Ayala Land, Inc.

October 8, 2009 BIR RULING [DA-(C-230) 591-09] Art. 1191, 1385 Civil Code; 059-92; DA-080-03; DA-280-03; DA-020-07; DA-201-01; 027-93 Ayala Land, Inc. Tower One, Ayala Triangle Ayala Avenue, Makati City Attention: Attys. Mildo C. Sison and Elner A. Reyes Tax Counsels Gentlemen : This refers to your letter dated August 12, 2009 requesting for a confirmation of opinion that the Deed of Rescission and Reconveyance to be executed by the corporate buyers of the subdivision lots with Ayala Land Inc. (ALI) is not subject to the regular income tax imposed under Section 27 (A) and consequently to the creditable withholding tax (CWT) prescribed by Revenue Regulations (RR) No. 2-98, as amended, implementing Section 57 (B) of the Tax Code of 1997, as amended, as well as to documentary stamp tax (DST) under Section 196 of the same Tax Code. AcSIDE It appears that ALI is a domestic corporation duly organized and existing under Philippine laws with principal office address at the 31st Floor, Tower One and Exchange Plaza, Ayala Triangle, Ayala Avenue, Makati City. In 1998, ALI began the development of a residential subdivision located in Barangays Malubog, Sirao and Pung-ol Sibugay, Cebu City known as the Ayala Heights Cebu (the "Project"). The Project has an overall master plan which specifies, among others, number of phases for development, the location plan for specific salable lots, roads, amenities and common areas once it is fully developed. On the basis of the overall master plan, ALI offered the subdivision lots for sale to the public. In the initial stage of development, ALI was able to sell the subdivision lots in phase 1 of the Project to at least ten (10) corporate buyers either in cash or installment basis. Each buyer was able to complete the payment of the purchase price based on the agreed payment schemes. Upon full payment of the consideration, ALI executed a Deed of Absolute Sale (DOAS) in favor of each buyer to transfer the ownership of the subdivision lots. Each DOAS was duly notarized and the corresponding CWT, value-added tax (VAT) and DST for each transaction were paid and remitted to the Bureau of Internal Revenue (BIR). Thereafter, each corporate buyer of subdivision lot was able to register the sale with the Registry of Deeds for Cebu City who issued the corresponding Transfer Certificates of Title (TCT) in their respective corporate names. The details of the 10 subdivision lots, together with the TCT No. issued by the Registry of Deeds to each corporate buyer, are provided below for easy reference: Number Block Lot Area Notarization TCT of Lots No. No. in sq.m. Date No. 1 1 1 514 08/23/01 T-160311 2 1 19 770 03/25/99 156256 3 1 26 636 04/16/01 160465 4 1 27 625 09/02/04 T-174477 5 1 28 501 04/24/01 160909 6 1 29 528 04/24/01 160910 7 1 34 704 01/19/00 158812 8 1 35 723 10/06/99 162066 9 3 1 692 04/19/05 175973 10 3 12 808 03/26/99 156319 Later on, ALI discovered in the course of performance of land development works that the Project could no longer be implemented and completed due to an unforeseen event or force majeure caused by the uncontrollable soil instability. With this development, the aforesaid corporate buyers manifested their intention to rescind the purchase of the subdivision lots while ALI, as a responsible real estate developer, offered to return to each buyer the purchase price as stated in the DOAS without any interest whatsoever. To carry out the desire of the parties, the 10 corporate buyers will execute a separate Deed of Rescission and Reconveyance whereby they would reconvey the subdivision lot covered by their respective TCT to ALI, while the latter would also return the full amount covered by purchase price as stated in the DOAS. In reply, please be informed that the Civil Code specifically allows the rescission of the contract if one of the parties to said agreement cannot comply with what is required of him and such right to rescind is implied in reciprocal obligations. The same code also provides that rescission creates an obligation to return the things which were the object of the contract, together with their fruits, and the price with its interest. However, the rescission can be carried out only when one who demands rescission can return whatever he may be required to restore. The right to rescind a reciprocal obligation is granted by Article 1191, which states: "Art. 1191. The power to rescind obligations 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 obligation, 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. cDAEIH The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period. This is understood to be without prejudice to the rights of third persons who have acquired the thing, in accordance with articles 1385 and 1388 and the Mortgage Law." (emphasis supplied) In relation thereto, the provisions of Article 1385 of the Civil Code should be given equal importance, which reads: "Art. 1385. Rescission creates the obligation to return the things which were the object of the contract, together with their 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. Neither shall rescission take place when the things which are the object of the contract are legally in the possession of third persons who did not act in bad faith. In this case, indemnity for damages may be demanded from the person causing the loss." (emphasis supplied) In previous rulings, the BIR has consistently ruled that the rescission of contract does not give rise to a taxable event due to the following reasons: (a) the result of the 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 acknowledgement or confirmation of the title and ownership of the original owner of the property. (BIR Ruling Nos. 059-92 dated February 18, 1992; DA-080-03 dated March 17, 2003; DA-280-03 dated August 25, 2003 and DA-020-07 dated January 17, 2007). In the instant case, the 10 corporate buyers and ALI manifested their intention to rescind the DOAS because the Project could no longer be implemented and completed due to the uncontrollable soil instability. The rescission of contract between the buyers and ALI has the effect of cancelling the respective DOAS because of ALI's failure to implement and complete the Project based on the overall master plan. Thus, the rescission will give the corporate buyers the right to rescind and render null and void the stipulations in the DOAS with ALI, and the effect of rescission is, as if no sale, transfer or exchange ever took place between the parties. On the basis of the foregoing, it is clear that the reconveyance of the subdivision lots by the buyers to ALI and ALI's return of the full amount covered by purchase price to each of them by virtue of a Deed of Rescission and Reconveyance is not subject to the regular income tax imposed under Section 27 (A) and consequently to the CWT prescribed by RR No. 2-98, as amended, implementing Section 57 (B) of the 1997 Tax Code, as amended. Said transaction is likewise not subject to DST under Section 196 of the same Tax Code, as amended, inasmuch as it is a mere reconveyance of the object of the contract and without any monetary consideration. CASaEc In BIR Ruling No. DA-201-01 dated October 19, 2001, this Office ruled that: "In reply, please be informed that since the Deed of Rescission and Reconveyance was executed in order to effect the cancellation of the sale and is without monetary consideration, the transfer of the said property in favor of CMJ is not subject to the capital gains tax imposed under Section 24(D)(1) of the Tax Code of 1997 nor to the creditable withholding tax prescribed by Revenue Regulations No. 2-98, implementing Section 57(B) of the Tax Code of 1997. Furthermore, it is not likewise subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997. However the notarial acknowledgment to the said Deed of Rescission and Reconveyance is subject to the documentary stamp tax of P15.00 only pursuant to Section 188 of the Tax Code of 1997. (BIR Ruling No. 027-93 dated January 15, 1993) However, the P168,000.00 paid by the Cordero Spouses to CMJ as down payment, if not returned to Erlinda Cordero, is subject income tax at the rate prescribed under Section 27(A) of the Tax Code of 1997." (Emphasis supplied) Likewise, in BIR Ruling No. DA-020-07 dated January 17, 2007, the BIR recognized the right of the contracting parties to rescind the contract if the purpose for which the property was purchased could no longer be achieved. This Office has concluded that the execution of the Deed of Rescission between the parties is not subject to corporate income tax, CWT and DST. Said ruling states: "It is represented that on July 10, 1995, ASIAN SEAS RESOURCES & REALTY CORPORATION (ASSERRCO for brevity) executed a Deed of Absolute Sale in favor of the Cebu Doctors Hospital, Inc. & Cebu Doctors College, Inc. (the "Vendees") for and in consideration in the amount of P30,000,000.00, whereby ASSERRCO transferred and conveyed to the latter the real property covered by TCT No. 34916 located in Mandaue City. Title of said property was transferred in the name of Cebu Doctors Hospital, Inc. & Cebu Doctors College, Inc. under TCT No. 50084. On October 10, 1995, however, the Vendees and ASSERRCO mutually and voluntarily agreed that the above Deed of Absolute Sale be rescinded for the reason that the above subject property was no longer viable for school site purposes. ASSERRCO is willing to return the total consideration of the sale without interest whatsoever. By virtue of the above Deed of Rescission of Contract and by the return of the total consideration by ASSERRCO to the Vendees, all rights and interest pertaining to ASSERRCO over the subject property were restored, as if there was no conveyance of realty that took place. Based on the foregoing, you are requesting a ruling that the reconveyance of the subject property in favor of ASSERRCO is exempt from the capital gains tax/corporate income tax/withholding tax/and documentary stamp tax for the reason that the said reconveyance, effected through the execution of the Deed of Rescission, was executed without any monetary consideration and done only for the purpose of restoring the rights and interests of ASSERRCO as the original owner of the subject property. IaEHSD xxx xxx xxx Accordingly, the subsequent return of the subject property to ASSERRCO is not subject to the regular income tax imposed under Section 27(A) and consequently, to the creditable withholding tax prescribed by Revenue Regulations No. 2-98, as amended, implementing Section 57(B) of the Tax Code of 1997, as amended. The said transaction is likewise not subject to the capital gains imposed under Section 27(D) and to the documentary stamp tax imposed under Section 196 of the Tax Code since it is a mere reconveyance of the object of the rescinded contract and is not for monetary consideration. (BIR Ruling Nos. DA-012-2004 dated January 12, 2004 and DA-210-2001 dated October 19, 2001) However, the notarial acknowledgment to the said Deed of Rescission is subject to the documentary stamp tax of P15.00 only pursuant to Section 188 of the Tax Code of 1997 (BIR Ruling No. 027-93 dated January 15, 1993)." (Emphasis supplied) In fine, the Deed of Rescission and Reconveyance to be executed by the 10 corporate buyers of the subdivision lots with ALI is not subject to the regular income tax imposed under Section 27 (A) and consequently to the CWT prescribed by RR No. 2-98, as amended, implementing Section 57 (B) of the Tax Code of 1997, as amended. The transaction is also not subject to the DST under Section 196 of the same Tax Code. 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, then this ruling shall be considered as null and void. CTDHSE Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service