Documentary Stamp Taxability of Original Issue of Common Shares and the Sale of Shares Through PSE

April 16, 1999 BIR RULING NO. 052-99 173, 175, 176, 177-000-00-052-99 Ferry Toledo Victorino Gonzaga & Associates G/F AFC Building, Alfaro St. Salcedo Village, Makati Metro Manila Attention: Atty . Tomas C . Toledo Gentlemen : This refers to your letter dated March 24, 1999 requesting for a supplemental ruling on the following: "1. Whether the initial allotment or original issue to the eligible Philippine policy holders, is subject to documentary stamp tax. If in the affirmative, who is liable and what is the basic tax base and rate ? "2. Whether the sale by Holdco, in behalf of the eligible Philippine policyholders, of the shares of stock allotted to the Philippine policyholders, through the Philippine Stock Exchange (PSE) is subject to documentary stamp tax? If so, who is liable and what is the tax base and rate ?" It is represented that the Manufacturers Life Insurance Company (Manulife) is a foreign incorporated mutual life insurance company with its head office in Toronto, Canada; that Manulife operated in the Philippines through Manulife, Philippines, as a registered branch of a foreign life insurer for over 90 years; that Manulife demutualized and was converted to a stock corporation for which it expects that approximately 50,000 Philippine policyholders will be eligible to receive demutualization benefits; that the demutualization plan involves the surrender of ownership interest in Manulife by the eligible Manulife policyholders in exchange for shares of a holding company (Holdco) which will in turn receive all the Manulife shares of stock upon demutualization; that the Holdco will be incorporated in Canada under the Insurance Companies Act; that it will not set up an office or maintain operations in the Philippines; that in BIR Ruling No. 170-98 dated December 2, 1998, this Office upheld the tax-free character of the demutualization of Manulife; that, further, such exchange by the policyholder's membership rights for Holdco shares is not subject to tax on the part of the shareholder's or on the part of Holdco; that the issuance of Holdco shares to eligible Philippine policyholders will take place in Canada under Canadian law; and that, however, upon request by the eligible Philippine policyholders, Holdco may sell the Philippine policyholders' allotment of shares, for and in their behalf, through the Philippine Stock Exchange (PSE) at a price determined as the initial public offering (IPO) price or the foreign price. In reply, please be informed of the following: I. This Office previously ruled that the receipt of Holdco shares by eligible Manulife policyholders shall not be subject to tax. (BIR Ruling No. 170-98 dated December 2, 1998.) Pursuant to Section 175 of the 1997 Tax Code, a documentary stamp tax of Two pesos (P2.00) on each Two hundred pesos (P200.00) of the par value, or fractional part thereof, is levied on every original issue of shares of stock. In relation to the foregoing, Section 173 of the 1997 Tax Code provides in part that: "SEC. 173. Stamp Taxes Upon Documents, Loan Agreements, Instruments and Papers . Upon documents, . . ., there shall be levied, . . ., and in respect of the transaction so had or accomplished, the corresponding documentary stamp taxes prescribed in the following Sections of this Title, by the person making, signing, issuing, accepting, or transferring the same wherever the document is made, signed, issued, accepted or transferred when the obligation or right arises from Philippine sources or the property is situated in the Philippines . . . ." (Emphasis supplied) Conversely, DST being in the nature of an excise tax, is imposed on the privilege of conducting a particular transaction or executing a particular document within the Philippines. The issuance of shares should be subject to DST under Sec. 175 only if the corporation issuing the shares is a domestic corporation whose principal office is within the Philippines. Consequently, where a foreign corporation whose principal office is outside the Philippines issues shares of stock, where the subscribers of the shares are residents of the Philippines, the DST should not be imposed because the transaction occurs outside of the Philippines. In the instant case, since the Holdco shares which are to be exchanged for the membership rights of the eligible Philippine policyholders of Manulife, a Canadian corporation, and which right arose pursuant to the corporate charter of Manulife and the Canada corporate and regulatory regime which govern Manulife, are issued in Canada pursuant to the demutualization of Manulife under the Canadian corporate law, the provision of Section 175 of the 1997 Tax Code shall not apply to such issuance of Holdco common shares to eligible Philippine policyholders. Neither will the provision of Section 177 of the same Tax Code, pertinent portion of which states that "On all bonds, debentures, certificates of stock, issued in any foreign country, there shall be collected from the person selling or transferring the same in the Philippines, such documentary stamp tax as is required by law on similar instruments when issued, sold or transferred in the Philippines." (Emphasis supplied.) shall apply. As previously stated, the Holdco shares are issued in Canada, hence, the issuance did not arise from Philippine source. Accordingly, the initial allotment or original issue of Holdco common shares to the eligible Philippine policyholders is not subject to DST. LLpr II. As provided for in Section 177 of the 1997 Tax Code, a documentary stamp tax is collected from a person selling or transferring in the Philippines, among others, certificates of stock issued in any foreign country. The evident and clear intent of Section 177 is to subject all sales and transfers within the Philippines of shares issued by foreign corporations and thereby place the said transactions at par with the sales of shares issued by a domestic corporations. In this light, since Holdco is not the seller of the Holdco shares already issued to the eligible policyholders, the person required to pay the DST is the individual shareholder. Accordingly, the sale by the eligible policyholders, of their Holdco shares through the PSE is subject to the documentary stamp tax calculated pursuant to Section 176 of the Tax Code of 1997 which provides in part, thus "SEC. 176. Stamp Tax on Sales, Agreements to Sell, Memoranda os Sales, Deliveries or Transfer of Due-bills, Certificates of Obligation, or Shares or Certificates of Stock . On all sales . . . of shares or certificates of stock in any association, company or corporation . . ., there shall be collected a documentary stamp tax of One peso and fifty centavos (P1.50) on each Two hundred pesos, or fractional part thereof, of the par value . . . : Provided , further , That in case of stock without par value the amount of the documentary stamp tax herein prescribed shall be equivalent to twenty-five percent (25%) of the documentary stamp tax paid on the original issue of said stock." Correspondingly, the original issue price of a no par value shares of stock shall be determined in accordance with the proviso of Section 175 of the same Tax Code, thus " Provided, That in the case of the original issue of shares of stock without par value, the amount of the documentary stamp tax herein prescribed shall be based upon actual consideration for the issuance of such shares of stock. . . ." Thus, Section 176 of the 1997 Tax Code imposes DST on the sale of shares at the rate of 25% of DST paid upon original issue of the said shares, in the case of no par value share. On the other hand, Section 175 of the same Tax Code imposes DST on original issue of shares without par value at the rate of P2.00 on each P200.00 of the actual consideration for the issuance of such shares. LLphil Based on the foregoing, the value of the Holdco shares is determined by the actual consideration received which is the value of the eligible policyholders' membership rights exchanged. Stated differently, although the membership rights are not identical to the Holdco shares, the value of those rights can be approximated by the value of the Holdco shares, which is equal to the foreign issuance price or IPO price of the Holdco shares. Such being the case, the DST on the sale of the shares shall be calculated as 25% of 1% (i.e., P2.00 on each P200.00) of the foreign issuance price or IPO price of the Holdco shares, whichever is higher. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it shall be disclosed that the facts are different, then ruling shall be considered null and void. Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue