BIR Ruling No. 448-13

November 27, 2013 BIR RULING NO. 448-13 Sections 27 (D) (2), 98, 175; BIR Ruling No. 247-2012 Department of Finance Roxas Blvd. cor. Pablo Ocampo, Sr. Street, Manila 1004 Attention: Hon. John P. Sevilla Undersecretary/Officer-in-Charge Gentlemen : This refers to your letter dated October 17, 2013 stating that the Philippine National Construction Corporation (PNCC) is a corporation organized under Philippine laws with office address at Km. 15, East Service Road, PNCC Complex, Bicutan, Paraaque City; that it is engaged in tollways and construction business; that on March 31, 1977, PNCC, by virtue of Presidential Decree (PD) No. 1113 was granted a franchise to operate, construct and maintain toll facilities in the North and South Luzon Tollways; that in 1983, PD 1113 was amended by PD 1894, to include the Metro Manila Expressway; that the franchise pursuant to PD 1113 was effective for a period of thirty (30) years from May 1977 to May 2007; that Congress refused to extend the same, thus, PNCC's franchise for the North Luzon Expressway and the South Luzon Expressway expired on May 1, 2007; that PNCC holds shares of stock in various subsidiaries and/or joint venture (JV) companies, which includes Manila North Tollways Corporation (MNTC); that on February 14, 2012, PNCC in compliance with the decisions of the Supreme Court in G.R. Nos. 166910, 169917, 173630 and 183599 to transfer and turnover the shares of stock in the above-mentioned subsidiaries and/or joint venture companies which PNCC is holding in trust for the National Government, a Deed of Compliance to Transfer Shares of Stock to the National Government was executed by the PNCC, as represented by its President and Chief Executive, Atty. Luis F. Sison, and the Republic of the Philippines, represented by the Secretary of Finance; that in an En Banc Decision dated October 19, 2010, the Supreme Court in the case entitled Ernesto B. Francisco, et al. vs. TRB, PNCC et al. , docketed as G.R. Nos. 166910, 166917, 173630 and 183599, citing the case of Strategic Alliance Development Corp. vs. Radstock Securities Lmtd. , G.R. No. 178158, December 04, 2009, decreed as follows: "Considering, however, that all toll assets and facilities pertaining to PNCC pursuant to its PD 1113 franchise are deemed to have already been turned over to the National Government on May 1, 2007 whatever participation that PNCC may have in the new authorities to construct, maintain and operate the subject tollways, shall be limited to doing the same in trust for the National Government. In Radstock, the Court held that "with the expiration of PNCC's franchise, (its) assets and facilities . . . were automatically turned over, by operation of law, to the government at no cost. The court went further to state that the Government's ownership of PNCC's toll assets inevitably resulted in its owning too of the toll fees and the net income derived, after May 1, 2007, from the toll assets and facilities. But as we have earlier discussed, the tollways and toll facilities should remain functioning in accordance with the validly executed STOAs and TOCs. However, PNCC's assets and facilities, or in short, its very share/participation in the JVAs and the STOAs, inclusive of its percentage share in the toll fees collected by the JV companies currently operating the tollways shall likewise automatically accrue to the Government." HSCcTD and that on September 25, 2013 a Deed of Assignment of Stock was executed in accordance with the Deed of Compliance to Transfer Shares of Stock to the National Government whereby PNCC assigned, transferred and conveyed in favor of the Republic of the Philippines, to wit: Based on the foregoing representations, you now request for confirmation of your opinion that 1. The transfer in favor of the National Government of PNCC shares in MNTC, without consideration and made by the trustee in favor of the beneficial owner thereof, is not subject to capital gains tax imposed under Section 27 (D) (2) of the Tax Code of 1997; 2. The transfer of PNCC's shares in MNTC without consideration, as trustee in favor of the National Government, the beneficial owner, is not subject to donor's tax imposed under Section 98 of the Tax Code due to lack of donative intent on the part of the trustee; ACaEcH 3. The transfer in favor of the National Government of PNCC's shares in MNTC is not subject to documentary stamp tax imposed under Section 175 of the Tax Code; and 4. That from the foregoing a certificate authorizing registration (CAR) be issued for the transaction. In reply thereto, please be informed that in BIR Ruling No. 247-2012 dated April 13, 2012, we have ruled on the same issues relative to the assignment of stocks to the National Government by PNCC of its shares in certain JV companies (CITRA Metro Manila Tollways Corporation, Manila North Tollways Corporation, South Luzon Tollways Corporation, Skyway Operations and Maintenance Corporation, Tollways Management Corporation, Manila Toll Expressway Systems, Inc.), to wit: 1. Section 27 (D) (2) of the Tax Code of 1997, as amended, generally imposes a final tax at the rates of 5% and 10% upon the net capital gains realized during the taxable year from the sale, barter, exchange or other disposition of shares of stock in a domestic corporation, except shares sold, or disposed of through the stock exchange. The rule does not apply in the instant case considering that there is no sale, barter or exchange of the shares of stock held by PNCC, as trustee, in JV Companies, to the National Government, who is the true and beneficial owner thereof. Considering that the transfer of the shares in the JV Companies by PNCC, as Trustee, in favor of the National Government, as the true and beneficial owner, is without monetary consideration and is merely a confirmation of title/ownership in favor of the beneficial owner, the same is not subject to the income and capital gains taxes imposed under Section 27 (A) and (D) (2) of the Tax Code of 1997, as amended. HITEaS 2. Section 98 of the Tax Code of 1997 provides that a donor's tax is generally imposed on the transfer by any person, resident or non-resident, of property by gift. The donor's tax applies, whether such transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible. The essential elements of a valid donation are: (1) the reduction of the patrimony of the donor, (2) the increase in the patrimony of the donee, and (3) the intent to do an act of liberality (animus donandi) . Here, there is no animus donandi on the part of PNCC as the transfer is merely in compliance with the Supreme Court decisions as mentioned above. In fact the National Government, by virtue of the expiration of PNCC's franchise, ipso facto becomes the beneficial owner of the said shares with PNCC merely acting as the trustee. Beneficial ownership, as the plain meaning of the words implies, refers to the right to the gains, rewards and advantages generated by the property. (Intervenor's Memorandum pp. 7, 11 and 12) The concept is not new, but in fact is well entrenched in the law of trusts. Thus, while the trustee holds the legal title to or ownership of the property entrusted to him, he is nevertheless not the beneficial owner. Rather, he holds and administers the property for the benefit of another, called the beneficiary or the cestui que trust. Hence, the profits realized from the administration and management of the property by the trustee, who is the "naked owner," less any lawful fees due to the latter, accrue to the cestui que trust , who is the "beneficial" or "equitable" owner. (G.R. No. 127882, December 1, 2004) Accordingly, it is evident that PNCC cannot be held liable for donor's tax on the transfer of shares of stock in the JV Companies to the National Government. 3. Moreover, the transfer of the aforesaid Shares is not subject to the documentary stamp tax imposed under Section 175 of the Tax Code of 1997, as amended by Republic Act No. 9243, but only to the documentary stamp tax on certificates under Section 188, supra . 4. Finally, this will therefore serve as an authority for the Revenue District Officer concerned, which has jurisdiction over the JV Companies, to issue the corresponding Certificate Authorizing Registration (CAR) so that the Corporate Secretary may now transfer the shares of stock of PNCC in the name of the Republic of the Philippines in the Stock and Transfer Book as prescribed in Revenue Memorandum Order No. 66-99. Being on all fours with the above stated precedent ruling, we opine and confirm your opinion as follows: 1. The transfer in favor of the National Government of PNCC shares in MNTC, is not subject to capital gains tax under Section 27 (D) (2) of the Tax Code of 1997; 2. The transfer of PNCC's shares in MNTC is not subject to donor's tax imposed under Section 98 of the Tax Code; and 3. The transfer in favor of the National Government of PNCC's shares in MNTC is not subject to documentary stamp tax imposed under Section 175 of the Tax Code. A CAR shall thus be issued for the above transfer of PNCC shares in MNTC in the name of the Republic of the Philippines, after submission of the requisite documents to the Revenue District Office which has jurisdiction over the transaction. TAHcCI 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