Quiason Makalintal Barot Torres Ibarra & Sison

October 28, 2009 BIR RULING [DA-(C-245) 627-09] BIR Ruling No. DA-(C-017) 088-08 Quiason Makalintal Barot Torres Ibarra & Sison 21/F Robinsons-Equitable Tower, 4 ADB Avenue cor. Pedro Poveda St., 1605 Ortigas Center, Pasig City Attention: Atty. Benedict R. Tugonon Atty. Eric T. Dykimching Gentlemen : This refers to your letter dated August 20, 2009 requesting confirmation of your opinion that fair value reserve on land and fair value increment are excluded in the computation of the book value of shares of stock in The Shell Company of the Philippine Islands Limited (the "Company") for purposes of the capital gains tax in the sale or transfer of the said shares by Teresa T. de Gonzales La'o & Co., Inc. (the "Transferor") to Ma. Lourdes G. Aragon (the "Transferee"). cDCSTA It is represented that the Transferor is a corporation duly organized and existing under and by virtue of the laws of the Republic of the Philippines, with office address at 14B, JMT Corporate Condominium, ADB Ave., Ortigas Center, Pasig City. The Transferor is the absolute and registered owner of Three Hundred Thirty Nine (339) shares in the Company covered by stock certificate number 344 ("Shell Shares"). The Transferee is a Filipino citizen, of legal age, with address at c/o 14B JMT Corporate Condominium, ADB Ave., Ortigas Center, Pasig City. On February 18, 2009, the Transferor transferred the Shell Shares in favor of the Transferee and the Transferee paid Sixty Three Thousand Six Hundred Eighty Nine and 63/100 Pesos (P63,689.63) to the Transferor. In reply, please be informed that fair value reserve on land and fair value increment are not considered as income and should not therefore be included in the determination of the book value of shares of stock. In BIR Ruling No. DA-(C-017) 088-08, the BIR declared that revaluation increment on property and revaluation reserve for available-for-sale financial assets shall be excluded in the determination of the book value of shares for purposes of the 5%/10% final tax on the net capital gain from the sale of said shares. The said ruling provides that: "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 Regulation 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." TCcDaE Similarly, in BIR Ruling [UN-402-95] dated November 15, 1995, the BIR ruled as follows: "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 Regulation 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. This, your opinion that the accumulated and current equity, as well as the appraisal surplus, on 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. 4828 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 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." Moreover, in BIR Ruling No. DA-199-08, the BIR ruled that the share in revaluation increment should not be included in the determination of the book value of shares in Asturias Chemical Industries, Inc., Agusan Petroleum & Mineral Corporation, Batulao Mineral Corporation, Evercrest Cement & Mining Corporation and Standard Construction Industries, Inc. for purposes of the sale or transfer of said shares to Global 808 Investment Holdings, Inc. The ruling reads: "On the other hand, "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 are not considered as income and should not therefore be included in the determination of the book value of the aforesaid corporations shares for purposes of the capital gains tax on the sale or transfer of the said shares. Accordingly, this will therefore serve as the authority for the Revenue District Office concerned to issue the corresponding Certificate Authorizing Registration (CAR) relating to the shares of stock of Asturias Chemical Industries, Inc., Agusan Petroleum & Mineral Corporation, Batulao Mineral Corporation, Evercrest Cement & Mining Corporation and Standard Constructors Industries, Inc. on the aforementioned transactions." TcHEaI Based on the foregoing, the fair value reserve on land and fair value increment are not considered as income and should not therefore be included in the determination of the book value of shares of stock in the Company for purposes of the 5%/10% final tax on the net capital gain from the sale of said shares. 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