Taxability of the Transfer of Shares of Stock in Favor of the National Government in Exchange for Assumption of the Debts of PAL

May 7, 1992 BIR RULING NO. 143-92 173; 176 43-86 143-92 Philippine Airlines P. O. Box 954 Manila Attention: Mr . Manuel A . Reyes NG/CB Comptroller Gentlemen : This refers to your letter dated February 3, 1992 stating that certain interested bidders in the privatization of Philippine Airlines (PAL) want to know whether the transfer of shares of stock in favor of the National Government in exchange for its assumption of the debts of PAL, requires payment of documentary stamp taxes; that you have advised those bidders that no documentary stamp taxes are due on said transaction because the parties thereto, i.e., PAL and the National Government are both exempt from tax; that you have reasoned out that under Section 173 of the Tax Code, for the documentary stamp taxes to be due, at least one of the parties to the taxable document should be a non-exempt entity so much so that where both parties are exempt, no documentary stamp tax will be levied and collected since neither party is liable therefor; and that you want this Office to confirm your said opinion. In reply, please be informed that under Section 13 of P.D. No. 1590, which provides that in consideration of the franchise and rights therein granted your payment of 2% franchise tax based on gross revenues shall be in lieu of all other taxes, you are exempt from all taxes on income derived from activities connected with your franchised business. Since the transfer of shares of stock to the National Government in exchange for its assumption of your debts is not directly connected with your franchised business, said tax exemption provision cannot be invoked to avoid payment of the documentary stamp tax. This is a tax on the transfer of rights and obligations between PAL and the National government (Section 173 of Tax Code) and not covered by the preferential tax treatment under the "in lieu" clause. On the other hand, the national government is not also exempt in the payment of the documentary stamp tax in this case (please refer to P.D. 1177, P.D. 1931 and E.O. 93), so that the party liable therefor would be determined according to the agreement of the parties. Very truly yours, EUFRACIO D. SANTOS Deputy Commissioner