Philippine Racing Club, Inc.

February 26, 2009 BIR RULING [DA-(VAT-028) 127-09] Philippine Racing Club, Inc. Santa Ana Park, A.P. Reyes Avenue 1207 Makati City Attention: Mr. Solomon S. Cua President & Chief Executive Officer Gentlemen : This refers to your letters dated July 15, 2008 and November 20, 2008, both requesting confirmation that with the rescission of the Deed of Transfer with Subscription Agreement executed by the concerned parties, the VAT being imposed on the exchange transaction subject of the said Deed is thereby cancelled. TAHCEc The facts and circumstances of the case are summarized as follows: With the intention of availing of the benefits of Section 40 (c) (2) of the NIRC, as amended, on the non-recognition of gain or loss and tax deferments on exchange of property for shares of stocks. Philippine Racing Club, Inc. (PRCI), transferor/subscriber, and JTH Davies Holdings, Inc. (JTH), transferee/company, entered into a Deed of Transfer with Subscription Agreement dated July 8, 2008 calling for the transfer of certain properties of PRCI with aggregate zonal value of P3,817,242,000.00 in exchange for shares of stock of JTH. In a prior Certification Ruling dated July 3, 2008, the transfer of properties was confirmed "not subject to income tax/capital gains tax/expanded withholding tax/donor's tax/and value added tax/documentary stamp tax on transfer of real property" pursuant to the tax deferment provisions of Section 40 (c) (2) of the Tax Code of 1997, Revenue Regulations No. 18-2001 dated November 13, 2001 and Revenue Memorandum Order No. 32-2001 dated November 28, 2001. As a matter of course, Tax Clearance Certificate No. OCN 8TA0000007653 and Certificate Authorizing Registration (CAR) No. 2007 00266240 both dated 9th July 2008 were then issued authorizing the transfers of properties described in the said Deed of Transfer. However, in a letter dated July 15, 2008, then Commissioner of Internal Revenue, Lilian B. Hefti, informed PRCI that "upon further review of the transaction, the same disclosed that the real property which has been the subject of the above exchange is a property that is used in business" , hence subject to VAT following the provisions of Sec. 4.109-1 (j) of Revenue Regulations No. 16-2005 as last amended by Revenue Regulations No. 4-2007, which states that: "(p) The following sales of real properties are exempt from VAT, namely: "(1) Sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business. However, even if the real property is not primarily held for sale to customers or held for lease in the ordinary course of trade or business but the same is used in the trade or business of the seller, the sale thereof shall be subject to VAT being a transaction incidental to the taxpayer's main business." Consequently, PRCI was deemed liable to pay value-added tax, tentatively computed in the amount of P458,069,040.00 and was directed to pay the net VAT due by including the exchange transaction as part of the sales transactions subject to output tax in the VAT return for the month covering July 2008. IcSEAH In a reply letter to the Commissioner of Internal Revenue dated August 22, 2008, PRCI stated, among others, that "since the contracting parties agreed to the exchange of property for shares of stock on the premise that the same shall be exempt from value added tax, the contracting parties, after extensive deliberations, have rescinded the Deed of Transfer with Subscription Agreement". A copy of the duly executed Disengagement Agreement between PRCI and JTH dated August 22, 2008 was submitted as part of its letter. In view of the rescission of the subject Deed of Transfer and Subscription Agreement or the non-consummation of the exchange transaction, PRCI now requests for the formal cancellation or withdrawal of the demand for the payment of the value added tax. In reply, please be informed that without a sale or exchange having been effected, it follows that no taxable event has taken place. Further, in a number of rulings, this Office ruled that rescission of a 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. (BIR Ruling No. 059-92 dated February 18, 1992; BIR Ruling No. DA-080-03 March 17, 2003; BIR Ruling No. 588-04 dated November 22, 2004; BIR Ruling No. DA-664-04, dated December 23, 2004). Pursuant to the Disengagement Agreement which rescinded the Deed of Transfer with Subscription Agreement, the exchange transaction between the parties was cancelled. Hence, the documentary stamp tax (DST) under Section 196 of the Tax Code of 1997, as amended by Republic Act (R.A.) No. 9243, cannot be imposed on the said Deed of Transfer since as a result of the rescission, it is as if there was no transfer or exchange that took place. Furthermore, even if the said exchange transaction was consummated, the DST on said transaction is exempt under Sec. 199 (m) of R.A. No. 9243. However, the Disengagement Agreement is subject to the P15.00 DST under Section 188 of the Tax Code, as amended. Records of the case show that there is no occasion for the return of the object of the rescinded contract as the properties in question remain in the name of the original owners. Consequently, there being no actual exchange or transfer of properties by PRCI to JTH as contemplated in the rescinded Deed of Transfer with Subscription Agreement, there is now no taxable transaction subject to VAT and any demand letter issued for the payment thereof is hereby withdrawn. You are therefore required to surrender the original Tax Clearance Certificate No. OCN 8TA0000007653 and Certificate Authorizing Registration (CAR) No. 2007 00266240 both dated 9th July 2008 issued in favor of Philippine Racing Club, Inc. (PRCI) to the Large Taxpayers Division, National Office so that the same can be properly cancelled and nullified. TADaCH Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Commissioner of Internal Revenue