Tax Consequences of the Swap Arrangement Negotiated by BCDA with Fort Bonifacio Medical Center, Inc.

June 28, 2000 BIR RULING NO. 027-00 R.A. 7227 000-00 027-2000 Tan Concepcion & Bawagan Law Offices Suite 2104-2106, Medical Plaza Ortigas Bldg. San Miguel Avenue, Ortigas Center Pasig City Attention: Atty. Fe L. Concepcion Gentlemen : This refers to your letter dated March 7, 2000 requesting on behalf of your client, Fort Bonifacio Medical Center, Inc. ("FBMCI") formerly, Fort Bonifacio Medical Plaza, Inc. ("FBMPI"), for confirmation of your opinion on the tax consequences of the swap arrangement being negotiated by Bases Conversion Development Authority ("BCDA") with FBMCI involving their respective properties in Fort Bonifacio. It is represented that BCDA was created pursuant to Republic Act (RA) No. 7227, enacted on March 13, 1992, as amended by RA No. 7917, primarily for the following purposes: (1) Convert into alternative productive uses the military reservations in the country and their extensions; and for this purpose, raise funds by the sale of portions of Metro Manila military camps transferred to it by the President. (2) Apply said funds to the development and conversion to productive civilian use of the aforementioned former U.S. bases. that under Section 8 of RA 7227, the President and, subsequently the BCDA, were authorized to "dispose of certain areas in Fort Bonifacio and Villamor as the latter so determines"' that the proceeds from such disposition were made tax-exempt pursuant to the amendment introduced to Section 8 of RA 7227 by RA 7917 which read as follows: "The provisions of law to the contrary notwithstanding, the proceeds of the sale thereof shall not be diminished and, therefore, exempt from all forms of taxes and fees." LexLib and that pursuant to the same section, as amended, the President transferred some Metro Manila military camps, including portions of the Fort Bonifacio military reservation to the BCDA. FBMCI, on the other hand, was incorporated with the Securities and Exchange Commission (SEC) on October 21, 1997, with the primary purpose of a realty development company, originally under the name of Fort Bonifacio Medical Plaza, Inc.; that the name of the corporation was changed to FBMCI pursuant to an amendment of the Articles of Incorporation approved by the SEC on January 21, 2000; that recently, the primary purpose of the FBMCI was amended to that of a provider of medical and health care delivery services, including the operation, management and maintenance of clinics, hospitals and diagnostic centers; that this amendment was compelled by the need to reflect the real essence of the corporation and the nature of its operations, and thereby to convert it from a mere landholding company into one primarily devoted to providing medical services; that the amendment is a requirement for the license to operate the hospital and various other permits which FBMCI needs to secure from the Department of Health; that immediately after incorporation, or on November 19, 1997, FBMCI purchased a property with a total area of 8, 749 sq.m., more or less, and covered by Transfer Certificate of Title (TCT) No. 31606 ("FBMCI property"); that since its acquisition, the land has always been reflected in the books of FBMCI as a fixed or capital asset and not as investment or ordinary asset as shown by the company's audited financial statements for the years 1997 and 1998; that this is due to the fact that FBMCI property was acquired as a site for a world-class tertiary hospital which FBMCI intended to construct, operate and manage; and that however, it turned out that the FBMCI property is not an ideal site for the hospital. BCDA, on the other hand, owns two (2) parcels of land with a total area of 31,564 sq.m. ("BCDA property") which it intends to develop as part of its housing project; and that the BCDA property is a strategic site for the hospital project. At no time was the FBMCI property held primarily for sale to customers or held for lease in the ordinary course of trade or business; that the land, although secured by a non-permanent perimeter fence (barbed wire and coco lumber) to keep out illegal occupants, is vacant and devoid of any permanent structure of any kind; that it has always been treated as a capital asset in the books of the corporation; that it has not been used for any business venture conducted for profit; and that it has always been treated as a capital asset in the books of the corporation. After a lengthy negotiation, BCDA and FBMCI (then FBMPI) entered into a Memorandum of Understanding (MOU) dated December 10, 1998 whereby FBMCI will swap the FBMCI property in exchange for a portion of the BCDA property of the same area; that as stated in the MOU, BCDA and FBMCI will execute a Deed of Exchange whereby: (a) BCDA shall convey to FBMCI a portion, consisting of 8,749 sq.m., of a parcel of land located in Taguig, Metro Manila and forming part of the Fort Bonifacio military reservation which is covered by and more particularly described in Transfer Certificate of Title (TCT) No. 28661 issued in BCDA's name by the Registry of Deeds for the Province of Rizal; and (b) FBMCI shall, in turn, convey to BCDA a parcel of land also located in Taguig, Metro Manila consisting of 8,749 sq.m., covered by and more particularly described in TCT No. 31606 issued in FBMPI's (now FBMCI) name by the Registry of Deeds for the Province of Rizal. llcd Based on the foregoing, you now request confirmation of your opinion as follows: a) On the conveyance by FBMCI to BCDA of its property a.1. The transaction is subject to capital gains tax of 6%, the FBMPI property being a capital asset; a.2 The transaction is subject to the documentary stamp tax of 1.5%; a.3 The conveyance shall not be subject to value-added tax, pursuant to the provision of Revenue Regulations No. 7-95, as clarified in Revenue Memorandum Circular No. 3-96, the property not being held primarily for sale to customers or held for lease in the ordinary course of trade or business of FBMCI; b) On the conveyance of BCDA to FBMCI of its property b.1 The conveyance is exempt from CGT/CWT pursuant to RA 7227, as amended by RA 7917; b.2 The transaction is subject to DST at 1.5% pursuant to Section 173 of RA 8424, otherwise known as the Tax Reform Act (Tax Code of 1997), which provides that whenever one party to a document subject to DST is exempt from payment thereof, the other party who is not exempt shall be the one directly liable therefor. FBMCI shall be liable for the payment of the DST. b.3 For purposes of computing the DST, Section 196 of the Tax Code of 1997 provides that the same shall be based on the "consideration to be paid for such realty or on its fair market value determined in accordance with Section 6(E) of this Code, whichever is higher." Inasmuch as the 5th Revision of the Schedule of Zonal Values adopted for the Municipality of Taguig does not provide any valuation for government lands, the DST on the conveyance by BCDA of its land shall be based on the value of FBMPI property which BCDA will receive in the exchange. The value of the FBMCI property is the "consideration contracted to be paid for" the BCDA property. Since the valuation of the FBMCI property, on the basis of prior sale, is pegged at P10,000.00/sq.m., the BCDA property should be given the same valuation for purposes of DST. In reply, please be informed as follows: a) On the conveyance by FBMCI to BCDA of its property a.1 Under Section 27(D)(5) of the Tax Code of 1997, a final tax of six percent (6%) is imposed on the gains presumed to have been realized on the sale, exchange or disposition of lands and/or buildings which are not actually used in the business of a corporation and are treated as capital assets based on the gross selling price or fair market value as determined in accordance with Section 6(E) of the Tax Code of 1997, whichever is higher, of such lands and/or buildings. From the foregoing provision of the Tax Code of 1997, it is clear that the said property is being held by your company as capital asset since: 1) it is not used in its business; 2) it does not form part of its inventory; and 3) it is not subject to depreciation. Accordingly, the said property not being used in business or just held as capital asset is correctly treated as capital asset subject to capital gains tax rate of six percent (6%) based on the gross selling price or the fair market value as determined in accordance with Section 6(E) of the Tax Code of 1997, whichever is higher. Moreover the six percent (6%) capital gains tax is a final tax and the gains presumed to be realized from the exchange thereof is no longer includible in the other items of gross income in computing the taxable income which is subject to normal corporate tax rate. a.2 Pursuant to Section 196 of the Tax Code of 1997, a conveyance or deed whereby land, tenement or other realty is granted, assigned, transferred or otherwise conveyed to another is subject to documentary stamp tax based on the consideration contracted to be paid for such realty or its fair market value as determined in accordance with Section 6(E) of the Tax code of 1997, whichever is higher. Accordingly, FBMCI is subject to DST based on the fair market value of the property received or the fair market value of the property exchanged as determined in accordance with Section 6(E) of the Tax Code of 1997, whichever is higher, of the land it proposes to convey or transfer by way of the swap/exchange to BCDA. a.3 Pursuant to Section 106(A)(1)(a) of the Tax Code of 1997, the sale, barter or exchange of real properties held primarily for sale to customers or held for lease in the ordinary course of trade or business is subject to VAT. Conversely, the sale, barter or exchange of real properties which are NOT held primarily for sale to customers or for lease in the ordinary course of trade or business is NOT subject to VAT. The FBMCI property is not held primarily for sale to customers nor it is being offered for lease in the ordinary course of trade or business. Accordingly, the proposed exchange thereof is not subject to VAT. b) On the conveyance by BCDA to FBMCI of its property b.1 Section 8(d) of Republic Act No. 7227, as amended by RA 7917, grants the President the authority to sell in whole or in part, that certain 30.15 hectares as relocation site for families to be affected by circumferential road 5 and radial road 4 construction, which are declared alienable and disposable, pursuant to the provisions of existing laws and regulations governing sales of government properties; and authorizes the Conversion Authority to dispose of certain areas in Fort Bonifacio and Villamor as determined by the latter. Furthermore, the proceeds of the sale shall not be diminished and, therefore, exempt from all forms of taxes and fees pursuant to the same provision of the said law. In view of the foregoing, BCDA is exempt from the creditable withholding tax imposed under Section 57(B) of the Tax code of 1997, as implemented by Section 2.57.2(J) of Revenue Regulations No. 2-98, or capital gains tax under Section 27(b)(5) of the Tax Code of 1997, whichever is applicable. b.2 BCDA is exempt from the payment of the DST imposed under Section 196 of the Tax Code of 1997. However, pursuant to Section 173 of the Tax Code of 1997 which provides that "whenever one party to the taxable document enjoys exemption from the tax therein imposed, the other party thereto who is not exempt shall be the one directly liable for the tax." Accordingly, FBMCI shall be liable to DST based on the fair market value of FBMCI property or the fair market value of BCDA property as determined in accordance with Section 6(E) of the Tax Code of 1997, whichever is higher, of the land BCDA proposes to convey or transfer by way of the swap/exchange to FBMCI, subject of Memorandum of Agreement (MOU) dated December 10, 1998. 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 null and void. Very truly yours, (SGD.) DAKILA B. FONACIER Commissioner of Internal Revenue