BIR Ruling No. 015-12

January 4, 2012 BIR RULING NO. 015-12 Sec. 99 (B) & Sec. 100 NIRC; RR 06-2008; RMC 25-2011 Romulo Mabanta Buenaventura Sayoc & De los Angeles Attorneys at Law 30th Flr. Citibank Tower 8741 Paseo de Roxas, Makati Attention: Atty. Jayson L. Fernandez Atty. Ronald D. Policarpio Tax Partners Gentlemen : This refers to your letter dated October 26, 2010 requesting, on behalf of your client, Philippine American Life and General Insurance Company (Philamlife), for confirmation that the difference between the book value and the selling price of Philamlife's Four Hundred Ninety Eight Thousand Five Hundred Ninety (498,590) Class A shares (the "Sale Shares") in Philam Care Health Systems, Inc. (PhilamCare) sold, through a public bidding, in favor of STI Investments, Inc. (STI), is not subject to donor's tax under Section 99 (B), in relation to Section 100, of the 1997 National Internal Revenue Code ("Tax Code of 1997"). The facts, as represented, are as follows: PhilamCare is a domestic corporation duly organized under the laws of the Philippines and owned by Philamlife (49.89%), United Health Group, Inc. (UHGI) (49.89%), and a number of estates and individual shareholders (0.22%). In early 2009, Philamlife decided to explore its options to divest from the health maintenance organization industry, the primary business of PhilamCare. It was eventually decided that the divestment would be done by selling all the Sale Shares to any interested third party buyer, or to UHGI, should the latter decide to exercise its right of first refusal. Thus, a financial adviser, Deutsche Bank A.G., was engaged to invite interested potential bidders and to manage the bidding process. A number of companies expressed interest in bidding for the Sale Shares. A competitive bidding process ensued in which each of the participants conducted comprehensive legal and financial due diligence audits of PhilamCare. After the conclusion of the due diligence process and the tender of bids, STI emerged as the winning bidder, with the highest indicative bid offer. This bid was made on the basis of the winning bidder's assessment of the true value of the PhilamCare shares taking into account its evaluation of PhilamCare's assets and liabilities, as well as the business outlook. UHGI opted not to exercise its right of first refusal, and Philamlife concluded the sale of its 498,590 Class A shares to STI for USD2,190,000.00 (or Php104,259,330.00 based on the prevailing exchange rate of Php47.607 to USD1.00) on 24 September 2009. The selling price of the Sale Shares was lower than their book value based on the financial statements of PhilamCare as of end-2008. The necessary stamp tax and capital gains tax returns were filed within the periods provided under the Tax Code. On the basis of the above, you now seek confirmation that the difference between the book value of the Sale Shares sold by Philamlife to STI and their selling price is not a taxable donation under Section 99 (B), in relation to Section 100 of the Tax Code. AaSCTD 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." 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 is 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 a gift subject to donor's tax under Section 100 of the Tax Code. Corollary to this is Revenue Memorandum Circular (RMC) No. 25-2011, dated March 2, 2011, in which, this Office revoked BIR Ruling No. [DA-(DT-065) 715-09] dated November 27, 2009 for lack of factual and legal basis and clarified that Section 100 of the Tax Code does not mention any exemption. The RMC, thus, provides: "It is noteworthy to state that the above provision (Section 100 of the Tax Code) does not mention of any exempt transactions. The above provision is clear and free from any doubt and/or ambiguity. Hence, there is no room for interpretation. There is only room for application. (Cebu Portland Cement Co. vs. Municipality of Naga, Cebu, et al., G.R. No. 24116-17, August 22, 1968) In City of Iloilo, et al. vs. Smart Communications, Inc. G.R. No. 167260, February 27, 2009, the Supreme Court held that: SHADcT The basic principle in the construction of laws granting tax exemptions has been very stable. As early as 1916, in the case of Government of the Philippine Islands v. Monte de Piedad, this Court has declared that he who claims an exemption from his share of the common burden of taxation must justify his claim by showing that the Legislature intended to exempt him by words too plain to be beyond doubt or mistake. This doctrine was repeated in the 1926 case of Asiatic Petroleum v. Llanes, as well as in the case of Borja v. Commissioner of Internal Revenue (CIR) decided in 1961. Citing American jurisprudence, the Court stated in E. Rodriguez, Inc. v. CIR: The right of taxation is inherent in the State. It is a prerogative essential to the perpetuity of the government; and he who claims an exemption from the common burden, must justify his claim by the clearest grant of organic or statute law . . . When exemption is claimed, it must be shown indubitably to exist. At the outset, every presumption is against it. A well-founded doubt is fatal to the claim; it is only when the terms of the concession are too explicit to admit fairly of any other construction that the proposition can be supported. In the recent case of Digital Telecommunications, Inc. v. City Government of Batangas, et al., we adhered to the same principle when we said: A tax exemption cannot arise from vague inference. . . Tax exemptions must be clear and unequivocal. A taxpayer claiming a tax exemption must point to a specific provision of law conferring on the taxpayer, in clear and plain terms, exemption from a common burden. Any doubt whether a tax exemption exists is resolved against the taxpayer." In view of the foregoing, this Office hereby rules that the difference between the book value and the selling price of the Sale Shares is 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. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue