Tax Exemption on the Donation of BA Shares of Stock to Its Resident Employees

January 26, 1987 BIR RULING NO. 018-87 101 018-87 Gentlemen : This refers to your letter dated January 12, 1987 stating that you are acting as counsel in the Philippines, for the counsel of British Airways (BA) and Her Majesty's Government (HMG) in connection with the proposal of HMG to privatize BA, a company incorporated under the laws of the United Kingdom; that all of the issued and outstanding capital stock of BA is owned by HMG; that part of the privatization plan is the intention of HMG to afford the BA employees (residents of the Philippines) an opportunity to acquire a certain number of shares of BA; that owing to the provisions of our Revised Securities Act (B.P. Blg. 178) and applicable Central Bank circulars, memoranda and regulations, HMG has decided to offer, within a period of ten (10) days, to the Philippine resident BA officers/employees and opportunity to acquire a certain number (Approximately) 245 sterling worth for each employee), of fully paid shares of BA, without payment ('Free Shares'); and the acquired Free Shares will be held in trust in the United Kingdom for two years during which period the Free Shares cannot be sold or transferred by the employees concerned. On the basis of the foregoing representation, you pose the following questions: (1) Whether the Free Shares constitute immediate additional compensation to the employees notwithstanding that the Free Shares may not be sold or transferred within the prescribed two-year holding period; (2) Whether the transaction will not invite a tax or it does not constitute a taxable event, however, the employees will be subject to capital gains tax only upon the sale/disposition of free shares; (3) Whether the transaction is a donation. In reply thereto, I have the honor to inform you that the aforementioned transaction is a donation. Pursuant to Section 101 of the Tax Code as amended, a donor's gift tax shall be levied, assessed, collected and paid upon the transfer by any person, resident or non-resident, of property by gift. The said tax shall apply whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible. However, where the donor is a non-resident foreign entity at the time of the donation, its personal property so transferred which is situated outside the Philippines shall not be included as part of its gross gift pursuant to Section 108 of the same Code. The gift tax is an excise tax on the transfer of property. It is not a tax on the property which is the subject of the gift, although it is measured by the value of that property. It is a tax on the donor's privilege to give. (see Bromely V. Mc-Caughn, 280 U.S. 124 cited in p. 953, Chap. 19, Montgomery's Federal Taxes (1951-52). In view thereof, and considering that the donor in this case is beyond the jurisdiction of the Philippine Government to tax, this Office is of the opinion as it hereby holds that the aforesaid donation of BA shares of stock to its resident employees is not subject to any Philippine tax. cdtech Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner