Whether the Conveyance of Plant Facilities is Subject to the Corporate Income Tax

July 1, 1994 BIR RULING NO. 115-94 24 000-00 115-94 Flores & Ereso Unit 104, Ground Floor First Midland Condominium Bldg. Gamboa St., Legaspi Village Makati, Metro Manila Attention: Attys . Mariano C . Ereso, Jr . and Romeo H . Duran Gentlemen : This refers to your letter dated April 20, 1994 stating that sometime in July 1990, Paper Industries Corporation of the Philippines (PICOP) issued a public announcement and caused the publication in various newspapers of a notice for the sale thru sealed bidding on an "as is, where is" basis of its Iligan Abaca Pulp Plant located on Bo. Maria Cristina, Balo-I, Lanao del Norte; that included in the sale where a parcel of land (Premises) on which the plant was constructed as well as certain machinery, equipment systems, shops and related buildings and structures (Plant Facilities) within the Premises; that Papcel Papier Cellulose Technologies Und Handels (Smbh) (Papcel), a nonresident foreign corporation domiciled in the Federal Republic of Germany, a major world manufacturer of abaca pulp and a leading buyer of abaca pulp and fiber in the Philippines, expressed interest in participating in the bid; that in a letter of authorization dated August 2, 1990, Papcel appointed "Dr. Alberto P. Felix, Jr." as its authorized representative in the Philippines to represent Papcel in all actions/applications connected with the bidding for an Abaca Pulp Plant located in Iligan City under the Asset Privatization Trust/Paper Industries Corporation of the Philippines with powers and authority "to sign, execute and deliver any and all documents that may be necessary in connection with the said actions/applications"; that the group of Filipino investors incorporated BALO-I on October 8, 1990 with an authorized capital of One Million (P1,000,000.00) Pesos for the purpose of participating in the sealed bidding for the Iligan Abaca Pulp Plant; that BALO-I thru Dr. Alberto P. Felix, Jr. participated in the sealed bidding of PICOP's Iligan Abaca Pulp Plant located in Barrio Maria Cristina, Balo-I, Lanao del Norte (Iligan Plant) held on October 30, 1990; that the PICOP Biddings Committee in a letter dated October 31, 1990 advised BALO-I of the approval of the award of the Iligan Plant based on its bid of P50,007,777.00; that in accordance with the arrangements between Dr. Alberto P. Felix and Papcel, the latter inwardly remitted thru the banking system funds which were converted to Philippine currency at prevailing rates, as follows: cdta D a t e Amount Exchange Peso (U.S. $) Rate Equivalent (Net) 09-10-90 $202,972.09 PHP 27.59 P5,600,000.00 10-03-90 4,966.00 26.10 129,909.30 11-03-90 4,969.00 28.28 140,297.42 11-05-90 244,355.05 28.28 6,900,000.00 11-20-90 1,664,343.39 28.42 47,229,793.28 $2,121,626.33 P60,000,000.00 =========== =========== that PAPCEL caused the incorporation of NEWTECH to operate the Plan Facilities acquired from PICOP; that NEWTECH was incorporated under Philippine laws on November 21, 1990 with an authorized capital stock of P200,000,000.00 divided into 2,000,000 shares with a per value of P100.00 each; that PAPCEL subscribed to 599,995 shares worth P59,995,500.00 representing 99.99% of the total subscribed and outstanding shares of NEWTECH, making NEWTECH a wholly owned subsidiary of PAPCEL; that PAPCEL's subscription to NEWTECH's shares was fully paid out of the proceeds of the aforementioned remittances, which were registered with the Central Bank of the Philippines as PAPCEL's investment in the Philippines; that PICOP and BALO-I as the winning bidder and the awardee of the bid, subsequently executed two (2) Deeds of Absolute Sale both dated December 3, 1990, one to convey the parcel of land (Premises) on which the Plant Facilities are constructed to BALO-I for the stated consideration of P250,000.00 and another to convey the Plant Facilities for the stated consideration of P49,757,777.00; that the consideration for the Premises was paid by BALO-I while the consideration for the Plant Facilities was paid by PAPCEL/NEWTECH thru BALO-I out of the proceeds of the aforementioned remittances; that on December 14, 1990, BALO-I executed a Deed of Absolute Sale over the Plant Facilities to NEWTECH indicating as consideration the amount of P49,757,777.00, the same amount paid by BALO-I to PICOP as the consideration for the sale of the Plant Facilities to BALO-I; that the execution of the Deed of Absolute Sale; without disclosing the circumstances of the transaction, gives rise to the impression that the transfer from BALO-I to NEWTECH is for a monetary consideration, hence, subject to income and other taxes incidental to a taxable sale; and that in order to forestall any tax complications on the part of BALO-I and/or NEWTECH incident to the conveyance of the titles to the Plant Facilities to NEWTECH, you advised the cancellation of the Deed of Absolute Sale executed by BALO-I and NEWTECH on December 14, 1990 and in its place, for BALO-I to execute a Deed of Conveyance of the Plant Facilities. In connection therewith, you are requesting confirmation of your opinion that 1. The aforesaid conveyance of the Plant Facilities from BALO-I to NEWTECH as the assignee of PAPCEL to be effected thru the attached Deed of Conveyance is not subject to the corporate income tax of 35% imposed under Section 24 of the Tax Code, as amended, since the conveyance of the Plant Facilities is not for monetary consideration and merely acknowledges and confirms the title and ownership of NEWTECH as the assignee of PAPCEL of the said Plant Facilities. Considering that the said conveyance is not subject to the corporate income tax imposed under Section 24 of the Tax Code, as amended, the same is not subject to the 5% creditable withholding tax on sale, exchange or transfer of real properties under Revenue Regulations No. 1-90, as amended. Accordingly, the Certificate Authorizing Registration (CAR) may be issued by the Revenue District Officer authorizing the issuance of the Tax Declarations over the said Plant Facilities in the name of NEWTECH without the need to pay the 5% creditable withholding tax prescribed in Revenue Regulations No. 1-90, as amended (BIR Ruling No. 118, April 24, 1987). 2. Since the consideration for the conveyance of BALO-I to NEWTECH of the Plant Facilities is not monetary in character; the Deed of Conveyance therefore is not subject to the documentary stamp tax imposed under Section 196 of the Tax Code, as amended, but only to the documentary stamp tax on certificates in the amount of P10.00 imposed under Section 188 of the Tax Code, as amended. ( Ibid .) 3. The conveyance of the Plant Facilities by BALO-I to NEWTECH as the assignee of PAPCEL under the Deed of Conveyance is not subject to the donor's gift tax imposed under Section 91 of the Tax Code, as amended due to lack of donative intent. ( Ibid .) In reply thereto, please be informed as follows: 1. That your opinion to the effect that the aforementioned conveyance of the Plant Facilities from BALO-I to NEWTECH as the assignee of PAPCEL to be effected thru a Deed of Conveyance is not subject to the corporate income tax of 35% under Section 24 of the Tax Code, as amended, since the conveyance of the Plant Facilities is not for a monetary consideration but merely acknowledges and confirms the title and ownership of NEWTECH as the assignee of PAPCEL of the Plant Facilities is hereby confirmed. Thus, the conveyance is not subject to the 5% creditable withholding tax on the sale, exchange or transfer of real properties under Revenue Regulations No. 1-90. Accordingly, the Certificate Authorizing Registration (CAR) may be issued by the Revenue District Officer concerned authorizing the issuance of the Tax Declarations over the Plant Facilities in the name of NEWTECH without the need to pay the 5% creditable withholding tax under Revenue Regulations No. 1-90, as amended. 2. That your opinion that since there is no monetary consideration for the conveyance by BALO-I to NEWTECH of the Plant Facilities, the Deed of Conveyance is not subject to the documentary stamp tax under Section 196 of the Tax Code, as amended, but only to the documentary stamp tax of P10.00 on certificates under Section 188 of the Tax Code, as amended, is hereby confirmed; and, 3. That your opinion that the conveyance of the Plant Facilities by BALO-I to NEWTECH as to the assignee of PAPCEL is not subject to the donor's gift tax under Section 91 of the Tax Code, as amended due to the lack of donative intent is likewise hereby confirmed. cdti Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue