BIR Ruling No. 024-15

February 3, 2015 BIR RULING NO. 024-15 Sec. 24 (D) (1) and 27 (D) (1) of the Tax Code of 1997, as amended; BIR Ruling No. 460-11 Somera & Asiddao Law Offices Unit 306 Cattleya Condominium 235 Salcedo St., Legazpi Village, Makati City Attention: Mindamar Somera Gentlemen : This refers to your letter dated October 16, 2009 requesting in behalf of your client, Philippine Realty and Holdings Corporation (PhilRealty), for exemption from the payment of Capital Gains Tax, Documentary Stamp Tax, Withholding Tax and Expanded Value Added Tax on its exchange of properties. It is represented that PhilRealty is a corporation duly organized and existing under Philippine laws, with business address at the 5th Floor, East Tektite Tower, Ortigas Center, Pasig City. PhilRealty is the developer of the 31 storey Skyline Tower, the first building in its Andrea North Project, located at Balete Drive corner N. Domingo Street, New Manila, Quezon City. Skyline Tower has a total of 180 condominium units, one hundred twenty units (120) units of which are three bedroom units and the remaining sixty (60) two bedroom units. The areas of typical units are 206.78 sq.m. and 153.59 sq.m. respectively. The construction and sale of units in Skyline Tower began in 1996. Unfortunately, this was stopped during the latter half of 1997 due to the Asian financial crisis. At the time construction was stopped, about fifty-five percent (55%) of the building was completed. Of Skyline's 180 units, 75 have been pre-sold, net of cancellations. Despite stoppage of construction works, some of PhilRealty's clients continued and completed payment of their condominium units with parking lots on installment basis. Presently, some of the pre-sold units are now fully-paid and have been transferred to their owners ("New Unit Owners") via Deeds of Absolute Sale , as follows: Area Area Unit (in square Parking (in square Number meters) Number meters) New Unit Owner 1204 1 206.78 1204 12.5 Ayala Integrated Steel Manufacturing Co. 1404 2 206.78 1404 12.5 Michael Kenneth Maralit Sy 1405 3 153.59 1405 12.5 Carmen Mimette Maralit Sibal 1406 4 206.78 1406 12.5 Michelo Edgardo Maralit Sy Pursuant to said Deeds of Absolute Sale , the New Unit Owners have been issued Condominium Certificates of Titles (CCTs), as follows: Condominium Certificate of Title Unit Number Owner (CCT) No. 1204 Ayala Integrated Steel 37688 Manufacturing Co. 1404 Michael Kenneth Maralit Sy N-24796 1406 Michelo Edgardo Maralit Sy N-24795 Corresponding taxes in relation to the absolute sale and issuance of CCTs to the names of the New Unit Owners have already been paid, and except for the unit purchased by Carmen Mimette Maralit Sibal, the Certificates Authorizing Registration (CAR) to the subject properties have been issued. The unit of Carmen Mimette Sibal, on the other hand, is the subject of an application for abatement. Since the Corporation was badly affected by the Asian financial crisis and because of its inability to meet all its debts as they fall due, PhilRealty, in December 2002, filed a petition for corporate rehabilitation with prayer for suspension of payments. Finding PhilRealty's petition for rehabilitation impressed with merit, the rehabilitation court, on June 11, 2004, approved PhilRealty's petition for rehabilitation and made an Adjudication , to wit: " WHEREFORE, the foregoing premises considered, the court determines that Petitioner Philippine Realty and Holdings Corporation, Inc., deserves a sporting chance at rehabilitation in accordance with its Amended Rehabilitation Plan, as modified by the Evaluation and Recommendation Report of the Rehabilitation Receiver. Said Amended Rehabilitation Plan, as modified, is APPROVED, subject to the following conditions: (1) The rehabilitation receiver, petitioner and creditors shall file written reports at the end of the first year of implementation and annually thereafter until the termination of the rehabilitation; (2) At the end of two years form and after the initial implementation of the plan, the court shall undertake a review of the entire rehabilitation plan to determine the desirability of terminating or continuing with the rehabilitation. For this purpose, the rehabilitation receiver, petitioner and creditors are required to file their reports and to seasonably prompt the court accordingly." (Emphasis supplied.) In view of the approval of the rehabilitation plan, PhilRealty was able to slowly recover from its losses and is now ready to resume construction of the Skyline Tower. However, due to a significant shift in market preference to smaller condominium units, and in order to be competitive in the market and thus be able to work within the approved rehabilitation plan, PhilRealty was constrained to resize some of the existing units in the Skyline Tower to make it more saleable. The new units are now smaller in size and will range from 45 to 86 square meters. Smaller units will be clustered from levels 3-19, while the original larger units will be located at levels 20-32. In a meeting held on June 26, 2008, PhilRealty's Board of Directors resolved to amend Sections 2 (a), 3 (a), and 3 (b) of the Master Deed with Declaration of Restrictions of the Andrea North Condominium Project to make way for the changes. This resolution was duly approved by 68.79% of PhilRealty's stockholders in a meeting held on August 8, 2008. To implement the new plan, the New Unit Owners were given the option and have agreed to exchange their present units to units owned by PhilRealty under the following terms: a. The units to be transferred from PhilRealty shall be one of the units located on the 20th to 32nd floors; b. The units owned by the different owners and the corresponding units owned by PhilRealty to be exchanged shall have the exact same size (in square meters); and c. The exchange shall be without any monetary consideration and shall be for the sole purpose of helping PhilRealty get back on its feet pursuant to the Adjudication ordered by the rehabilitation court. The option is likewise dependent on whether or not PhilRealty will be able to secure this present ruling from this Honorable Office. These terms are evidenced by a Certification dated August 14, 2008, issued by PhilRealty's President, Mr. Amador C. Bacani. To set the wheels in motion for the unit-swap, PhilRealty and the New Unit Owners entered into several Memorandum of Agreement (MOA) , as follows: Memorandum of Unit Number New Unit Owner Agreement executed on 1204 Ayala Integrated Steel April 7, 2009 Manufacturing Co. 1404 Michael Kenneth Maralit Sy April 7, 2009 1405 Carmen Mimette Maralit Sibal April 7, 2009 1406 Michelo Edgardo Maralit Sy March 10, 2009 These MOAs state that upon securing the present ruling from this Honorable Office, the following unit-swaps shall be made thru the execution of Deeds of Exchange : a. Ayala Integrated Steel Manufacturing Corporation's Unit 1204 consisting of 206.78 square meters shall be exchanged with PhilRealty's Unit 2104, covered by CCT No. N-17719 and also consisting of 206.78 square meters; b. Michelle Kenneth Maralit Sy's Unit 1404 consisting of 206.78 square meters shall be exchanged with PhilRealty's Unit 2603 covered by CCT No. N-17747 and also consisting of 206.78 square meters; c. Carmen Mimette Maralit Sibal's Unit 1405 consisting of 153.59 square meters shall be exchanged with PhilRealty's Unit 2602 covered by CCT No. N-17746 and also consisting of 153.59 square meters; and d. Michelo Edgardo Maralit Sy's Unit 1406 consisting of 206.78 square meters shall be exchanged with PhilRealty's Unit 2601 covered by CCT No. N-17745 and also consisting of 206.78 square meters. Based on the foregoing, you request confirmation of your opinion that the exchange of condominium units between PhilRealty and the New Unit Owners is not subject to the following: a. Capital Gains Tax (when applicable); b. Documentary Stamp Tax; c. Withholding Tax; and d. Expanded Value Added Tax. In reply, please be informed that Section 24 (D) (1) of the Tax Code of 1997 provides that capital gains presumed to have been realized from the sale, exchange or other disposition of real property located in the Philippines classified as capital assets, including pacto de retro sales and other forms of conditional sales, by individuals, including estates and trust, shall be taxed at the rate of 6% based on the gross selling price or the fair market value as determined in accordance with Section 6 (E) of this Code, whichever is higher. (BIR Ruling No. 460-11 dated November 24, 2011) It is noted, however, that at the outset, PhilRealty has presented no sufficient justification to exempt the exchange/swap of properties from applicable internal revenue taxes. The explanation it offered-that there has been a significant shift in market preference to smaller condominium units, that smaller units will be clustered from levels 3-19 and the original larger units will be located at levels 20-32, and that the subject units will be given by the present owners in exchange for units owned by PhilRealty located in another floors pursuant to his clustering plan-in no way qualifies as a plausible justification for any tax exemption. The tax treatment of the transaction cannot be made to depend on the company's marketing plan. In addition, the fact that PhilRealty was under corporate rehabilitation does not mean that it should be accorded any special treatment. Unless otherwise specifically exempted by law. Regrettably, your request for exemption from the payment of capital gains tax, documentary stamp tax, withholding tax and VAT is hereby denied for lack of legal basis. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Deed of Absolute Sale dated October 14, 2003. 2. Deed of Absolute Sale dated February 14, 2000. 3. Deed of Absolute Sale dated November 11, 2005. 4. Deed of Absolute Sale dated February 14, 2000.