Assignment of Subscription to Common Shares in Manila Water Co. Not Subject to Documentary Stamp tax

December 20, 2001 BIR RULING NO. 059-01 Section 176 000-00 SGV & Co. 6760 Ayala Avenue 1226 Makati City Attention: Atty. C. P. Noel Partner, Tax Division Gentlemen : This refers to your letter dated May 16, 2000 requesting, on behalf of your client, Mitsubishi Corporation, Japan (MC-Japan) for a ruling confirming your opinion that the assignment of subscription to one hundred eighty eight million (188,000.00) common shares in Manila Water Company, Inc. (MWC) by Ben MWSS Holdings, Ltd. (BMHL) to MC-Japan is not subject to documentary stamp tax (DST). It is represented that your client, MC-Japan, is a corporation duly organized and existing under the laws of Japan: that it maintains a Philippine branch, Mitsubishi Corporation-Manila: that on January 22, 1997, MC-Japan entered into an Option Agreement with BMHL and Ayala Corporation in which it was granted an option to purchase from BMHL the shares of MWC equal to ten percent (10%) of the outstanding capital stock of MWC; that on June 18, 1997, when MWC increased its Authorized Capital Stock, BMHL subscribed to 376,000,000 common shares of stock in MWC with a total par value of P376,000,000 (the MWC shares having a par value of P1.00 per share); that the total subscription price was P400,000,000.00; that BMHL made a partial payment of the subscription price, in the amount of P200,000,000.00 which was then equivalent to US$7,261,479.87, upon conversion at the then prevailing exchange rate of approximately US$1:P2754; that in effect, BMHL has an unpaid subscription worth P200,000,000.00; that on October 14, 1997, MC-Japan and BMHL executed an Assignment of Subscription, whereby BMHL assigned to MC-Japan its 188,000,000 unpaid subscription in MWC, which is equivalent to 10% of MWC's outstanding capital stock, in consideration for the payment of US$3,630,739.93 or (P100,000,000 at the same exchange rate of $1:P27.54) and the assumption by MC-Japan of the payment of the unpaid subscription of P100,000,000 of BMHL; and that MC-Japan acquired the subscription directly and not through its Philippine branch; that no DST was paid on the assignment of subscription following BIR Ruling No. 173-89 where it was held that the assignment of the right to subscribe is exempt from the payment of DST under Section 176 of the National Internal Revenue Code (NIRC) of 1977. In reply thereto, please be advised that Section 176 of the NIRC of 1997, as amended, which is the applicable law at the time the aforementioned transaction took place on October 14, 1997, imposes DST on the sale or assignment of shares or certificates of stock, to wit: SEC. 176. Stamp Tax on Sale, Agreements to Sell, Memoranda of Sales, Deliveries or Transfer of Due-bills, Certificates of Obligation, or Shares or Certificates of Stock . On all sales, or agreements to sell, or memoranda of sales, or deliveries, or transfer of due-bills, certificates of obligation, or shares or certificates of stock in any association, company or corporation, or transfer of such securities by assignment in blank, or by delivery, or by any paper or agreement, or memorandum or other evidences of transfer or sale whether entitling the holder in any manner to the benefit of such due-bills, certificates of obligation or stock, or to secure the future payment of money, or for the future transfer of any due-bill, certificates of obligation or stock, or to secure the future payment of money, or for the future transfer of any due-bill, certificates of obligation or stock, there shall be collected a documentary stamp tax of One peso (P1.00) on each two hundred pesos, or fractional part thereof, of the par value of such due-bill, certificates of obligation or stock: Provided, That only one tax shall be collected on each sale or transfer of stock or securities from one person to another, regardless of whether or not a certificate of stock or obligation is issued, indorsed, or delivered in pursuance of such sale or transfer: and Provided, further, that in the case of stock without par value the amount of the documentary stamp tax herein prescribed shall be equivalent to twenty-five per centum of the documentary stamp tax paid upon the original issue of said stock: Provided, furthermore, That the tax herein imposed shall be increased to One peso and fifty centavos (P1.50) beginning 1996. (as amended by R.A. 7660) The issue now is whether or not the assignment of subscription where BMHL has assigned to MC-Japan all its rights and interests in the 188,000,000 common shares it previously subscribed from MWC is equivalent to an assignment of shares. The Supreme Court (SC) in the case of Commissioner of Internal Revenue vs. Construction Resources of Asia (145 SCRA 671, November 25, 1986) held: "Ordinarily, when a corporation issues a certificate of stock (representing the ownership of stocks in the corporation to fully paid subscription) the certificate of stock can be utilized for the exercise of the attributes of ownership over the stocks mentioned on its face. The stocks can be alienated; the dividends of fruits derived therefrom can be enjoyed, and they can be conveyed, pledged or encumbered. The certificate as issued by the corporation, irrespective of whether or not it is in the actual or constructive possession of the stockholder, is considered issued because it is with value and hence the documentary stamp tax must be paid as imposed by Section 212 of the National Internal Revenue Code, as amended. xxx xxx xxx "Predicated on the above reasons. We are firmly convinced that the Government stands to lose nothing in imposing the documentary stamp tax only on those stock certificates duly issued, or wherein the stockholders can freely exercise the attributes of ownership and with value at the time they are originally issued . Under Section 72 of the Corporation Code of the Philippines, the holders of subscribed shares not fully paid which are not delinquent shall have all the rights of a stockholder. It is a settled rule in corporation law that a subscriber for stock in a corporation or a purchaser of stock becomes a stockholder as soon as his subscription is accepted by the corporation, whether a certificate of stock is issued to him or not, and although he may have no certificate he is thereupon entitled to all the rights of a stockholder (11 Fletcher Cyc. Corp., Sec 5094). A holder of subscribed shares can therefore exercise the rights of a stockholder regardless of whether the subscription is fully or partially paid. As such, upon acceptance of the subscription, shares of stock are already issued. From the foregoing, the subsequent assignment of BMHL of its subscription of the 188,000,000 common shares in MWC is equivalent to an assignment of shares of stock subject to DST under Section 176 of the NIRC of 1977. The decision of the SC in the aforementioned case of Commissioner of Internal Revenue vs. Construction Resources of Asia forms part of the law of the land under Article 8 of the Civil Code of the Philippines. Thus, following the cardinal rule that laws shall have no retroactive effect unless the contrary is provided (Article 4, Civil Code), the SC decision will apply to transactions executed after such decision has become final. This will include the subject transaction of your client. The SC decision takes precedence over rulings issued by administrative agencies such as BIR Ruling No. 173-89. However, since your client relied on the said ruling, the increments accruing from the non-payment of DST is hereby abated pursuant to Section 204 (B) of the NIRC of 1997 as implemented by Revenue Regulations (RR) No. 13-2001 provided that the basic DST liability under Section 176 is paid within thirty (30) days from receipt of this ruling. For this purpose, your client is hereby enjoined to comply with the procedural requirements of RR 13-2001. 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 this ruling shall be considered null and void. Very truly yours, (SGD.) REN G. BAEZ Commissioner of Internal Revenue