Francisco G. Tagao Law Office

November 27, 2009 BIR RULING [DA-(DT-065) 715-09] 100; BIR Ruling 033-02; DA 398-95; 023-02; 075-03; 652-06 Francisco G. Tagao Law Office Lot 23 Block 56, Francisco Reyes Street BF Homes Paraaque Subdivision Paraaque City Attention: Atty. Francisco G. Tagao Gentlemen : This refers to your letter dated October 30, 2009 requesting, on behalf of your client, Metro Pacific Corporation ("MPC") , for confirmation that the sale of the Bonifacio Land Corporation ("BLC") shares of stock, not listed and traded through the local stock exchange, by MPC to Columbus Holdings, Inc. ("CHI") is not subject to donor's tax under Section 100 of the 1997 National Internal Revenue Code ("Tax Code"). The facts, as represented, are as follows: On February 13, 2001, MPC acquired from ML & H Corporation 1,099,610 BLC shares for a total acquisition cost of P467,334,250 or an acquisition cost of P425.00 per share. Stock Certificate No. 199 was issued for 1,099,609 out of the 1,099,610 BLC shares in the name of MPC while the balance of one (1) share was issued in the name of MPC's nominee. On January 25, 2002, MPCC also acquired from ML & H Corporation 1,843,240 BLC shares for a total acquisition cost of P822,131,633.91 or an acquisition of cost of P446.03 per share. The 1,843,240 BLC shares were evidenced by Stock Certificate No. 191 issued in the name of MPC. On October 29, 2009, MPC and CHI executed a Deed of Absolute Sale whereby MPC sold 2,597,197 BLC common shares of stock consisting of the entire 1,843,240 BLC common shares of stock covered by Stock Certificate No. 191 and 753,957 BLC common shares of stock covered by Stock Certificate No. 199, at a price of P158 per share or a total selling price of P410,357,126.00. The total acquisition cost of the sold BLC shares is P1,142,563,358.91. SAHaTc MPC agreed to sell the said BLC shares for the following business reasons: 1. The BLC shares are no longer a significant asset of MPC and it does not expect to realize any meaningful returns on its investment therein, both immediately and in the long term; 2. Selling said shares at the best possible price will provide MPC fresh funds that it can readily use to retire long outstanding debts and reduce borrowing costs; 3. As CHI is an affiliate of the A/B Group which holds a pledge lien over the subject shares, it will be difficult to find a buyer for the said shares other than CHI; and 4. Taking into account recent BLC shares sales transactions, the purchase price appears to be the best price that MPC can get for the said BLC shares. Based on the latest audited financial statements of BLC as of December 31, 2008, the book value per BLC share is P332.78 and the total book value of the 2,597,197 BLC shares is P864,295,217.66. Recent sales of BLC shares in September 2008 (four[4] sales) and one (1) sale in April 2009 would show that BLC shares were sold at prices lower than their book value by unrelated parties other than MPC and CHI at a price of P158 per share which gives the prevailing market price of the BLC shares at P158 per share. It is also represented that MPC and CHI are not related parties and that the sale and purchase of the BLC shares is an ordinary business transaction negotiated in good faith and motivated by legitimate business reasons. Moreover, there was no intention to donate on the part of MPC and the sale of the BLC shares at a price lower than their book value is not intended to avoid the payment of the capital gains tax. On the basis of the above, you now seek confirmation that the difference between the book value of the BLC shares sold by MPC to CHI and their selling price is not a taxable donation under Section 99 (B), in relation to Section 100, of the Tax Code. In reply, please be informed that Section 99 (B) of the Tax Code imposes a 30% donor's tax on gifts made to a stranger including a corporation. The tax is payable on gratuitous transfers and on transfers with insufficient consideration. Relative thereto, Section 100 of the Tax Code provides that: "SEC. 100. Transfer for Less Than Adequate and Full Consideration. Where property, other than real property referred to in Section 24(D), is transferred for less than an adequate and full consideration in money or money's worth, then the amount by which the fair market value of the property exceeded the value of the consideration shall, for the purpose of the tax imposed by this Chapter, be deemed a gift, and shall be included in computing the amount of gifts made during the calendar year." HDATSI Based on the above, where property is transferred for less than an adequate and full consideration in money or money's worth, the amount by which the fair market value of the property exceeded the value of the consideration shall be considered a gift subject to the donor's tax. Section 100 of the Tax Code is implemented by Revenue Regulations (RR) 6-2008 insofar as the property involved are shares of stocks. Section 7 (c) (c.1) (c.1.4) of the Regulations provides as follows: "(c) Determination of Amount and Recognition of Gain or Loss. (c.1) In the case of cash sale, the selling price shall be the consideration per deed of sale. xxx xxx xxx (c.1.4) In case the fair market value of the shares of stock sold, bartered, or exchanged is greater than the amount of money and/or fair market value of the property received, the excess of the fair market value of the shares of stock sold, bartered or exchanged over the amount of money and the fair market value of the property, if any, received as consideration shall be deemed a gift subject to the donor's tax under Section 100 of the Tax Code, as amended." Further, Section 7 (c.2) (c.2.2) of the same regulations provides that: "(c.2) Definition of 'fair market value' of the Shares of Stock. For purposes of this Section, 'fair market value' of the share of stock sold shall be: xxx xxx xxx (c.2.2) In the case of shares of stock not listed and traded in the local stock exchanges, the book value of the shares of stock as shown in the financial statements duly certified by an independent certified public accountant nearest to the date of sale shall be the fair market value." Based on the above provisions, in case the consideration of the sale of shares of stock not listed and traded through the local stock exchange is lower than the fair market value (FMV)/book value of the shares, the difference between the book value and the selling price of the shares is considered as a gift subject to donor's tax under Section 100 of the Tax Code. While this is the general rule, it should be borne in mind, however, that the application of this provision is obtaining only in the situation where a tax is sought to be avoided by the parties to a sale. SIaHDA The legislative intendment of the deemed gift provision under Section 100 of the Tax Code is to discourage the parties to a sale from manipulating their selling price in order to save on income taxes. This is because under the Tax Code, the measurement of gain from a disposition of property merely considers the amount realized from the sale, which is the selling price minus the basis of the property sold. Hence, if the parties would declare a lower selling price per document of sale than the actual amount of money which changed hands, there is foregone revenue and the government is placed at a very disadvantageous position. In order to plug this tax leakage, Section 100 automatically treats the disparity between the FMV and selling price of the property as gift subject to donor's tax. In short, the deemed gift provision compliments the income tax rule on the measurement of gain and, thus, works to avoid the recurrence of under-declaration of the selling price. Although the sale of the BLC shares by MPC to CHI was made at a price lower than the book value of the shares, this Office is of the opinion that the instant case is an exception to the rule on deemed gift provisions. First , the sale was entered into as an ordinary commercial transaction for legitimate business purposes between unrelated parties. Second, and more important, the evil sought to be avoided by the law does not exist in the given set of facts. Granting that the selling price is lower than the book value, this is not intended to gain tax advantage due to the fact that the seller will still be in a loss position even if it disposes off the shares at book value because the acquisition cost is much higher than the book value. Hence, there can be no instance where parties can avoid the payment of capital gains tax since the transaction does not yield any gain on the part of the seller. In this connection, various BIR rulings recognize that Section 100 is not absolute and admits of certain exceptions. In BIR Ruling [DA-652-06] dated November 6, 2006 and BIR Ruling No. 033-02 dated August 16, 2002, the BIR ruled that as long as the transaction is conducted at arm's length such that a bonafide business arrangement or the dealings are done in the ordinary course of business, a sale for less than an adequate consideration is not subject to donor's tax. Moreover, in BIR Ruling DA-398-95 dated November 14, 1995, the BIR also held that the transfer of 1,000,000 shares in a Philippine corporation for US$1.00 is not subject to donor's tax because there was no intent on the part of the seller to donate. The BIR also ruled that a transaction is not subject to donor's tax under Section 100 of the Tax Code if there is no intention to donate and the transaction is undertaken for a legitimate or bonafide business purpose. (BIR Ruling [DA-(S40M-004) 007-08], July 4, 2008; BIR Ruling [DA-075-03], March 11, 2003; BIR Ruling [DA-023-02], February 19, 2002). Thus, in BIR Ruling No. 033-02 dated August 16, 2002, the Commissioner of Internal Revenue ruled as follows: "As a rule, under Section 100 of the Tax Code of 1997, transfer for less than an adequate and full consideration in money or money's worth of property, is deemed a gift to wit: ASaTCE SEC. 100. Transfer for Less Than Adequate and Full Consideration. Where property, other than real property referred to in Section 24(D) is transferred for less than and adequate and full consideration in money or money's worth, then the amount by which the fair market value of the property exceeded the value of the consideration shall, for the purpose of the tax imposed by this Chapter, be deemed a gift, and shall be included in computing the amount of the gifts made during the calendar year. However, this rule is not absolute. In the case of Commissioner of Internal Revenue vs. B.F. Goodrich Phils., Inc. (now Sime Darby International Tire Co., Inc.) and the Court of Appeals, G.R. No. 104171, February 24, 1999, the Supreme Court ruled that: '. . . It is possible that real property may be sold for less than adequate consideration for a bona fide purpose, in such event, the sale remains as 'arm's length' transaction. In the present case, the private respondent was compelled to sell the property even at a price less than its market value, because it would have lost all ownership rights over it upon the expiration of the parity amendment. In other words, private respondent was attempting to minimize its losses. At the same time, it was able to lease the property for 25 years, renewable for another 25. This can be regarded as another consideration on the price.' Judging from the facts, there is no showing of donative intent on the part of York. Though Section 100 does not require donative intent since its purpose is to close any avenue for tax avoidance by encompassing all transactions where there is a disparity in consideration, it is however, indicative or a strong proof that a gratuity is intended. That is why, ordinarily transfer for insufficient consideration is deemed a gift. However, jurisprudence recognizes those instances where there is no gratuity intended these are dealings done in the 'ordinary course of business'. Although it is true that these dealings per se is not sufficient to rule out existence of donative intent, it is equally true that donative intent is not synonymous with a disparity in consideration. (PAUL, Federal Estate and Gift Taxation) " In view of the foregoing, this Office hereby confirms that the difference between the book value and the selling price of the BLC shares is not a taxable donation subject to the 30% donor's tax under Section 99 (B) of the Tax Code, in relation to Section 100 of the same Code because it is an ordinary commercial transaction negotiated in good faith between unrelated parties and motivated by legitimate business reasons. Moreover, it has been ascertained that the transaction was not intended to avoid the payment of the capital gains tax as the total acquisition cost of the shares is very much higher than their book value. DCESaI This will therefore serve as a basis for the issuance of the Certificate Authorizing Registration (CAR)/Tax Clearance Certificate (TCC) on the sale of the BLC shares by MPC to CHI and the exemption from donor's tax pursuant to Section 99 (B) in relation to Section 100, both of the Tax Code and RR 6-2008. 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 as null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service