Whether Conversion of Preferred Shares to Common Shares is Considered as One Single and Continuing Transaction

November 10, 1998 BIR RULING NO. 158-98 176-000-00-158-98 Metro Pacific Corporation 41-41F Rufino Pacific Tower Ayala Avenue corner Herrera St. Makati City Attention: Atty . Rene G . Baez Group Vice President - Tax Gentlemen : This refers to your letter dated October 28, 1998 requesting for a ruling that the conversion of preferred shares to common shares is considered as one single and a continuing, transaction and, therefore, documentary stamp tax should be paid only once. cdt It is represented that Metro Pacific Resources, Inc. (MPRI) is a registered and beneficial owner of series 1 Preferred Shares of Metro Pacific Corporation (MPC); that each Preferred Share was subscribed at P520.00; that because of economic downturn in the region and to support MPC's debt restructuring program, MPRI has decided to convert its Preferred Shares to Common Shares; that the right to convert is a right available to Preferred Shareholder at the time when it originally subscribed the Series 1 Preferred Shares; that the Preferred Shares is convertible into common shares at any time after the issuance thereof, at the option of MPRI; that each Preferred Share is convertible into eighty five percent (85%) common shares of MPC subject to adjustment upon the issuance of the 33% stock dividend approved by the shareholders of the MPC on July 4, 1997; that as of October 27, 1998, the market price of MPC common share closed at P1.22, hence, the total value which MPRI will receive from the conversion is much less than the original investment; and that you are of the opinion that "1) A documentary stamp tax is an excise tax because it is really imposed on the transaction than on the document. Being an excise tax, it is paid only once. But the liability to the tax and the amount thereof are determined from the fact of the document itself. "2) Consistent with various BIR rulings with respect to importation, only one documentary stamp tax should be collected upon the acceptance of bills of exchange or draft, and that there shall be no more imposition of documentary stamp tax on the payment of the bills of exchange and execution of trust receipts pursuant to Section 7 of Revenue Regulations No. 9-94". cdta "3) The rationale of the foregoing ruling is that the execution of various document relates to one and an interrelated transaction. And considering that the essence of the imposition of a DST is on the transaction, only one DST is imposed and collected on the importation because there is only principal transaction despite the execution of the other related documents. "4) In the instant case, the conversion of preferred shares to common shares should likewise be treated as one, single and continuing transaction. This treatment is consistent with the nature of the imposition of DST being an excise tax imposed on the transaction rather on the document, "5) Hence, only one documentary stamp tax should be imposed and collected upon the issuance of the preferred shares and there shall be no more imposition of documentary stamp tax on the issuance of the common shares to the same shareholder who previously owns the preferred shares and now the common shares." Hence, this request. In reply, please be informed that pursuant to Section 176 of the Tax Code of 1997 reading "SEC. 176. Stamp Tax on Sales , 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, of for the future transfer of any due-bill, certificate of obligation or stock, there shall be collected a documentary stamp tax of One Peso and fifty centavos (P1.50) on each Two hundred pesos (P200.00), or fractional part thereof, of the par value of such due-bill, certificate 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: . . ." (Emphasis supplied.) that a documentary stamp tax is imposed on all sales, or agreements to sell, or deliveries, or transfer of certificates of obligation or shares or certificate of stock. While it is being levied on the instrument, it is actually a tax on the privilege to enter into transaction. Thus, it is neither a tax on the transaction per se (Azarraga vs. Rodriguez, 9 Phil. 637) nor on the property it describes (Commissioner vs. Head Lumber Company, 10 SCRA 372). In the instant case, the MPRI had previously entered into a subscription contract with MPC for a series 1 Preferred Shares at P520.00. Among the rights available to the Preferred Shareholder at the time when MPRI originally subscribed the said Series 1 Preferred shares is the right to convert, at its option (of MPRI in this case) said Preferred shares to common shares. The subsequent conversion of said Preferred shares at any time after the issuance into eighty five (85) common shares of MPC subject to adjustment upon issuance of the 33% stock dividend approved by the shareholders of the MPC on July 4, 1997 is duly embodied in the Preferred subscription contract. Simply stated, the very essence of Section 176 is the exercise of a privilege by a person to enter into a transaction, i.e., the execution of a subscription contract relating to sales or agreements to sell, or memoranda of sales, or deliveries, or transfer of certificates of obligation, or shares or certificates or stock. Considering therefore, that the corresponding documentary stamp tax had been previously paid, i.e., at the time the Preferred Shareholder MPRI entered into a subscription contract, the mere exercise of such right to convert said preferred shares into common shares duly granted under the contract without a corresponding change of ownership will negate payment of another DST. Moreover, the proviso of the above Section 176 of the Tax Code does not, in any way, affect the foregoing transaction considering that there is no sale or transfer of the preferred shares involved. cd Accordingly, the conversion by MPRI of its Preferred shares into common shares, at its option, duly granted under the subscription contract, which does not entail any transfer of ownership to another Shareholder but to itself alone, is not a transaction distinct from the subscription contract but a mere continuation of the initial transaction which it previously entered into and for which the required documentary stamp tax was already paid. Such being the case, said exercise of right to convert by MPRI can be recorded as a memorandum not of a sale transaction but of conversion which is not subject to documentary stamp tax. 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.) BEETHOVEN L. RUALO Commissioner of Internal Revenue