BIR Ruling No. 178-13

May 17, 2013 BIR RULING NO. 178-13 Mariano Z. Velarde, et al. vs. Court of Appeals, et al., G.R. No. 108346; Philippine Home Assurance Corporation, et al. vs. Court of Appeals, et al., G.R. No. 119446; BIR Ruling No. 633-2012 Pointer Construction International Corp. No. 52, 5th Street, Barangay Mariana New Manila, Quezon City Attention: Ms. Ofelia P. Trinidad President and General Manager Gentlemen : This refers to your letters dated August 12, 2010, September 15, 2010, January 26, 2011 and February 16, 2011 requesting on behalf of Pointer Construction International Corp. ( "Pointer" for brevity) exemption from the payment of capital gains tax (CGT) and documentary stamp tax (DST) on the reconveyance of two (2) parcels of land covered by Transfer Certificate of Title (TCT) Nos. 211643 and 211644, respectively, executed by One World Land & Properties Corp. ( "One World" for brevity) in favor of Pointer pursuant to the Order dated January 13, 2009 of the Regional Trial Court (RTC), Branch 62, of Makati City ("RTC Makati"). EACIaT It is represented that Pointer , with Tax Identification Number (TIN) 200-380-836-000, is a corporation duly organized and existing under the laws of the Philippines with principal office address at 52, 5th Street, New Manila, Quezon City; that it is registered with the Securities and Exchange Commission, bearing SEC Certificate of Registration No. 132341; that, on the other hand, One World, with TIN 005-218-046 is a domestic corporation duly organized and existing under the laws of the Philippines, with registered office address at Suite 2105 Galleria Corporate Center, EDSA corner Ortigas, Quezon City Philippines. It is further represented that on January 22, 1997, Pointer and One World executed a Contract to Buy and Sell over a portion of a parcel of land consisting of 7,876.71 square meters for the amount of Php200,000,000.00. Subsequent thereto, Pointer and One World executed an Addendum/Amendment to the Contract to Buy and Sell whereby the parties agreed to subdivide the property into four (4) lots, to wit: Lots B-1A, B-1B, B-1C and B-1D, with a stipulation, among others, that the balance of the purchase price in the amount of Php40,000,000.00 shall be paid by One World in the form of condominium units. Accordingly, Lots B-1A and B-1C, the lots subject of the reconveyance, were issued TCT Nos. 210429 and 210430, respectively, under the name of Pointer . On January 30, 1998, Pointer and One World executed a Deed of Absolute Sale over Lots B-1A and B-1C, by virtue of which, TCT Nos. 210429 and 210430 in the name of Pointer were cancelled and new TCT Nos. 211643 and 211644 were issued in the name of One World for the subject lots. For failure of One World to comply with its undertaking as set forth in the Contract to Buy and Sell and the Addendum/Amendment thereto, Pointer filed an action with RTC Makati for, among others, the rescission of the contract against One World. After due trial and hearing, the RTC Makati, in its decision dated February 14, 2007, ordered the rescission of the Contract to Buy and Sell and the Addendum/Amendment thereto, thereby directing the parties to return what they have received by reason of the same. Pointer complied with the said Decision and paid One World by selling to the latter in a public auction one of its real properties covered by TCT No. 207993. On the other hand, the RTC Makati ordered One World to reconvey TCT Nos. 211643 and 211644 covering Lots B-1A and B-1C in favor of Pointer . Based on the foregoing representations, you now request for ruling on the following matters: THCASc 1. The reconveyance of TCT Nos. 211643 and 211644 in favor of Pointer pursuant to the RTC Makati's Order, is not subject to capital gains tax and the corresponding documentary stamp tax; 2. Refund of whatever taxes paid relative to the Deed of Absolute Sale executed on January 30, 1998; and 3. Ruling on the deed of donation of a house covered by TCT No. RT-11764(290904)(PR-21231). In reply, please be informed that in the case of Mariano Z. Velarde, et al. vs. Court of Appeals, et al., G.R. No. 108346 dated duly 11, 2001, the Supreme Court held that "(t)o rescind is to declare a contract void at its inception and to put an end to it as though it never was. It is not merely to terminate it and release the parties from further obligations to each other, but to abrogate it from the beginning and restore the parties to their relative positions as if no contract has been made." Based on the above Court's pronouncement, the rescission of a contract would not give rise to a taxable event for two reasons: a) the result of rescission is that it is as if there was no sale, transfer or exchange, and hence, no income is realized; and b) the return of the object of the rescinded contract is not for monetary consideration and is merely an acknowledgement or confirmation of the title and ownership of the original owner of the property. Such being the case, the reconveyance by One World of TCT Nos. 211643 and 211644 covering Lots B-1A and B-1C in favor of Pointer , in accordance with the Order of RTC Makati, is not subject to CGT imposed under Section 27 (D) of the 1997 Tax Code, as amended. Moreover, said reconveyance is not subject to DST pursuant to Section 185 of Revenue Regulations No. 26, otherwise known as the Revised Documentary Stamp Regulations, which provides that the conveyance of a real property without monetary consideration is not subject to the payment of DST. (BIR Ruling No. 633-2012 dated November 26, 2012) Anent the issue on the refund of whatever taxes paid, such as the DST, the same cannot be given due course. The nature of the imposition of the DST was explained by the Supreme Court in the case of Philippine Home Assurance Corporation, et al. vs. Court of Appeals, et al., G.R. No. 119446 dated January 21, 1999 in the following manner: cDCEIA "In general, documentary stamp taxes are levied on the exercise by persons of certain privileges conferred by law for the creation, revision, or termination of specific legal relationships through the execution of specific legal relationships through the execution of specific instruments. Examples of such privileges, the exercise of which, as effected through the issuance of particular documents, are subject to the payment of documentary stamp taxes are leases of lands, mortgages, pledges and trusts, and conveyances of real property. Documentary stamp taxes are thus levied on the exercise of these privileges through the execution of specific instruments, independently of the legal status of the transactions giving rise thereto. The documentary stamp taxes must be paid upon the issuance of the said instruments, without regard to whether the contracts which gave rise to them are rescissible, void, voidable, or unenforceable. As the Supreme Court of the United States held in Du Pont v. United States : 'The tax is not upon the business transacted but is an exercise upon the privilege, opportunity, or facility offered at exchanges for the transaction of the business. It is an excise upon the facilities used in the transaction of the business separate and apart from the business itself. In this view it is immaterial whether the transfer of the account constituted a sale.'" Accordingly, the subsequent cancellation of the transaction from where the DST liability attaches does not have the effect of cancelling such liability. In the instant case, the rescission of the Deed of Contract to Buy and Sell and the Addendum/Amendment thereto did not operate to rescind the tax liability due on the transaction. Finally, Pointer is hereby advised to submit a separate request for ruling on the deed of donation involving a parcel of land, together with the following documents: 1. Request letter stating the material facts and the applicable provisions for tax exemption; 2. Certified true copy of the Deed of Donation; 3. Certified true copy of the TCT covering the property; 4. Certified true copy of the Tax Declaration of the property; 5. TIN/Certificate of BIR Registration of the parties to the Deed of Donation; ACEIac 6. Certified true copy of the SEC Registration, Articles of Incorporation and By-laws if the parties to the Deed of Donation are corporations. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue