MANILA, Philippines - Commissioner Kim Jacinto-Henares has overturned a 2008 Bureau of Internal Revenue (BIR) ruling, which granted certain tax exemptions to real-estate corporations Fort Bonifacio Development Corp. (FBDC) and the Bases Conversion and Development Authority (BCDA) on transactions involving the transfer of real properties in the former military base in exchange for shares of stock.
Henares issued Revenue Memorandum Circular (RMC) 3-2014, which ruled that the transfer of FBDC’s real properties to BCDA—in redemption of BCDA shares of stock that FBDC sought to retire—is now subject to income tax, value-added tax on the sale of real properties, and documentary stamp tax (DST).
RMC 3-2014 modifies a 2008 BIR ruling which held that the transfer of real-estate properties by FBDC to BCDA—in redemption of preferred shares held by BCDA—is not subject to income tax, VAT, donor’s tax and DST. The 2008 ruling covers only two transactions between FBDC and BCDA, but RMC 3-2014 will also apply to other similar transactions by the two entities.
RMC 3-2014 rules that FBDC’s redemption of the preferred B shares held by BCDA—which resulted in profit made by the government agency— is subject to the payment of income tax, BCDA is a government-owned and -controlled corporation mandated to transform former military bases into alternative productive civilian use.
Henares cited Revenue Regulations 6-2008 which provides for the payment of income taxes on the redemption of shares meant to be cancelled or retired by the issuing corporation.
Section 9 of RR 6-2008 provides that: “When preferred shares are redeemed at a time when the issuing corporation is still in its “going-concern” and is not contemplating in dissolving or liquidating its assets and liabilities, capital gain or capital loss upon redemption shall be recognized on the basis of the difference between the amount/value received at the time of redemption and the cost of the preferred shares.
“Similarly, the capital gain or loss derived shall be subject to the regular income tax rates imposed under the Tax Code, as amended, on individual taxpayers or to the corporate income tax rate, in case of corporations.”
RMC 3-2014 ruled that FBDC should pay VAT of 12 percent upon the transfer of real properties to BCDA in redemption of BCDA shares. The BIR ruled that since the transfer of the real properties are deemed as sales, and such real properties are considered ordinary assets of a real-estate corporation such as FBDC, the sale of which is subject to VAT.
“In general the sale of real properties held primarily for sale to customers or held for lease in the ordinary course of trade or business of the seller shall be subject to VAT. In the instant case, the transfer of the subject real properties by FBDC to BCDA to redeem its shares, although not occurring in the regular conduct or in the course of FBDC’s trade or business and is a transaction which is not done with regularity, is nevertheless subject to VAT, the same being considered a transaction ‘deemed sale,’” Henares said in the memorandum.
The VAT to be paid by FBDC should be 12 percent of the gross selling price, which is either the redemption price of the shares held by BCDA or the fair market value of the real property transferred, whichever is higher.
The memorandum also said the sale and conveyances of real property between FBDC and BCDA are subject to DST as provided for in Section 196 of the Tax Code of 1997.