Universal Robina Corporation

December 23, 2009 BIR RULING [DA-(C-347) 834-09] Secs. 28, 32; DA 297-05, DA-209-07 Universal Robina Corporation 110 E. Rodriguez, Jr. Avenue Bagumbayan, Quezon City Attention: Lance Y. Gokongwei Deputy CEO Gentlemen : This refers to your letter dated August 3, 2009, wherein you requested for confirmation of your opinion that the transfer of a property of a company to its employees retirement plan is not subject to capital gains tax (CGT), creditable/expanded withholding tax (EWT), documentary stamp tax (DST) and donor's tax; that the said contribution is an expense which is deductible in the income tax return of the employer; and that in the event that the retirement plan will subsequently lease the said property, the corresponding income of the plan from the lease of the said property is not subject to income tax and consequently to EWT. Background It is represented that Universal Robina Corporation (hereinafter referred to as URC) is a corporation duly organized and existing under and by virtue of Philippine laws, with office address at 110 E. Rodriguez, Jr. Avenue, Bagumbayan, Quezon City; that URC maintains a retirement plan known as Universal Robina Corporation Employees Retirement Plan (hereinafter referred to as URC-ERP or the Plan) and the same has been qualified by this Office per BIR Rulings ERP-036-94 dated June 28, 1994 and ERP-217-99 dated July 6, 1999 as a reasonable retirement benefit plan within the purview of then Section 28 (b) (7) (A) of the National Internal Revenue Code (now Section 32 (B) (6) (a) of the Tax Code of 1997, as amended; that URC owns the property which is located in Barrio San Jose, San Pablo, Laguna, with an area of 84,236 sq. m. and covered by four land titles with a book value of P84,236,000 (hereinafter referred to as "Property"); that the Property is being used by URC-Beverage Division as a Water Plant for its production of beverages; and that URC intends to contribute the said Property to the Plan, at book value, to cover URC's future pension cost liability. Ruling Requested You now request confirmation of your opinion that the transfer of the Property from URC to the Plan, in compliance with the former's obligation to fund the said Plan, has the following tax consequences: 1. The transfer of the Property as URC's contribution to its Retirement Plan is not subject to capital gains tax (CGT), creditable withholding tax (EWT), value-added tax (VAT), documentary stamp tax (DST) and donor's tax; 2. The contribution to the Plan ( i.e., the Property) is an expense which is deductible in the income tax return of URC; and 3. In the event that the Retirement Plan will subsequently lease the said Property, the corresponding income of the Plan from the lease of the said Property is not subject to income tax and consequently to EWT. In reply, please be informed as follows: I. The transfer of the Property as URC's contribution to its Retirement Plan is not subject to CGT, EWT, VAT, DST and Donor's Tax a. Capital Gains Tax The term "capital asset", which is subjected to capital gains tax, is defined under Section 39 (A) (1) of the TRA as follows: DHITcS "The term 'capital assets' means property held by the taxpayer (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, or property used in the trade or business, of a character which is subject to the allowance for depreciation provided in Subsection (F) of Section 34; or real property used in trade or business of the taxpayer. " Considering that the Property is being used by URC-Beverage Division as a Water Plant for its production of beverages, the same is considered not as a capital asset but as an ordinary asset, being "real property used in trade or business of the taxpayer" . Consequently, the transfer of the said Property by URC to the Retirement Plan is not subject to CGT. b. Creditable/Expanded Withholding Tax In the case of Philamlife (BIR Ruling DA-486-04 dated September 10, 2004), where the employer transferred certain realties to its employees' duly-qualified retirement fund, this Office ruled as follows: ". . . the transfer of Property (which is classified as ordinary asset) by Philamlife to PERF by way of contribution is not considered a sale, hence, not subject to creditable withholding tax . Article 458 of the New Civil Code defines a contract of sale as: "Article 458. By the contract of sale one of the contracting parties obligates himself to transfer the ownership of and to deliver a determinate thing, and the other to pay therefor a price certain in money or its equivalent . "Applying the above principles, there is no obligation on the part of PERF "to pay therefor a price certain in money or its equivalent." There is no "price paid or promised." Further, PERF is not liable to Philamlife "as a debtor for the agreed price". Thus, there is no sale to speak of in this case that shall give rise to withholding tax obligation on the part of PERF. xxx xxx xxx "Based on the foregoing, it can be concluded that what the law contemplates as an occasion for the application of the creditable withholding tax is a sale, transfer or exchange where cash or valuable consideration is paid to the transferor in consideration for the sale or transfer of property . "The contribution by Philamlife of property to PERF to answer for its past service liability does not result in PERF paying valuable consideration to Philamlife in exchange for such property. PERF does not part with anything of value to Philamlife which may warrant the application of withholding tax." Applying the same reasoning, we rule that the transfer of the Property from URC to its BIR-qualified Retirement Plan is not a sale of realty, hence, it is not subject to EWT. c. Documentary Stamps Tax The conveyance of the Property to the Retirement Plan is not subject to DST because the said transfer is without any consideration. Section 196 of the Tax Code reads: "SEC. 196. Stamp Tax on Deeds of Sale and Conveyances of Real Property. On all conveyances, deeds, instruments, or writings, other than grants, patents or original certificates of adjudication issued by the Government, whereby any land, tenement or other realty sold shall be granted, assigned, transferred or otherwise conveyed to the purchaser, or purchasers, or to any other person or persons designated by such purchaser or purchasers, there shall be collected a documentary stamp tax , at the rates herein below prescribed, based on the consideration contracted to be paid for such realty or on its fair market value determined in accordance with Section 6(E) of this Code, whichever is higher . . . ." Moreover, Revenue Regulations No. 26, The Revised Documentary Stamp Tax Regulations states in part: CONVEYANCES OF REAL ESTATE "On all conveyances, deeds, instruments, or writings, grants, patents, or original certificates of adjudication issued by the Government, whereby any lands, tenements, or other realty granted, assigned, or otherwise conveyed to the purchaser, purchasers, or to any other person or persons designated by the purchaser or purchasers . . . SEC. 185. Conveyances without consideration. Conveyances of realty, not in connection with a sale , to trustees or other persons without consideration are not taxable . It is crystal clear from the above provisions of the Tax Code and its implementing Regulations that the DST is imposed on the sale of any land, tenement or other realty, with the transferee of the property being "the purchaser, or purchasers, or . . . any other person or persons designated by such purchaser or purchasers" , and with the basis of the tax being "the consideration contracted to be paid for such realty" . EDIaSH In addition, in BIR Ruling DA-209-07, this Office ruled that transfer to a Retirement Plan of a property not in connection with a sale without consideration is not taxable. This Office explained, thus: "Section 185 of Revenue Regulations No. 26, otherwise known as the Documentary Stamp Tax Regulations, provides that conveyances of realty, not in connection with a sale, to trustee or other persons without consideration are not taxable. "Since the transfer of the Baguio Property from JDI-MEERP to JDII-ERP is a conveyance not in connection with a sale and is without monetary consideration, said transfer is not subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997, as amended." Based on the above discussion, we confirm your opinion that the deed of conveyance transferring the property to URC-ERP is not subject to DST. d. Donor's Tax While the transfer of the Property to the Plan is without consideration, the same cannot be considered a donation which should be subjected to donor's tax because of the absence of a donative intent on the part of the transferor. URC is just complying with its obligation to fund its Retirement Plan. In BIR Ruling DA-486-04, dated September 10, 2004, a case with similar facts to the instant case, this Office ruled as follows: "The transfer, while without consideration, also cannot be considered as a donation subject to donor's tax. Under Article 725 of the Civil Code, a "(d)onation is an act of liberality whereby a person disposes gratuitously of a thing or right in favor of another, who accepts it. "Well-settled in our jurisprudence is the fact that the essential elements of a valid donation are: (1) the reduction of the patrimony of the donor; (2) the increase in the patrimony of the donee; and (3) the intent to do an act of liberality (animus donandi) . (citing BIR Ruling [DA-075-03] March 11, 2003). "Since the contribution by Philamlife to the employees' retirement fund is in compliance with its legal obligation to contribute therein, there is no act of liberality to speak of in this case. Thus, no donor's tax is due." This Office reiterates the above-cited ruling and confirms your opinion that the conveyance of the Property from URC to URC-ERP is not subject to Donor's Tax. II. The contribution to the Plan (i.e., the Property) is an expense which is deductible in the income tax return of URC In BIR Ruling ERP-036-94 issued in favor of URC, this Office had ruled that "the contributions of the company to the retirement fund are deductible from its gross income" . It should be noted that contributions to retirement funds are not limited to cash but also include property. Moreover, in BIR Ruling DA-486-04 dated September 10, 2004, this Office ruled: "The 1997 Tax Code or any other law does not qualify the term "contribution" to employees' retirement fund as to refer solely to monetary contributions. Thus, nothing should preclude the employer from making property contributions to the employees' retirement fund for as long as no part of the corpus or income of the fund shall be used for, or be diverted to, any purpose other than for the exclusive benefit of the said official and employees." We therefore confirm your opinion that the contribution to the Plan of the Property is a deductible expense on the part of URC for purposes of computing its net income. III. In the event that the Retirement Plan will subsequently lease the said Property, the corresponding income of the Plan from the lease of the said Property is not subject to income tax and consequently to EWT Any income from the lease of the said Property is not subject to income tax as well as EWT because of the income tax exemption of the URC Employees' Retirement Plan, a BIR-qualified reasonable retirement benefit plan whose earnings shall neither be used for nor diverted to any purpose other than for the exclusive benefit of the member-employees. This Office had, in its Ruling ERP-036-94 issued in favor of URC, already confirmed that "The income of the Trust Fund from its investments are exempt from income tax" . The spirit of such exemption was highlighted in the landmark case of CIR vs. The Hon. Court of Appeals, the Court of Tax Appeals & GCL Retirement Plan (G.R. No. 95022 dated March 23, 1992) in the following vein: "It is evident that tax exemption is likewise to be enjoyed by the income of the pension trust. Otherwise, taxation of those earnings would result in a diminution of accumulated income and reduce whatever the trust beneficiaries would receive out of the trust fund. This would run afoul of the very intendment of the law." EIAScH It is noteworthy to state at this point that this Office, in a long line of cases and using the GCL doctrine, has ruled on the exemption from income tax and withholding tax of the income of reasonable retirement benefit plans, like the case of Alaska Milk where this Office ruled that the income of the Retirement Plan from leasing of its properties is exempt from income tax (BIR Ruling DA-652-04 dated December 21, 2004). 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