transfer Certificate of Title No. S-30664 by the Registry of Deeds for the Province of Rizal; and that you opine that pursuant to the PNRC charter, the sale is exempt from capital gains tax. In reply, please be informed that on the basis of Section 4 of Presidential Decree No. 1264, the PNRC is exempt from the payment of capital gains tax on the sale of its real properties. ISCHET In BIR Ruling No. 072-95 dated April 17, 1995, the BIR exempted the PNRC from the payment of capital gains tax on the sale of its shares of stock in an American company. The facts presented therein are similar hereto, to wit: ". . . following the expiration of the Laurel-Langly Agreement which allowed ownership of lands in the Philippines by Americans E.R. Squibb and sons Philippine Corporation (Squibb) divested itself of its interest on a parcel of land located at Makati, Metro Manila, and donated 60% of its undivided interest in the land to the Philippine National Red Cross (PNRC), thus reducing Squibb's interest over said property to 40%; that thereafter, PNRC and Squibb exchanged their respective 60% and 40% interest for shares of stock of RCS Realty Corporations (RCS); that presently, PNRC holds 240,000 shares of RCS which represents 60% control over said corporation; and that PNRC and Squibb are presently contemplating to sell their respective shares of stocks in RCS to a Philippine National. . . ." The legal basis for that ruling was "since the proposed sales of PNRC's shares of stock is part of your fund-raising drives the proceeds of which shall be used to finance your benevolent and humanitarian objectives, the conclusion is justified that the net capital gains to be realized from the sale of said shares of stock, if not listed or traded in the local stock exchange, shall be exempt from the capital gains tax prescribed under Section 24 (e) (2) of the Tax Code." Inasmuch as the facts and legal bases set forth in the sale by the PNRC of its real properties are practically on all fours with the ruling on the sale of the PNRC's shares of stock, we see no cogent reason to depart from this doctrine. Moreover, this Office has previously ruled that the PNRC is exempt from the payment of other taxes, such as (i) the 12% Value Added Tax (VAT) on its importations and local purchases under Sections 107 and 109 (q), respectively, of the Tax Code of 1997, (ii) the 20% final tax imposed on interest income derived by it from currency bank deposits and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements under Section 27 (D) (1) of the same Code has already been upheld by this Office in BIR Ruling No. 014-99 dated February 1, 1999, and BIR Ruling No. DA-392-2006 dated June 26, 2006; and (iii) withholding tax on rentals received by the PNRC from lessees of its real properties (BIR Ruling No. DA-153-04 dated March 31, 2004). IACDaS In recognizing that the PNRC is exempt from paying the above-mentioned taxes, this Office relied upon the strength of Section 1 Presidential Decree No. 1264. Moreover, this Office also recognized that Executive Order No. 93 which took effect on March 10, 1987, and which revoked tax and duty exemption privileges of government and private entities, DID NOT apply to the PNRC, to wit: ". . . thus, the withdrawal of all tax and duty incentives granted to private entities refers to private entities which are engaged in trade or business or an economic activity. It does not therefore apply to PNRC which is a non-profit and charitable organization." "Such being the case, the tax exemption privileges of PNRC under Section 4 of Presidential DecreeNo.1264 still subsists and has not been withdrawn by Executive OrderNo.93. "This revokes BIR Ruling No. 026-96 dated February 27, 1996 and BIR Ruling No. 064-98 dated May 21, 1998." (BIR Ruling No. DA-392-2006 dated June 26, 2006 citing BIR Ruling No. 014-99 dated February 1, 1999) Based on the above rulings and precedents alone, we rule that the PNRC is exempt from the payment of capital gains tax on the sale of such real property. As to the issue of whether the PNRC should be considered as an international organization as a further basis for exemption from the payment of capital gains tax, this Office rules that while the PNRC is not an international organization as contemplated by law that would warrant its exemption from tax (BIR Ruling DA-128-06), we also recognize the fact that the PNRC is imbued with the character of an international organization based on the purposes for which it was created. The PNRC was created by law (Republic Act No. 95 and Presidential Decree No. 1264), which removes it from the ambit of an international organization. However, the PNRC was created pursuant to the Philippines' obligations under the Geneva Red Cross Convention of 1947 as "a body corporate and politic to be the voluntary organization officially designated to assist the Republic of the Philippines in discharging the obligations set forth in the Geneva Conventions and to perform such other duties as are inherent upon a national Red Cross Society". (Section 1, P.D. 1264) ECaITc Since the PNRC was formed to assist the Philippine Government in discharging the latter's obligations under the Geneva Conventions, it can be gainsaid that the PNRC is an instrumentality of the national government enjoying tax exemption privileges because of its charter, and because it is imbued with an international character, while not completely an international organization. Thus, as an instrumentality imbued with the character of an international organization, the PNRC is exempt from capital gains tax. In Manila International Airport Authority vs. Court of Appeals, et al., G.R. No. 155650, July 20, 2006, the Supreme Court held that government instrumentalities refer "to any agency of the National Government, not integrated within the department framework, vested with special functions or jurisdiction by law, endowed with some if not all corporate powers, administering special funds, and enjoying operational autonomy, usually through a charter". The Supreme Court further ruled "When the law vests in a government instrumentality corporate powers, the instrumentality does not become a corporation. Unless the government instrumentality is organized as a stock or non-stock corporation, it remains a government instrumentality exercising not only governmental but also corporate powers". As regards PNRC, it cannot be considered as stock corporation because it has no capital stock (MIAA vs. CA, supra, citing Section 3, Corporation Code of the Philippines). Neither can the PNRC be considered a non-stock, non-profit corporation because it has no members, and it was not organized "for charitable, religious, educational, professional, cultural, recreational, fraternal, literary, scientific, social, civil service, or similar purposes, like trade, industry, agriculture and like chambers, . . . ." (MIAA vs. CA, supra, citing Sections 87 and 88, Corporation Code of the Philippines). However, it is a government instrumentality imbued with an international character because it was created to "be the voluntary organization officially designated to assist the Republic of the Philippines in discharging the obligations set forth in the Geneva Conventions and to perform such other duties as are inherent upon a national Red Cross Society". (Section 1, P.D. 1264) In view of the above, your request for a ruling that the PNRC is exempt from the payment of capital gains tax on the sale of its real properties is hereby confirmed on the basis that Section 4 of Presidential Decree No. 1264 provided that the sale of the said property is connected with the PNRC's fund raising activities. acIHDA 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