Professional Documents
Culture Documents
BIR Ruling 039 02 PDF
BIR Ruling 039 02 PDF
000-00
Gentlemen :
This refers to your letter dated July 24, 2001 on behalf of your clients, TA
Bank of the Philippines, Inc. ("TA") and The Manila Banking Corporation
("TMBC"), the pertinent portion of which is quoted as follows:
"Its outstanding capital consists of One Billion Two Hundred Fifty Million
Pesos (PhP1,250,000,000.00), divided into PhP625,000,000 in preferred
shares 1 and PhP625,000,000 in common shares 2 .
"All of the outstanding shares of TA are wholly owned by TMBC and its
nominees.
Copyright 2014 CD Technologies Asia, Inc. and Accesslaw, Inc. Philippine Taxation Encyclopedia 2013 1
"TA is planning to decrease its authorized capital stock to 1,129,020
common shares, with a par value of PhP100.00 per share, and a total value
of One Hundred Twelve Million Nine Hundred Two Thousand Pesos
(PhP112,902,000.00) ["Plan"].
"Under the Plan, all of TA's outstanding preferred shares, and 5,120,980 of
its outstanding 6,250,000 common shares shall be surrendered by TMBC
and cancelled immediately upon approval by the TA stockholders, the
Securities and Exchange Commission ("SEC") and the Bangko Sentral ng
Pilipinas ("BSP") of the said decrease.
"In exchange for the surrender of the abovesaid shares by TMBC, TA shall
transfer to TMBC both real and personal, tangible and intangible properties
listed hereunder, and referred to hereinafter as "Distributed Assets."
A. LOAN PORTFOLIO 3
(Amounts in Thousand)
Copyright 2014 CD Technologies Asia, Inc. and Accesslaw, Inc. Philippine Taxation Encyclopedia 2013 2
JAIME CANCIO 300
C. QUIAMBAO 2,954
R. RUBIO 906
A. DOMINGO 300
AMA COMPUTER 925
ATSUSHI HARADA 1,094
CONCEPCION, PS 186
DAVID DALISAY 870
DE ROCA, DARLITO 925
DE ROCA, RIC 650
MICLAT, ROMY & ANICETA 186
CORTEZ, FELIX & MARISSA 840
————————————— ———–
TOTAL 922,663
=====
B. ACQUIRED ASSETS
Active Realty Dev't Corp. 146 lots located at Town & Country Southville,
Biñan, Laguna with a total area of 23, 604 sq.m.
9 lots located at Town & Country Southville,
Biñan, Laguna with a total area of 1,193 sq.m.
6 lots located at Town & Country North Marilao,
Bulacan with a total areas of 2,696 sq.m.
8 Mount Malarayat Golf & Country Club shares
DJJ and Sons 5 units located at the 14th Flr. World Trade
Exchange Center, Juan Luna St., Binondo
Fil Estate Land, Inc. A parcel of land situated in dela Paz, Antipolo,
Rizal with a lot area of 473 sq.m. and covered by
TCT-361115
12 lots situated in Parkridge Estate Phase V
Antipolo, Rizal (5,757.50 sq.m.)
6 lots situated in Sherwood Hills, Trece Martires
City, Cavite (4,254 sq.m.)
Metropolitan Land Corp. 4 CCTs located at the 11th Flr., Trafalgar Plaza
HV dela Costa St., Salcedo Village, Makati City
with total area of 913.20 sq.m.
DESCRIPTION/LOCATION
"1. TA shall not be liable for income tax either for its receipt of the
surrendered shares, or its transfer of the Distributed Assets to TMBC as
liquidating dividends.
"2. No documentary stamp tax under Section 176 of the Tax Code
is due on the surrender by TMBC of the TA shares and the subsequent
cancellation thereof.
Copyright 2014 CD Technologies Asia, Inc. and Accesslaw, Inc. Philippine Taxation Encyclopedia 2013 4
dividend is not subject to documentary stamp tax on sale or transfer of real
property under Section 196 of the Tax Code.
"6. TMBC shall realize capital gain or loss when it surrenders its
shares in TA in exchange for the assets distributed by TA as liquidating
dividends, and such capital gain or loss shall be subject to final tax under
Section 27(D)(2) of the Tax Code."
1. TA shall not be liable for income tax either on its receipt of the surrendered
shares, or its transfer of the Distributed Assets to TMBC as liquidating dividends.
In BIR Ruling No. 171-92 dated May 28, 1992, this Office ruled that the
transfer by the liquidating corporation of its remaining assets to its stockholders is
not considered a sale of these assets. Thus, a liquidating corporation does not
realize gain or loss in partial or complete liquidation. (W.P. Fox & Sons, Inc.,
Petitioner v. Commissioner of Internal Revenue, Respondent, 15 BTA 115; Jordan
Petroleum Company, 13 AFTR 2d 1692; 227 F. Supp. 174; J.T.S. Brown & Son
Company v. Commissioner of Internal Revenue, 10 TC 840, cited in BIR Ruling
No. 196-010-90-059-90 dated April 17, 1990).
Accordingly, TA Bank is not liable for income tax on either the transfer of
its assets to its stockholders, or on its receipt of the shares surrendered by the
shareholder, TMBC.
The Tax Code of 1997 imposes a DST on the sale, assignment or transfer of
shares of stock under Section 176 thereof, which in part reads:
No DST under the above quoted provision shall be due on the surrender by
TMBC of the shares of stock to TA. The surrender of the shares does not
constitute a sale, assignment or transfer because TA is not taking title to the
surrendered shares, and the shares are retired and not retained as treasury shares.
In effect, TA does not realize any benefit, as owner or otherwise, from its receipt
of the shares.
The pertinent provisions in the Tax Code of 1997 as regards this issue are
as follows:
"Sec. 180. Stamp tax on all bonds, loan agreements, promissory notes,
bill of exchange, drafts, instruments and securities issued by the
Government or any of its instrumentalities, deposits substitute debt
instruments, certificates of deposits bearing interest and others not
payable on sight or demand. — On all bonds, loan agreements, including
those signed abroad, wherein the object of the contract is located or used in
the Philippines, bills of exchange (between points within the Philippines),
drafts, instruments and securities issued by the Government or any of its
instrumentalities, deposit substitute debt instruments, certificates of
deposits drawing interest, orders for the payment of any sum of money
otherwise than at sight or on demand, on all promissory notes, whether
negotiable or non-negotiable, except bank notes issued for circulation, and
on each renewal of any such note, there shall be collected a documentary
stamp tax of P0.30 on each P200.00, or fractional part thereof, of the face
value of any such agreement, bill of exchange, draft, certificate of deposit
or note. . ." (emphasis supplied)
The above-quoted Sections clearly provide for the imposition of DST on the
renewal or continuance of loan agreements and promissory notes. In the instant
case, DST shall not be imposed on the assignment by TA of its Loan Portfolio
(loan agreements and promissory notes) to TMBC, since the same is not for
renewal or continuance (BIR Ruling No. 139-97 December 29, 1997). The term
"assignment or transfer" in Section 198 of the Tax Code of 1997 applies only to
"mortgage, lease or policy of insurance". Thus, in BIR Ruling No. 041-86 dated
April 8, 1986, this Office defined the term "renew" within the context of Section
198 of the Tax Code of 1997 as follows:
". . . One of the definitions of the word "renew" found in Webster's New
Copyright 2014 CD Technologies Asia, Inc. and Accesslaw, Inc. Philippine Taxation Encyclopedia 2013 7
International Dictionary is: "To grant or obtain extension of; to continue in
force for a fresh period; as to renew a note or a bond". As commonly used
with reference to notes and bonds, the word "renewal" imports a
postponement of the maturity of the obligation dealt with, an extension of
the time in which that obligation may be discharged. (Emphasis supplied,
Campbell River Timber Co. v. Vierhus, 198 American Law Reports, 763;
86 F. (2d) 673) In other words, the term "extension" has the same
connotation as "renewal" which means the continuance of the old
obligation."
Under Section 195 of the 1997 Tax Code, on every mortgage or pledge of
lands, estate or property, real or personal, there shall be collected a DST at the
following rates:
(a) When the amount secured does not exceed P5,000.00, P20.00;
Since the DST on mortgage is based on the amount secured, the DST on the
assignment of mortgage, if any, shall be based on the outstanding balance of the
original loan at the time of the transfer or assignment. (BIR Ruling No. 139-97, id.)
6. TMBC shall realize capital gain or loss when TA distributes its assets as
liquidating dividends.
The second paragraph of Section 73 (A) of the Tax Code of 1997 states:
In the case of Wise & Co., Inc., et al. vs. Bibiano L. Meer, Collector of
Internal Revenue (78 Phil 655 [1947]), the Supreme Court, in interpreting a
similarly worded provision as above cited as in Section 25(a) of Act No. 2833
Copyright 2014 CD Technologies Asia, Inc. and Accesslaw, Inc. Philippine Taxation Encyclopedia 2013 8
("Income Tax Law"), as amended by Section 4 of Act No. 3761 [which is partially
lifted from section 201(c) of the US Revenue Act of 1918], adopted the judicial
construction of the US Supreme Court in the case of Hellmich vs. Hellman (276
US 233), where it was held that the amounts distributed in the liquidation of a
corporation shall be treated as payments in exchange for stock or shares, and any
gain or profit realized thereby shall be taxed to the distributee as other gains or
profits. The Supreme Court also stated that "(W)hen the corporation was dissolved
and in the process of complete liquidation and its shareholders surrendered their
stock to it and it paid the sums in question to them in exchange, a transaction took
place, which was no different in its essence from a sale of the same stock to a third
party who paid therefor".
In BIR Ruling No. 190-84 dated December 21, 1984, the issue raised was
precisely whether the liquidating gain (that is, the difference between the fair
market value of the properties received and the cost basis of the shares to the
stockholders) derived by an individual stockholder is subject to the then 10%/20%
tax rates under Section 34(g) of the then Tax Code or to the graduated income tax
rates under then Section 21(b). This Office ruled that such gain should be subject
to the tax rates under then Section 21(b). The same conclusion was reached in
other rulings of the BIR (BIR Ruling Nos. 322-87 dated October 19, 1987; 136-88
dated April 12, 1988; 021-89 dated February 13, 1989; 270-91 dated December
23, 1991; DA-223-98).
Finally, this Office also notes that a similar treatment has been given to
corporate shareholders of a dissolving corporation, in that the liquidating gain
realized is subject to the ordinary corporate income tax rate rather than to the then
10%/20%; or the current 5%/10% final tax rates. (see for instance BIR Ruling
Nos. DA-214-96 dated June 26, 1996 and 171-92 dated May 28, 1992)
This Office also takes note of BIR Ruling No. DA-367-99 dated January
24, 1999 issued under designated authority, and similar rulings where the BIR
departed from the above-mentioned rulings, and ruled that the liquidating gain is
subject to the 5%/10% capital gains tax rate. The basis for this ruling was BIR
Copyright 2014 CD Technologies Asia, Inc. and Accesslaw, Inc. Philippine Taxation Encyclopedia 2013 9
Ruling No. 015-82 dated January 20, 1982, where the BIR held that the liquidating
gain received by individual shareholders is subject to the then 10%/20% final tax,
but, this ruling was effectively overturned in the subsequent BIR Ruling No.
190-84 and many other similar rulings mentioned above. Thus, BIR Ruling No.
DA-529-99 and rulings similar to it have no basis, having been based on a ruling
that had already been revoked.
Copyright 2014 CD Technologies Asia, Inc. and Accesslaw, Inc. Philippine Taxation Encyclopedia 2013 10
Endnotes
1 (Popup - Popup)
This ruling has been reversed and set aside by the Commissioner of Internal Revenue
in BIR Ruling No. 479-11 dated 5 December 2011.
Copyright 2014 CD Technologies Asia, Inc. and Accesslaw, Inc. Philippine Taxation Encyclopedia 2013 11