Carag De Mesa & Zaballero

November 27, 2008 BIR RULING [DA-(C-145) 469-08] DA539-04 Carag De Mesa & Zaballero Suite 602, 26th Floor, The Altanta Center No. 31 Annapolis Street 1500 Greenhills, San Juan City Attention: Atty. Othelo C. Carag and Atty. Maria Theresa C. San Pablo Gentlemen : This refers to your letter dated October 31, 2008 stating that your client, RFM Corporation (RFM), is a corporation organized and existing under the laws of the Philippines with principal office address at RFM Corporate Center, Pioneer Street corner Sheridan Street, Mandaluyong City; that on the other hand, ABS-CBN Broadcasting Corporation (ABS-CBN) is a corporation organized and existing under the laws of the Philippines with principal office address at Mother Ignacia Street, Quezon City; that RFM is indebted to ABS-CBN Broadcasting Corporation (ABS-CBN) in the total amount of P46,096,511.99 as of April 15, 2005, representing unpaid media placements from 2004 and prior years; that RFM has rights and interest over the One Mckinley Place ground floor commercial unit consisting of 492 square meters with a value of P44,280,000.00; that in a Memorandum of Agreement (MOA) executed between RFM and ABS-CBN on June 17, 2005, RFM assigned and transferred all of its rights and interest in the above-described property to ABS-CBN, as and by way of partial payment of its obligation up to the amount of P44,280,000.00, with the remaining balance in the amount of P1,816,511.99 paid in cash on June 30, 2005; and that due to the failure of the parties to transfer title over the subject property to ABS-CBN from the time of the execution of the MOA, the parties have mutually agreed to rescind the MOA dated June 17, 2005 on August 5, 2008. TIaCAc Based on the foregoing representations, you now request confirmation of your opinion that 1. Given that there was no transfer of the subject property and, effectively, no consideration for the settlement of RFM's obligation to ABS-CBN, for which reason the parties agreed to rescind the MOA dated June 17, 2005, no income was realized by RFM from the assignment of rights over the subject property; 2. Since the Deed of Rescission was executed in order to effect the cancellation of the terms and conditions of the MOA dated June 17, 2005 and is without monetary consideration, the reversion of the rights and interest over the subject property in favor of RFM shall not be subject to income/withholding tax or capital gains tax; and 3. As there was no actual conveyance of the subject property in favor of ABS-CBN, the execution of the Deed of Rescission reverting the rights and interest over the subject property in favor of RFM shall not be subject to documentary stamp tax. In reply thereto, please be informed that Article 1191 of the Civil Code of the Philippines provides that the power to rescind obligation is implied in reciprocal ones, in case one of the obligors should not comply with what is incumbent upon him. The injured party may choose between the fulfillment and the rescission of the obligations with the payment of damages, in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter should become impossible. Corollarily, Article 1385 of the same Code provides that the rescission creates the obligation to return the things which were the object of the contract, together with the fruits, and the price with its interest; consequently, it can be carried out only when he who demands rescission can return whatever he may be obliged to restore. Rescission of contract does not give rise to a taxable event for two reasons: (a) the result of rescission is that it is as if there was no sale, transfer or exchange, and hence, no income is realized; and (b) the return of the object of the rescinded contract is not for monetary consideration and is merely an acknowledgment or confirmation of the title and ownership of the original owner of the property. HaEcAC In applying the above-cited articles to the case in point, both RFM and ABS-CBN have mutually agreed to rescind the subject MOA for failure to cause the transfer of title over the subject property to ABS-CBN, conversely there is no consideration for ABS-CBN to extinguish the obligation of RFM to that extent. Thus, rescission gives RFM the right to rescind and render null and void the stipulations in the aforementioned MOA, the effect is, as if no sale, transfer or exchange ever took place between the parties. SUCH BEING THE CASE, this Office hereby confirms your opinion that 1. Since there was no transfer of the subject property and, effectively, no consideration for the settlement of RFM's obligation to ABS-CBN, for which reason the parties agreed to rescind the MOA dated June 17, 2005, no income was realized by RFM from the assignment of rights over the subject property. Accordingly, the assignment of rights over the subject property by RFM in favor of ABS-CBN is not subject to income tax and documentary stamp tax. 2. Since the Deed of Rescission was executed in order to effect the cancellation of the terms and conditions of the MOA dated June 17, 2005 and is without monetary consideration, the reversion of the rights and interest over the subject property in favor of RFM shall not be subject to income/withholding tax or capital gains tax; and 3. As there was no actual conveyance of the subject property in favor of ABS-CBN, the execution of the Deed of Rescission reverting the rights and interest over the subject property in favor of RFM shall not be subject to documentary stamp tax. CcHDaA 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, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service