04-20-2005 BIR Ruling [DA-182-05]

April 20, 2005

BIR RULING [DA-182-05]

R.A. No. 9243; RR 13-2004; Regs. 26

Philippine Life Insurance

Association, Inc.

Suite 54, Fifth Floor

Legaspi Suites, 178 Salcedo Street

Legaspi Village, Makati City

Attention: Mr. Jose L. Cuisia, Jr.,

President

Gentlemen :

This has reference to your letters dated February 22 and March 1, 2005, requesting reconsideration of this Office's interpretation of Section 183 of the Tax Code of 1997, as amended by Republic Act (RA) No. 9243 and as implemented by Revenue Regulations (Rev. Regs.) No. 13-2004 regarding the collection of DST on life insurance policy based on the amount of premium collected which, consequently, is being done every time the premium is paid by the insured. HCEISc

The request is anchored on your argument that the objective of the amendment of Section 183 is primarily to provide some relief to the insurance industry by way of savings in DST; that the tax relief is meant to be the first in several decades; that the original bills had actually sought to grant a relief in the form of abolishing both the DST and the premium tax imposed on life insurance policies; that, however, the final version of the Senate bill had proposed exemption from DST only of insurance policies whose premium paying period exceeds five years; that the said final version of the bill as approved by the Bicameral Conference Committee meeting held on November 19, 2003, is the one wherein the tax base for purposes of DST was changed from "amount insured" to "amount of premium collected"; that you presented a simulation of the amount of DST payable on a given insurance wherein you compared the DST payable pursuant to (i) Sec. 183 of the Tax Code, (ii) Revenue Regulations (Rev. Regs.) No. 13-2004 implementing RA 9243 which amended Sec. 183 (BIR interpretation) and (iii) PLIA's interpretation of Sec. 183, as amended by RA 9243; that PLIA's version is premised on the above argument; and that you further alleged that then Sec. Camacho had committed to provide said relief. TDSICH

In reply, please be informed that this Office has considered the merit of your argument that the objective of the amendment is to provide relief to the insurance industry by way of savings in DST on life insurance policies. However, contrary to your position that the "collection of DST based on the premium

collected will result to a heavier tax burden," we find the same to be without factual and legal bases. Rather, we conclude that the alleged heavier tax burden is the result of your erroneous interpretation. In fine, we hereby answer each and specific matter you raised as follows, to wit:

I. The payment of DST on life insurance premium pursuant to Rev. Regs. 13-2004 is not a relief.

(As reference, we made use of the simulated amounts which you presented to Sen. Ralph Recto.)

Issue Payment Fee Annual DST

Products Age Term Amount Premium A B C

(Old) (BIR's) (PLIA's)

1. Participating

Whole Life 35 Lifetime 1,000,000 27,360 2,500 4,446.00 68.40

(Veresalife 100)

We believe otherwise. Rather, since the payment of DST under RA 9243, as implemented by Rev. Regs. No. 13-2004 is being imposed on the premium price, it is but logical that DST (P68.40 per above simulation) is imposed whenever a portion of the insurance premium is collected. Unlike in the old provision of Sec. 183, a DST, i.e., P2,500 per above simulation, is imposed on the value of the policy, which is being paid by the policyholder when the policy is issued. This alone is an enormous DST relief.

2. Revenue regulations are meant to implement the provisions of the law and not to interpret or alter its purpose. For a rule or regulation to be valid, it must be consistent with the provisions and intent of the enabling statute which it is supposed to implement. Section 7 of Rev. Reg. 13-2004 gives a different interpretation of Section 183 of the Tax Code, as amended.

The bone of contention is the imposition of DST which under Reg. Regs. 13-2004 is required to be paid every time a premium is collected on the policy. You posit that the intent of the law may accurately be gleaned from the rationale or explanatory notes accompanying the various bills of both Houses which became the bases of the final version of amended Sec. 183, and that is, to abolish both the DST and the premium tax. However, in the final version presented by Sen. Ralph Recto to the Bicameral Committee, the relief came in the, form of exempting from DST those policies with a paying period of five years (5) years or more. This was modified by then DOF Sec. Camacho who proposed to change the tax base from the face amount of the policy to the amount of premium collected. DHSaCA

The foregoing narration strengthens our position that the final tax relief granted under RA 9243 is in the form of reduction of the tax base of DST under Sec. 183 of the Tax Code from sum assured to amount of premium collected.

The terms "premium" and "premium charged" have been previously defined by the Bureau of Internal Revenue (BIR) in Regulations (Regs.) No. 26. It is axiomatic that when Congress made use of the term

"premium" they are referring to the term as understood and accepted both by the BIR and the insurance industry. The principle of legislative intent suggests that the law has been enacted as intended.

Under said Sec. 61 of Regs. No. 26 the term "premium" means the agreed price for assuming and carrying the risk. It includes all that is received by the underwriter therefore and is in fact the total consideration receivable for underwriting the risk, whether in one sum or in installments, during the life of the policy.

We have noted that the law does not simply say "based on the amount of the premium." It says amount of the premium collected. The term "premium" is modified/limited by the word "collected." In the same Sec. 61, the different modifier "charged" was used. Thus, the term "premium charged" has been defined to mean the total premium payable during the life of the contract of insurance and includes any additional assessment or charge in the nature of a premium which may be assessed and charged during the life of a contract of insurance, whether payable in one sum or in installments and however paid (and though never paid if the contract of insurance be delivered and accepted or otherwise becomes binding upon the insurer).

In short, the law requires payment of DST not on the full amount of the premium price contracted to be paid during the paying period subject to the happening of the risk insured on the actual amount paid as premium price. Otherwise stated, the "amount of premium collected" is in fact the actual price/consideration paid for the insurance coverage upon which the DST 1 should be based. IHCSTE

It is further noted that the term "premium" does not have a plural form such that the whole amount paid corresponding to the insurance policy, whether paid in one sum or in installments, is simply called "premium." Conversely, for purposes of insurance, the collection of premium in installments is merely a mode of collecting the price agreed to be paid by the policyholder. In short, the initial amount paid when the insurance policy is issued is merely a portion of the whole consideration (premium).

3. On your position that there is only one DST due on the entire policy the amount of which is based on the initial premium collected, and therefore, subsequent payments of the portion of the premium are not subject to DST —

Your position is premised on fact that DST is a form of excise tax which is being imposed on the transaction, and by its nature is paid only once i.e., when the document is made, signed, issued, . . . As a consequence thereof, in the case of life insurance policy, the DST should be based on the amount of only one premium at the time when an insurance is made or renewed upon any life or lives.

You further proposed that for practicality and uniformity, the DST should be based on the amount of one annual premium.

We are constrained to disagree. The law does not specify that the DST shall be imposed on one premium payment only; it simply says "DST of . . . , of the amount of premium collected." As earlier discussed, in the previous provision of Sec. 183, the DST is imposed on the amount assured which is disclosed in the

insurance policy. Under RA 9243, the tax base which is the premium collected will depend on the amount actually collected during the paying period. DTAcIa

Since a "premium" is allowed to be paid in installments, whether annually, semi-annually, quarterly, or monthly, and since the uniform pre-determined installments are merely portions of the entire premium price, the last payment of which stops and is deemed completed only upon the happening of the risk insured upon, there is more reason to collect the DST each time a portion/installment of the premium price is collected (in short, premium collected). Thus, the imposition of DST each time the installment amount is collected is called for considering that the actual premium price (full amount of consideration) is not certain at the time the policy is issued. Should the insured die early, the full amount of premium will no longer be paid. The imposition of DST is proper only on the portion of the total premium price collected i.e., installment premium, either on a monthly, quarterly, semi-annual or annual basis, or we would violate the principle underlying the DST law which is to impose the DST on the transaction, that is underwriting the risk.

Therefore, from our end, it is our conclusion that the imposition of DST every time the premium is collected is by itself a relief. While other provisions of the DST law require payment of DST only once and upfront, in the case of life insurance, the full payment of DST is effectively spread over certain period of time, depending on the number of installments the premium is expected to be paid or upon the happening of the risk insured.

In the same vein, we conclude that the relief also comes by way of tax reduction in consideration of the fact that previously, the DST is paid based on "the amount insured" whereas, under the amended provision it is imposed on the "amount of premium collected." It is a fact that the amount of insurance coverage is higher than the premium price. Moreover, since premium is paid in installments and DST is imposed on the actual portion of the premium collected, the chance is, a lower DST is actually paid. 2 With reference to the simulation you presented, reality dictates that a lifespan of 100 years is not normally achievable. In short, the chance of collecting the full amount of premium will depend on the lifespan of the policyholder. The shorter the lifespan is the fewer installments premium are actually collected which effectively will result in lower actual DST payments. SaCIAE

4. Finally, on the allegation that then Secretary Camacho agreed to the reduction of DST through the imposition of only one DST based on initial premium —

Quoted hereunder is the observation of the Secretary before the Bicameral Conference Committee, viz.:

"MR. CAMACHO. MR. Chairman, Can we share an observation?

"THE CHAIRMAN (SEN. RECTO). Okay. Yes, please.

"MR. CAMACHO. In the Senate version, Mr. Chairman, there is provision that will exempt the DST on insurance policies that have a premium paying period of more than five years. While we support the idea of providing some relief to the insurance industry, Mr. Chairman, we would like to propose that the form of relief be modified so that its . . . the exempt, the change would be from using the policy amount

as the basis to the premium amount which is more consistent in terms of taxing the transaction, which is the premium payments, it's not the policy."

Consistent with this Office's interpretation, as explained above, the relief is in the form of reduction in the tax base, i.e., from policy amount to the amount of premium. Likewise, the DST is contemplated to be imposed on the premium payments which we explained earlier, as actually referring to a portion of the premium (installment) the amount of which when added together would be the full amount of premium, or in layman's term, the price or consideration of insurance coverage.

In fine, the collection of DST on the each portion of the premium collected does not violate the rule that the DST is a tax on the transaction. The modality of collecting DST every time a portion of the premium is collected is in effect imposing DST on the actual amount of the premium collected. Moreover, the foregoing deliberation implies that the law contemplates that payment of premium may be made in installments, as when then Sec. Camacho used the phrase "premium paying period." Therefore, if the amount collected corresponds only to one or more installments without full payment of the agreed premium price, such amount collected is merely a portion of the entire premium price. Yet it cannot be considered the tax base for DST purposes because, as explained earlier, the "amount of premium collected" refers to the actual consideration/price paid. The imposition of DST on each amount/portion of the premium collected does not mean that the tax shall be imposed more than once. TIcAaH

On the basis of the foregoing, this Office holds that the interpretation of RA 9243 as implemented by Rev. Regs. No. 13-2004, as signed by the Secretary of Finance is the correct interpretation and in accordance with the objective of the law to grant DST relief to the insurance industry. HEIcDT

Very truly yours,

Commissioner of Internal Revenue

By:

(SGD.) JOSE MARIO C. BUÑAG

Deputy Commissioner

Legal & Inspection Group

Footnotes

1. See Sec. 196 of the Tax Code of 1997 wherein "actual consideration" is being allowed as the tax base of DST.

2. Per simulation, the premium for the entire coverage is payable in 65 years. Conclusively, with the age of the policyholder at 35 when the coverage is taken, the premium installments being collectible in 65 years, the contemplated lifespan is 100 years old.

06-27-2005 BIR Ruling [DA-288-05]

June 27, 2005

BIR RULING [DA-288-05]

006-89 dtd Jan. 20, 1989

Pioneer Insurance & Surety Corporation

Pioneer House Makati

108 Paseo de Roxas, Legaspi Village

Makati City

Attention: Sally Coyukiat-Ong Pac

Senior Vice President — Accounting

Gentlemen :

This refers to your letter dated April 5, 2005 requesting confirmation of your opinion that no documentary stamp tax (DST) is due on insurance policies issued in Hong Kong by your Hong Kong Branch Office. SHacCD

It is represented that your company, Pioneer Insurance & Surety Corporation (hereinafter referred to as "Pioneer") is a domestic corporation engaged in the business of general insurance, including statutory insurance and acceptance of reinsurance; that in 1960, Pioneer was authorized by the Insurance Commission to operate a branch office in Hong Kong; that the branch has been in operation since 1963; that the branch office in Hong Kong is duly registered under the Hong Kong Companies Ordinance and is duly authorized to write certain categories of the general insurance business in Hong Kong; that pursuant to such registration, the Hong Kong Branch Office issues insurance policies and earns direct premiums on such insurance policies issued in Hong Kong to its Hong Kong clients involving properties situated outside the Philippines; that a previous BIR ruling, BIR Ruling No. 006-89 dated January 20, 1989, directly addresses the DST implications of the insurance contracts issued by Pioneer's Hong Kong branch; that the said ruling, issued to the Insurance Commissioner, states that since "the non-life insurance policies and bonds are issued in Hong Kong, the same are not subject to the documentary stamp tax; that this is so because the documentary stamp tax, being an excise tax, is applicable only to transactions effected and consummated within the Philippines;" and that in 1994, Republic Act No. 7660 amended Section 173 of the Tax Code to impose DST wherever the document is made, signed, issued, accepted, or transferred "when the obligation or right arises from Philippine sources or the property is situated in the Philippines."

It is, therefore, in this context that you request for confirmation of your opinion that despite the foregoing amendment, no DST shall be imposed on policies of property insurance issued by your Hong Kong Branch in Hong Kong to its Hong Kong clients covering property situated outside the Philippines.

In reply, please be informed that the general rule is still that DST is in the nature of an excise tax. It is not imposed upon the business transacted, but upon the privilege, opportunity or facility offered at exchanges for the transaction of the business. (Commissioner of Internal Revenue vs. Heald Lumber Co., L-16340, February 29, 1964) Thus, DST is imposed on the privilege of conducting a particular transaction or executing a particular document within the Philippines, since the parties to the said transaction or document exercise the privilege, opportunity or facility offered at exchanges for the transaction of the business in the Philippines. DAHEaT

R.A. No. 7660, however, introduced an exception to the general rule by inserting in Section 173 of the Tax Code the phrase "wherever the document is made, signed, issued or accepted or transferred when the obligation or right arises from Philippine sources or the property is situated in the Philippines." The present Section 173 of the Tax Code provides:

"Sec. 173. Stamp taxes upon documents, instruments, loan agreements, and papers. — Upon documents, instruments, loan agreements, and papers, and upon acceptances, assignments, sales and transfers of the obligation, right, or property incident thereto, there shall be levied, collected and paid for, and in respect of the transaction so had or accomplished, the corresponding documentary stamp taxes prescribed in the following sections of this Title, by the person making, signing, issuing, accepting, or transferring the same wherever the document is made, signed, issued, accepted, or transferred when the obligation or right arises from Philippine sources or the property is situated in the Philippines, and at the same time such act is done or transaction had: Provided, That whenever one party to the taxable document enjoys exemption from the tax herein imposed, the other party thereto who is not exempt shall be the one directly liable for the tax." (Emphasis ours)

The amendment is meant to plug the loophole in the law which enabled the parties to a contract to simply go outside the Philippines to sign the document and lawfully avoid payment of DST. With the amendment, DST will be payable regardless of where the document is signed, issued, accepted, or transferred, for as long as the said document pertains to (a) obligations or rights arising from sources within the Philippines or (b) property situated in the Philippines. Thus, deeds of conveyance covering real property situated in the Philippines will be liable to DST regardless of where the deed is executed. cCTaSH

Similarly, insurance policies covering property situated in the Philippines shall be liable to DST even if the policy is issued abroad. Section 184 of the Tax Code provides:

"SEC. 184. Stamp Tax on Policies of Insurance Upon Property. — On all policies of insurance or other instruments by whatever name the same may be called, by which insurance shall be made or renewed upon property of any description, including rents or profits, against peril by sea or on inland waters, or by fire or lightning, there shall be collected a documentary stamp tax of Fifty centavos (P0.50) on each Four pesos (P4.00), or fractional part thereof, of the amount of premium charged: Provided,

however, That no documentary stamp tax shall be collected on reinsurance contracts or on any instrument by which cession or acceptance of insurance risks under any reinsurance agreement is effected or recorded."

Applying the afore-quoted Section 184 in relation to Section 173 of the Tax Code to the case of Pioneer's Hong Kong Branch, the property insurance policies issued by the said Hong Kong branch will be subject to DST imposed under Section 184 of the Tax Code, even if such policies are signed or issued abroad, for as long as the properties which are the object of insurance are situated in the Philippines. Conversely, where the property insured is situated outside the Philippines, the DST imposed on property insurance under Section 184 will not apply.

While it may be true that Pioneer's Head Office is considered the same juridical entity as its Hong Kong branch office under the single-entity concept, such fact is not relevant in determining liability for DST on property insurance policies which depend solely on the location of the subject property.

In view of the foregoing, this Office therefore hereby confirms your opinion that the insurance contracts issued by Pioneer Hong Kong Branch, being in the nature of property insurance covering properties situated outside the Philippines are not subject to DST. SAHaTc

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 void.

Very truly yours,

(SGD.) JOSE MARIO C. BUÑAG

Deputy Commissioner

Legal and Inspection Group

March 10, 2005

BIR RULING [DA-076-05]

40 (A);

RMC 74-99

DA-023-2003

SGV & Co.

6760 Ayala Avenue

1226 Makati City

Attention: Atty. E. C. Alcantara

Tax Services

Gentlemen :

This refers to your letter dated December 21, 2004 requesting on behalf of your client, Panasonic Communications Imaging Corporation of the Philippines (PCIP), for a ruling on the tax consequences of the proposed transfer of its selected assets and liabilities to Panasonic Communications Corporation of the Philippines (PCP) in pursuance of its corporate reorganization. TaCDAH

The facts as you represented are as follows:

PCIP is a corporation duly organized and existing under and by virtue of Philippine laws. It is engaged in the business of manufacturing and export of all equipment, apparatus, appliances, instruments and devices concerned with information handling, such as but not limited to copiers, scanners, and printers and other goods of similar nature. PCIP is a wholly-owned subsidiary of Panasonic Holding (Netherlands) B.V. (PHN), a corporation duly organized and existing under and by virtue of the laws of Netherlands. ACcEHI

PHN, on the other hand, is wholly-owned by Matsushita Electric Industrial Co., Ltd., (MET) a corporation organized and existing under the laws of Japan.

PCIP is registered with the Philippine Economic Zone Authority (PEZA) as manufacturer and exporter of the following products and enjoys the incentives indicated opposite each of the products described below:

Product Code Description Incentive

LC2 Analog Copiers 5% Gross Income Tax

LCN, LSU Analog Copiers Income Tax Holiday

Laser-scanning units Income Tax Holiday

L4, L5, L7, LL Digital fax machines Income Tax Holiday

Multi-function products Income Tax Holiday

L2 Multi-function products Income Tax Holiday

As part of the restructuring of MEI's Philippine operation aimed at eliminating inefficiencies of the current Philippine structure, PCIP proposes to sell, at book value, the following assets and liabilities to PCP, also a corporation duly organized and existing under and by virtue of Philippine laws:

Assets Liabilities

Inventories Estimated liabilities for warranty,

Rental Deposits customers' claims and other provisions

Deferred Tax Asset

Property and Equipment

PCP is also registered with PEZA as manufacturer and exporter of CD-R/RW and slim DVD Combination Drives. It is proposed that the transfer by PCIP to PCP of its selected assets and liabilities, as well as the PEZA incentives applicable to the above products will take effect on April 1, 2005.

PCIP will thereafter cease business operations and will be subsequently dissolved. HacADE

Based on the foregoing, you now request for confirmation of your opinions that:

1. The transfer by PCIP to PCP of its selected assets and liabilities at their book values pursuant to MEI's Philippine restructuring plan will not result to any income tax consequence;

2. The transfer by PCIP, a PEZA-registered enterprise, to PCP, also a PEZA-registered enterprise, of its selected assets and liabilities are exempt from the 10% value-added tax (VAT);

3. The transfer by PCIP to PCP of its machinery and equipment placed on leased real properties, including other personal properties, shall not be subject to documentary stamp tax (DST).

In reply, please be informed that:

1. Under Section 40(A) of the Tax Code of 1997, any gain or loss for income tax purposes shall be determined as follows:

"(A) Computation of Gain or Loss. — The gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the basis or adjusted basis for determining gain, and the loss shall be the excess of the basis or adjusted basis for determining loss over the amount realized.

The amount realized from the sale or other disposition of property shall be the sum of money received plus the fair market value of the property (other than money) received;"

Thus, if the transfer of assets is made at book value, no taxable gain will be realized. Consequently, the transfer by PCIP of its selected assets and liabilities at their book value, assuming the same to be at arms' length, shall not result in a taxable gain or loss on the part of PCIP. SETAcC

2. Pursuant to Section 5(3) of Revenue Memorandum Circular No. 74-99 dated October 15, 1999, which provides, viz.:

"(3) Sale Of Goods, By A PEZA Registered Enterprise, To Another PEZA Registered Enterprise ( i.e., Intra ECOZONE Sales Of Goods). — Its sale of goods or property to another zone enterprise shall be exempt from VAT, pursuant to Sec. 109(q), NIRC, in relation to Sec. 24, R.A. 7916, as implemented by Sec. 1, Rule VIII, PART V, of the PEZA implementing rules and regulations."

Likewise, in BIR Ruling No. DA-023-2003 dated January 28, 2003, this Office has clarified that the sale by and between two (2) PEZA-registered enterprises of its properties and assets is not subject to the 10% VAT, pertinent portion of the aforesaid Ruling states that:

"In interpreting and applying the above-cited section of the Tax Code and in relation to Section 24 of R.A. No. 7916, as amended by R.A. No. 8748, this Office in Revenue Memorandum Circular No. 74-99 declared that sale of goods or property by a PEZA-registered enterprise to another PEZA-registered enterprise shall be exempt from value-added tax. Considering that Seagate is a PEZA registered enterprise, the sale of its properties, consisting of the building and equipment, within the ECOZONE whether to foreign or local buyers shall be exempt from value-added tax pursuant to Section 109(q) of the Tax Code of 1997. (BIR Ruling No. DA-090-01 dated May 16, 2001)."

Applying the foregoing, it can be said that the sale by PCIP, a PEZA-registered enterprise to PCP, another PEZA-registered enterprise of its selected assets and liabilities is deemed exempt from the 10% VAT. SEHaDI

3. The machinery and equipment placed and/or installed by PCIP on its leased parcels of land and buildings are considered personal properties. Inasmuch as only the consideration attributed to the sale of real properties are subject to documentary stamp tax under Sec. 196 of the 1997 Tax Code, the transfer by PCIP to PCP of its machinery and equipment on its leased real properties shall not be subject to documentary stamp tax.

This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered null and void. aDcHIS

03-14-2005 BIR Ruling [DA-084-05]

March 14, 2005

BIR RULING [DA-084-05]

27 (D) (5); 73; 196

#039-2002; DA-496-2004

First Christian Development Corporation

252 Buendia Avenue, Makati City

Attention: Mr. Noel V. Santos

President

Gentlemen :

This refers to your letter dated November 12, 2004 requesting for a ruling that the transfer of properties by First Christian Development Corporation ("FCDC") to its stockholders by way of liquidating dividends, as a consequence of the former's complete liquidation, is of subject to the corporate income tax, creditable withholding tax, and documentary stamp tax. DTaSIc

It is represented that FCDC is a domestic corporation duly registered with the Securities and Exchange Commission on February 14, 1994 having an authorized capital stock of Fifty Million Pesos (P50,000,000.00); that on November 10, 2004, the Board of Directors of FCDC unanimously approved to dissolve the corporation by shortening its corporate life effective December 31, 2004 with no single transaction whatsoever, as evidenced by its filing of income tax return for non-operation; and that as a result of the dissolution, the assets of the corporation will be distributed to its stockholders by way of liquidating dividends, consisting of condominium units, as follows:

NAME OF STOCKHOLDERS PROPERTY/IES

(CCT NOS.)

NOEL V. SANTOS 65232 65028 65025

65015 65023 65024

65016

ALEC V. SANTOS 65231 65062 65061

65060 65037 65058

RAYA V. SANTOS 65228 65063 65039

65057 65066 65052

65044

ALAN V. SANTOS 65227 65034 65050

65053 65093

MARK V. SANTOS 65229 65047 65064

65046 65051 65065

65003

RINA S. HIZON 65027 65070 65067

65036 65032 65002

ALAN V. SANTOS &

MARL V. SANTOS 65056

RANDY C. SANTOS 65013 65048 65019

65035 65033 65022

65095 65043 65031

65017 65045 64886

NOEL, ALEC, ALAN, RAYA,

RINA & MARK 64879

(Equal ownership)

SARADA S. SANTOS 65012 2012

JADERANI S. SANTOS 65026 2112

NILO A. SANTOS 65054 2312

DOLORES A. SANTOS 65055 2314

NILO L. SANTOS 65233 3707

TBA: FOUNDATION 64887 64888

TBA: PERSON A 65029 2201

TBA: PERSON B 65030 2202

NORA S. SANTOS 65040 65041 65042

65086 65087 65234

2212 2214 2215

2602 2603 3708

MILA SANTOS TANSECO 65085 65091 65230

2601 2607 3704

ELSA L. SANTOS 65018 65020 65021

2104 2106 2107

MYRA SANTOS BRODETT 65059 65068 65069

65088 65089 65092

2403 2412 2414

2604 2605 2608

*FCDC has no liability of any kind.

In reply, please be informed as follows:

1. The stockholders of FCDC shall realize capital gain or loss, as the case may be, when the latter distributes to the former its remaining assets (condominium units) as liquidating dividends. Specifically, Section 73 of the Tax Code of 1997 provides as follows:

"Section 73. Distribution of Dividends or Assets by Corporation. —

(A) Definition of Dividends. — The term 'dividends' when used in this Title means any distribution made by a corporation to its shareholders of its earnings or profits and payable to its shareholders, whether in money or in other property;

Where a corporation distributes all of its assets in complete liquidation or dissolution, the gain realized or loss sustained by the stockholder, whether individual or corporate, is a taxable income or a deductible loss, as the case may be." [Underscoring ours]

Liquidating gain or loss is in the nature of capital gain or loss, as the case may be, and therefore treated in the manner stated in Section 39 of the Tax Code of 1997.

The gain, if any, derived by the individual stockholders consisting of the difference between the fair market value of the liquidating dividends and the adjusted cost to the stockholders of their respective

shareholdings in the corporation (Section 66 (a); Sec. 256 of Revenue Regulations No. 2, otherwise known as the Income Tax Regulations) shall be subject to the ordinary income tax rates provided under Section 24(A)(1)(c) of the Tax Code of 1997. (BIR Ruling No. 039-2002 dated November 11, 2002)

2. The conveyance of the condominium units in the form of liquidating dividends is not subject to income tax, on the part of FCDC, either on its receipt of the surrendered shares, or its transfer of the aforesaid property to its stockholders.

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). CHcESa

Conversely, neither is a liquidating corporation subject to tax on its receipt of the shares surrendered by its stockholders pursuant to a complete or partial liquidation (BIR Ruling No. 171-92, supra).

Accordingly, FCDC 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 shareholders.

3. The conveyance of the condominium units in the form of liquidating dividends is not subject to the documentary stamp tax (DST) on sale or transfer of real property imposed under Section 196 of the Tax Code of 1997.

Section 189 of Revenue Regulations No. 26, otherwise known as the "Documentary Stamp Tax Regulations" provides, viz.:

"Section 189. Conveyances by Corporation to Owner of All the Capital. — A conveyance of real estate by a corporation without valuable consideration to an owner of all its capital stock in consequence of its dissolution is not subject to tax." (Underscoring and italics supplied)

Under the above-quoted provision, a distribution in liquidation, without consideration, of the assets of a corporation consisting of condominium units is not subject to DST imposed under Section 196 of the Tax Code of 1997. Accordingly, the distribution of the remaining assets of FCDC to its controlling stockholders without monetary consideration is not subject to DST as prescribed under Section 196 of the Tax Code of 1997. (BIR Ruling No. 214-96 dated June 26, 1996 and BIR Ruling No. 092-99 date July 8, 1999 citing BIR Ruling No. 059-90) DcITaC

In addition, Section 196 of the Tax Code of 1997 speaks of "all conveyances, deeds, instruments, or writings, . . ., whereby any land, tenement or other realty sold shall be granted, assigned, transferred, or otherwise conveyed to the purchaser, or purchasers, or to any other person designated by such purchaser or purchasers, . . .". Since it has been held that a corporation that distributes its assets to its stockholders as liquidating dividends is not deemed to be selling such assets to the latter, then Section 196 of the Tax Code of 1997 shall not apply. However, the notarial certification on this deed of

assignment is subject to the DST of P15.00, pursuant to Section 188 of the Tax Code of 1997. (BIR Ruling No. 039-2002 dated November 11, 2002)

It goes without saying that before the corporation can formally distribute and return its properties to its stockholders, a clearance must be obtained from the BIR that it has no outstanding tax liabilities. SAHIaD

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. AaCEDS

Very truly yours,

Commissioner of Internal Revenue

By:

(SGD.) JOSE MARIO C. BUÑAG

Deputy Commissioner

Legal and Inspection Group

February 23, 2005

BIR RULING [DA-065-05]

APIC DA-139-2004

Rural Bank of Rosales, Inc. (ROSBANK)

Rizal Street, Poblacion, Rosales, Pangasinan

Attention: Mr. Andres M. Cornejo

Chairman & CEO

Gentlemen :

This refers to your letter dated February 2, 2004 requesting for a ruling that the transfer of real properties by the Spouses Condrado and Sergia Estrella in favor of Rural Bank of Rosales, Inc. (ROSBANK) representing additional infusion of capital in the nature of paid-in surplus is not subject to the capital gains tax imposed under Section 24 of the Tax Code of 1997. IHEAcC

Documents submitted disclosed that ROSBANK is a domestic corporation duly registered with the Securities and Exchange Commission; that on October, 31, 2002, Spouses Condrado and Sergia Estrella executed two (2) separate Deed of Conveyance, whereby they transferred to ROSBANK two (2) parcels of land located in Rosales, Pangasinan; that on the same date, Sergia Estrella executed a Deed of Conveyance whereby she transferred to ROSBANK her paraphernal property also located in Rosales, Pangasinan; unit the corresponding fair market value/appraised value of the aforementioned properties are as follows:

Property Area & value per sq.m. Valuation

A) Paraphernal Property of Sergia Estrella

TCT No. 21172 4,871 sq.m. @ P3,000/sq.m. P14,613,000.00

B) Conjugal Property of Spouses Estrella

TCT No. 37196 13,910 sq.m. @ P2,000/sq.m. 27,820,000.00

TCT No. 36556}

TCT No. 36557} 2,392 sq.m. @ P3,000/sq.m. 7,176,000.00

TCT No. 36558} –––––––––––

P49,609,000.00

===========

that the above-listed properties were transferred to ROSBANK as additional consideration in the nature of paid-in surplus for the existing shares of stock issued to Spouses Condrado and Sergia Estrella; that by virtue of said transfer of realties, the book value of the shares of stock owned by Condrado and Sergia Estrella shall be increased accordingly; and that since the transfer of the above properties represents additional infusion of capital in the nature of paid-in surplus, no shares shall be issued by ROSBANK to Condrado and Sergia Estrella. CHIScD

In reply, please be informed that under Section 24(D)(1) of the Tax Code of 1997, a final tax of six percent (6%) based on the gross selling price or current fair market value as determined in accordance with Section 6(E) of the same Code, whichever is higher, is imposed upon capital gains presumed to have been realized from the sale, exchange, or other disposition of real property located in the Philippines, classified as capital assets, including pacto de retro sales and other forms of conditional sales, by individuals, including estates and trusts. The 6% final tax is still imposed despite the fact that a transfer of property is made for a legitimate business purpose and without monetary consideration. 1 This is so because the foregoing tax is based on the capital gains presumed to have been realized by the taxpayer on the said transfer transaction. Such being the case, the transfer of the above-listed real properties to ROSBANK by stockholders Condrado and Sergia Estrella, as contribution to its capital, is subject to the 6% capital gains tax herein imposed.

On the other hand, Section 56 of Revenue Regulations No. 2, otherwise known as the "Income Tax Regulations" reads —

"Sec. 56. Contributions by shareholders. — Where a corporation requires additional funds for conducting its business and obtains such needed money through voluntary process payments by its shareholders, the amounts so received being credited to its surplus account or to a special capital account, will not be considered income, although there is no increase in the outstanding shares of stock of the corporation. The payments in such circumstances are in the nature of voluntary assessments upon, and represent an additional price paid for, in shares of stock held by the individual shareholders, and will be treated as an addition to and as part of the operating capital of the company."

Consequently, the fair market value of the above realties transferred, as so appraised, being credited to the surplus account of ROSBANK (i.e., additional paid-in capital) being a capital investment, is not within the purview of the term "taxable income" as defined in Section 32 of the Tax Code of 1997. Accordingly, the transfer of the above-listed real properties to ROSBANK by stockholders Condrado and Sergia Estrella, as their contribution to its capital, should not be treated as income on the part of the latter, thus, not subject to income tax. (BIR Ruling No. DA-221-02 dated November 25, 2002, cited in BIR Ruling Nos. DA-117-03 dated April 14, 2003 and DA-139-2004 dated March 26, 2004) CSaHDT

Finally, Section 185 of Revenue Regulations No. 26, otherwise known as the "Documentary Stamp Tax Regulations" provides that —

"Sec. 185. Conveyances without consideration. — Conveyances of realty not in connection with a sale, to trustees or other persons without consideration are not taxable."

Considering that Condrado and Sergia Estrella transferred the above-listed real properties without the corresponding issuance of additional shares of stock in their favor, the foregoing will be considered as contribution of additional paid-in capital, not subject to documentary stamp tax as the above conveyances of realties are without any consideration and are not made in connection with a sale. (DA-139-2004 dated March 26, 2004 citing DA-150-03 dated May 7, 2003)

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. cTDECH

Very truly yours,

Commissioner of Internal Revenue

By:

(SGD.) JOSE MARIO C. BUÑAG

Deputy Commissioner

Legal and Inspection Group

Footnotes

1. Except those transactions specified as exempt under the Tax Code.

12-17-2004 BIR Ruling [DA-640-04]December 17, 2004BIR RULING [DA-640-04]24 (D); 196; 105 DA-127-2002Quiason Makalintal Barot Torres & Ibarra21st Floor Robinsons-Equitable Tower4 ADB Ave. cor. Pedro Poveda StreetOrtigas Center, Pasig CityAttention: Attys. Wilfrido E. Sanchez, Ruelito Q. Sorianoand Benedict R. TugononGentlemen :This refers to your letter dated October 16, 2004 requesting on behalf of your client, Eduardo T. Caniza for a ruling confirming your opinion that the termination of co-ownership/partition of properties is exempt from capital gains tax, documentary stamp tax and value-added tax. aAEIHCIt appears that Eduardo T. Caniza (Eduardo for brevity) together with his brother Ernesto T. Caniza (hereinafter referred to as Ernesto) are the absolute and registered co-owners of the following real properties jointly titled in their names:

TCT/CCT No. LocationTCT No. T-98706 Cavinti, LagunaCCT No. 23284 Unit 101, One Corporate Plaza, Pasay CityTCT No. 215810 T. Alonzo, Sta. Cruz, ManilaTCT No. T-1 5579 Sungay East, Tagaytay CityTCT No. 215811/215812 Platerias, Sta. Cruz, ManilaTCT No. 164922 Masangkay, Tondo, Manilaon October 17, 2002, Eduardo and Ernesto executed a Memorandum of Agreement whereby the brothers agreed to partition the above-stated properties as follows:To: Eduardo T. CanizaTCT No. T-98706 Cavinti, LagunaCCT No. 23284 Unit 101, One Corporate Plaza, Pasay CityTCT No. 215810 T. Alonzo, Sta. Cruz, ManilaTo: Ernesto T. CanizaTCT No. T-15579 Sungay East, Tagaytay CityTCT No. 215811/215812 Platerias, Sta. Cruz, ManilaTCT No. 164922 Masangkay, Tondo, ManilaIn reply, please be informed that under Section 24(D)(1) of the Tax Code of 1997, a final tax of six percent (6%) based on the gross selling price. or current fair market value as determined in accordance with Section 6(E) of the Tax Code of 1997, whichever is higher, is imposed upon capital gains presumed to have been realized from the sale exchange, including pacto de retro sales and other forms of conditional sales, by individual, including estates and trust.

Considering that there is no sale, exchange or disposition of property in the above-mentioned transaction but merely a partition of the properties among the co-owners which properties rightfully belong to them and without any consideration, the same is not subject to capital gains tax imposed under Section 24(D)(1) of the Tax Code of 1997. TCaEIcMoreover, the partition of the said properties among the co-owners is not subject to documentary stamp tax under Section 196 of the Tax Code of 1997, but only to the documentary stamp tax of P15.00 prescribed under Section 188 of the same Tax Code. (BIR Ruling No. DA-127-2002 dated July 25, 2002)The transaction is likewise not subject to value-added tax, since the dissolution of co-ownership and eventually the partition of properties is not a sale of goods and services pursuant to Section 105 off the Tax Code of 1997.This ruling is being issued on, the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered null and void. aTSEcAVery truly yours,Commissioner of Internal RevenueBy:(SGD.) JOSE MARIO C. BUÑAGDeputy CommissionerLegal and Inspection Group

12-21-2004 BIR Ruling [DA-648-04]December 21, 2004BIR RULING [DA-648-04]RMC 34-91; 43-91; DA-374-2003Mrs. Elisea D. David1828 Jose Abad SantosTondo ManilaM a d a m :This refers to your letter dated October 6, 2004 requesting for exemption from the payment of capital gains tax.It is represented that you are now 85 years old and a retired public school principal; that in 1964 a Deed of Sale has been executed between you and your eldest son Erlando D. David over a parcel of land measuring 39 square meters located at No. 1828 Jose Abad Santos, Tondo, Manila, for the purpose of securing a housing loan from the Social Security System (SSS); that said Deed of Sale has been executed for convenience and without monetary consideration; that you want to be fair among all your heirs and put everything prospectively to avoid confusion and problems in the future; that you have no intention of selling the same and it is best to remain communal to serve the needs of any of your heirs; that you did not request Erlando any financial assistance when you built the present and new structure in 1997; and that a Deed of Sale has been executed in 1975 to revert back the property to you, again, for convenience and without monetary consideration. IEHDATIn reply, please be informed that the rules on the kind of tax, rate of tax, zonal or fair market value obtaining at the date of notarization on April 29, 1975 shall be applied in accordance with the provisions of RMC 34-91, as clarified by RMC 43-91. Therefore, prior to the effectivity of BP Blg. 37, capital gains from the sale or transfer of real property classified as capital assets were then subject to the regular income tax rates.Moreover, a closer perusal of the said transaction would reveal that the subject property is the same property which you previously transferred to your son's favor for SSS Housing Loan Program which, as represented, is one of the requirements for the granting of the loan. In other words, the transfer of the Title to the property being sold should be complied with in order to qualify under the SSS Housing Loan Program.Therefore, considering that the transfer of the subject property is without consideration and was executed only as a requirement for the granting of the SSS loan, this Office is of the opinion that the reconveyance of the same in your favor is exempt from the payment of the capital gains tax imposed under Section 24(D) of the Tax Code of 1997 and documentary stamp tax prescribed under Section 196 of the same Code. However, the same is subject to the documentary stamp of P15.00 as imposed by Section 188 of the Tax Code of 1997 on acknowledgements. (BIR Ruling No. 042-97 dated April 8, 1997) cITCAaThis ruling is being issued based on the foregoing representations. If upon investigation, however, it will be shown that the facts are different from the said representations, then this ruling shall be considered null and void. EHCDSIVery truly yours,

03-04-2014 BIR Ruling No. 079-14March 4, 2014BIR RULING NO. 079-14Secs. 108, 163, 188, 196, R.A. No. 8424; Rev. Regs. 2-98, 17-2003; BIR Ruling No. 027-2010Household Development Corporation3rd Level Starmall Las Piñas, CV Starr Avenue,Philamlife Village, Pamplona, Las Piñas CityAttention: Ms. Maribeth C. TolentinoPresidentGentlemen :This refers to your letter dated March 7, 2013 requesting for a ruling confirming your opinion that the payment of documentary stamp tax (DST) by HOUSEHOLD DEVELOPMENT CORPORATION on its sale transaction is correct and proper pursuant to the provisions of Revenue Regulations No. 17-2003. CEaDAcIt is represented that HOUSEHOLD DEVELOPMENT CORPORATION, (the "Buyer") a duly registered domestic corporation with TIN 001-221-703, entered into an Agreement to Purchase and Sell ("ATPS") with TWENTY TWO REALTY AND DEVELOPMENT CORPORATION (the "Seller") on June 29, 2012 covering the sale of two (2) parcels of land both located in Barangay Ususan, Taguig City, Metro Manila. One parcel registered under Transfer Certificate of Title (TCT) No. 36751 has an area of 18,419 square meters while the other, albeit unregistered, is covered by Tax Declaration No. GL-011-1500 and has an area of 1,096 square meters. Pursuant to the stipulations in the ATPS, the Buyer shall pay an initial down payment equivalent to fifty percent (50%) of the agreed purchase price and the balance shall be payable in two quarterly installments. On the same date, the Buyer remitted in full the 6% creditable withholding tax (CWT) based on the total consideration net of value-added tax since the initial payment is already 50% of the total consideration. On February 8, 2013 the parties executed a Deed of Absolute Sale for the parcel of land covered by TCT No. 36751 after the full payment of the purchase price. The corresponding DST on the Deed was paid on February 15, 2013.Based on the foregoing representations, you now request for an opinion on whether the payment of the DST on the sale and the conveyance of real property as prescribed in Section 196 of the National Internal Revenue Code of 1997, as amended (NIRC), after the execution of the Deed of Absolute Sale with the selling price on the ATPS as basis is correct and proper. aCcADTIn reply thereto, please be informed that Section 196 of the NIRC, provides that —"SEC. 196. Stamp Tax on Deeds of Sale and Conveyances of Real Property. — All conveyances, deeds, instruments, or writings, other than grants, patents or original certificates of adjudication issued by the Government, whereby any land, tenement or other realty sold shall be granted, assigned transferred or otherwise conveyed to the purchaser, or purchasers, or to any other person or persons designated by such purchaser or purchasers, there shall be collected a documentary stamp tax, at the rates herein below prescribed, based on the consideration contracted to be paid for such realty or on its fair market value determined in accordance with Section 6(E) of this Code, whichever is higher: . . ."

Corollary, Section 163 of Regulations No. 26, or Revised Documentary Stamp Tax Regulations which provides:"SEC. 163. Contract for sale of land. — If contract for the sale of land vests title on the land and improvements thereon, it would be subject to taxation as a conveyance. If it does not vest title but contains only certain provisions for the giving of a deed in the future upon compliance with conditions precedent, it is not subject to tax."In the same vein, Section 2.57.2 (J) of Revenue Regulations No. 2-98, as amended by Revenue Regulations No. 17-2003, provides that — SEIacA"xxx xxx xxxFor sale of property on installment basis or deferred payment basis where the Contract to Sell is always executed before the execution of the Deed of Sale, the said Contract to Sell must be attached to the Deed of Absolute Sale executed upon completion of the payments and the duly notarized original duplicate copy of both documents must be presented to the RDO having jurisdiction of the place where the property is located for validation of the correctness of payment of all applicable taxes before the issuance of CAR/TCL.It is to be noted, however, that in case of sale of real property paid under installment payment or deferred payment basis, the payment of the documentary stamp tax (DST) shall accrue upon the execution of the Deed of Absolute Sale but the basis for the imposition thereof shall be the gross selling price or fair market value of the property, whichever is higher, as of the time of the execution of the Contract to Sell.xxx xxx xxx"Considering that the terms of payment on the sale transaction between HOUSEHOLD DEVELOPMENT CORPORATION and TWENTY TWO REALTY AND DEVELOPMENT CORPORATION is on installment basis as stipulated in the ATPS and that the CWT due thereon has been paid, accordingly, the DST on the sale and the conveyance of real property as prescribed in Section 196 of the NIRC, is payable only upon the execution of the Deed of Absolute Sale (BIR Ruling No. 027-10 dated August 10, 2010) and the basis for the imposition thereof shall be the gross selling price or fair market value of the property, whichever is higher, as of the time of the execution of the ATPS pursuant to Revenue Regulations No. 17-2003. DAcSICHowever, it should be noted that the ATPS is subject to the DST of P15.00 pursuant to Section 188 of the Tax Code of 1997. (BIR Ruling No. 027-10 dated August 10, 2010)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-HENARESCommissioner of Internal Revenue

06-07-2005 BIR Ruling [DA-244-05]June 7, 2005BIR RULING [DA-244-05]40 (C) (2) & (3); 115-98National Home Mortgage and

Finance CorporationFilomena Building IIIAmorsolo St., Legaspi VillageMakati CityAttention: Mr. Celso delos AngelesPresidentGentlemen :This refers to your letters dated 14 December 2004 and 18 May 2005 requesting for our confirmation that no gain or loss shall be recognized by the National Home Mortgage Finance Corporation (NHMFC) upon the transfer of its mortgage loan receivables in favor of the BALIKATAN HOUSING, INC. (the "Corporation") in exchange for the latter's shares of stock and other debt instruments under Section 40(C)(2) of the Tax Code. cEATSIIt is represented that the NHMFC is a corporation created by virtue of Presidential Decree No. 1267 (1977); that among its objectives are to: (a) develop and provide for a secondary market for home mortgages granted by public and/or private home financing institutions [Pres. Decree No. 1267 (1977)]; (b) act as the major government home mortgage institution [Exec. Order No. 90 (1986)]; and (c) develop and provide a secondary mortgage market to finance mortgage take and fast track the disposition of existing mortgages [Exec. Order No. 195 (1999)]; that in line with its objectives, NHMFC provided financing for various low-cost housing projects and took over the various loan mortgage accounts of the buyers of houses and lots and that over the years, many of these loan mortgage accounts defaulted and NHMFC began to accumulate a portfolio of non-performing loans ("NPLs"); that in order to liquefy some fifty-five thousand (55,000) of its highly delinquent NPLs, NHMFC obtained approval from the Office of the President of the Philippines to incorporate the Corporation as a vehicle for holding on to the NPLs and to serve as an eventual entry point for other investors; that in light of the Presidential approval, the Corporation was incorporated with the Securities and Exchange Commission with an authorized capital stock of Two Hundred Million Pesos (P200,000,000.00) divided into Two Hundred Thousand (200,000) common shares with a par value of One Hundred Pesos (P100.00) per share and One Hundred Eighty Thousand (180,000) redeemable preferred shares with a par value of (P1,000.00) per share; that out of the Corporation's authorized capital stock of Two Hundred Million Pesos (P200,000,000.00), Forty-Nine Thousand (49,000) common shares with a par value of Four Million Nine Hundred Thousand Pesos (P4,900,000.00) and Fifty-Eight Thousand (58,000) redeemable preferred shares with a par value of Fifty-Eight Million Pesos (P58,000,000.00) have been subscribed and fully paid by NHMFC; that in full payment of its subscription, NHMFC executed a Deed of Assignment dated 13 December 2004 assigning the NPLs with an aggregate book value of approximately Thirteen Billion Four Hundred Fifty Three Million Eight Hundred Six Thousand Five Hundred Sixty Two Pesos and Sixty Centavos

(P13,453,806,562.60) (hereinafter referred to as the "Receivables") at an aggregate transfer value of Five Billion One Hundred Twenty-Three Million Two Hundred Nine Thousand Five Hundred Thirty-Nine Pesos and Five Centavos (P5,123,209,539.05) in favor of the Corporation. On 18 May 2005, NHMFC and the Corporation executed an Amended Deed of Assignment of Receivables to reflect mathematical adjustments made with respect to the number and value of the mortgage loan receivables resulting in a reduction of the book value of the receivables from P13,453,806,562.60 to P12,837,966,661.00 and an increase in the transfer value of such mortgage loan receivables to PhP5,172,936,190.00 instead of PhP5,123,209,539.05. Thus, pursuant to the Deed of Assignment of Receivables dated as of 13 December 2004 and following the execution of the Amendment to Deed of Assignment of Receivables dated as of 18 May 2005, the Corporation issued the following equity and debt instruments in favor of NHMFC in exchange for the Receivables:a. Equity

Type of Stock No. of Shares Par Value per Paid-in Premiumshare

Preferred 58,000 1,000.00 P58,000,000.00 P688,450,747.55Common 49,000 100.00 4,900,000.00 0Total 107,000 P62,900,000.00 P688,450,747.55b. Debt

Instrument Issue ValueSenior Debt Instruments + Additional Senior Debt Instruments 3,103,761,714.00Series "A" Subordinated Debt Instrument + Additional Series "A"1,055,278,982.76Subordinated Debt InstrumentSeries "B" Subordinated Debt Instrument + Additional Series "B" 262,544,745.69Subordinated Debt InstrumentTotal 4,421,585,442.45After the transfer by the NHMFC of the Receivables in exchange for the above-described equity and debt instruments, the outstanding capital stock of the Corporation is as follows:Name of Shareholder No. of Par Value Amount Premium Voting

Shares Per share Paid-Up PowerPreferred SharesNational Home 58,000 1,000.00 P58,000,000.00 P688,450,747.55 -Mortgage and FinanceCorporationCommon SharesNational Home 48,995 100.00 P4,899,500.00 0 100%Mortgage and FinanceCorporation

1 100.00 100.00 0 -1 100.00 100.00 0 -1 100.00 100.00 0 -1 100.00 100.00 0 -

1 100.00 100.00 0——— ————— ——————

Total Common 49,000 4,900,000.00 0 100%Grand Total 107,000 P62,900,000.00 P688,450,747.55 100%That as a result of the above-described transfer, NHMFC gained control of the Corporation; that based on the above-mentioned transactions, you requested our confirmation of your opinion that:"1. No gain or loss shall be recognized on the transfer by the NHMFC of the Receivables to the Corporation in exchange for 100% of the outstanding voting stock of the Corporation, pursuant to Section 40(C)(2) and (C)(6) of the Tax Code;"2. The basis of the shares of stock or debt instruments NHMFC acquired in the exchange shall be the same as the original acquisition cost or adjusted cost basis to NHMFC of the Receivables exchanged therefor; and the cost basis to the Corporation of the Receivables exchanged for stocks shall be the same as it would be in the hands of NHMFC, pursuant to Section 40(C)(5)(a) and (b) of the Tax Code;"3. The transfer of the Receivables by NHMFC to the Corporation will not be subject to value-added tax (VAT);"4. The transfer of the Receivables by NHMFC to the Corporation in exchange for shares of stock and debt instruments shall not be subject to donor's tax;"5. The transfer by NHMFC to the Corporation of the Receivables is exempt from DST pursuant to Section 199(m) of the Tax Code, as amended by Republic Act No. 9243;"6. The issuance of shares by the Corporation to NHMFC in exchange of the Receivables will be subject to the DST imposed under Section 174 of the Tax Code, as amended by Republic Act No. 9243; and"7. The issuance of the debt instruments by the Corporation to NHMFC in exchange for the Receivables will be subject to the DST imposed under Section 179 of the Tax Code, as amended by Republic Act No. 9243. However, no DST shall be due on the subsequent assignment, transfer, or amendment thereof provided there is no increase in the amount or change in the maturity date from that of the original instrument pursuant to Section 199(f) of the Tax Code."and that in support of your request, you submitted to this office copies of the following documents: (1) BIR Form No. 0605 evidencing payment of the filing fees; (2) Deed of Assignment of the Receivables executed by and between NHMFC and the Corporation dated 13 December 2004; (3) Amended Deed of Assignment of Receivables executed by and between NHMFC and the Corporation dated 18 May 2005; (4) certified list of the Receivables to be transferred; (5) A certification as to the original or historical cost or acquisition/adjusted cost basis of the Receivables; (6) Articles of Incorporation and By-Laws of the Corporation as filed with the Securities and Exchange Commission; and (7) Audited Financial Statements of NHMFC as of December 31, 2003.In reply, please be informed that pursuant to Section 40(C)(2) and (6)(c) of the Tax Code of 1997, no gain or loss shall be recognized if property is transferred to a corporation by a person, in exchange for stock in such a corporation of which, as a result of such exchange, said person, alone or together with others, not exceeding four persons, gains control of said corporation. The

term "control" shall mean ownership of stocks in a corporation possessing at least 51% of the total voting power of all classes of stocks entitled to vote. Control is determined by the amount of stocks received i.e., total subscribed, whether for property or for services by the transferors. In determining the 51% stock ownership, only those persons who transferred property for stocks in the same transaction may be counted up to a maximum of five.Section 40(C)(3)(a) of the 1997 Tax Code further states that if, in connection with the above-described exchange, an individual, a shareholder, security holder or corporation receives not only stock or securities permitted to be received without recognition of gain or loss, but also money and/or other property, the gain, if any, but not the loss, shall be recognized but in an amount not in excess of the sum of the money and the fair market value of such other property received. Pursuant to Section 40(A) of the same Tax Code, the gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the basis or adjusted basis for determining gain, and the loss shall be the excess of the basis or adjusted basis for determining loss over the amount realized. The amount realized from the sale or other disposition of property shall be the sum of money received plus the fair market value of the property (other than money) received. In an assignment of receivables, the gain shall be the excess of the amount realized therefrom over the cost or adjusted cost of the receivables and the loss to be recognized by the transferee from the assignment of receivables shall be the excess of the cost or adjusted cost of the receivables over the amount realized. The amount to be realized from the assignment of receivables is determined by considering the selling/transfer price of the receivables shall be the fair market value of the property received in exchange therefor and not the fair market value of the receivables transferred. (BIR Ruling No. 15-98 dated July 28, 1998)Accordingly, no gain or loss shall be recognized both to the transferors and the transferee corporation on the transfer by NHMFC of the Receivables in exchange for the common shares, redeemable preferred shares of stock and debt instruments issued by the transferee corporation, considering that as a consequence of the exchange, the transferor will gain control of the transferee corporation by owning 100% of its total voting stocks. Notwithstanding acceptance by NHMC of property consisting of debt instruments other than shares of stock to be issued by the Corporation in exchange for the Receivables, NHMFC will not realize any gains by virtue of the transaction since NHMFC will be transferring property consisting of the Receivables with a book value of approximately P12,837,966,661.00 in exchange for shares of stock and debt instruments with an aggregate par value of only P4,484,485,442.45. CScTDEIt should be emphasized, however, that Section 40(C)(2) and (6)(c) of the 1997 Tax Code merely defers recognition of the gain or loss from such transaction, for in determining the gain or loss from a subsequent transaction of the properties or of the stocks involved in the exchange, the original or historical cost of the properties or stocks is considered. Thus, if NHMFC later sells or exchanges the shares of stock or debt instruments it acquired in the exchange, it shall be subject to income tax on gains derived from such sale or exchange, taking into consideration that the cost basis of the shares and debt instruments shall be the same as the original acquisition cost or adjusted cost basis to the NHMFC of the Receivables exchanged therefor, and that the cost

basis to Balikatan of the Receivables exchanged for stocks and the debt instruments shall be the same as it would be in the hands of NHMFC. (Section 40(C)(5)(a) and (b) of the Tax Code)In this connection, you are further advised that, in order that the parties to the exchange can avail of the non-recognition of gains provided for in Section 40(C)(2) and (6)(c) of the Tax Code of 1997, as amended, they should comply with the requirements hereunder mentioned:a. The transferor must file with its income tax return for the taxable year in which the exchange transaction was consummated, a complete statement of all facts pertinent to the exchange, including:1. A description of the properties transferred, or of its interest in such properties, with a statement of the original acquisition cost/adjusted cost basis or other basis thereof at the time of the transfer;2. The kind of stocks or other properties received and preferences, if any;3. The number of shares of each class received; and4. The fair market value per share of each class at the date of the exchange.b. On the other hand, the transferee corporation must file with its income tax return for the taxable year in which the exchange was consummated the following:1. A complete description of the properties received from the transferor;2. A statement of the original acquisition cost or other basis of the properties in the hands of the transferor and the adjusted cost basis thereof at the time of the transfer; and3. Information with respect to the capital stock of the corporation including:a. The total issued and outstanding capital stock immediately prior to and immediately after the exchange with a complete description of each class of stock;b. The classes of stocks and number of shares and other property issued to the transferor in the exchange; andc. The fair market value as of the date of the exchange of the capital stock issued to the transferor.In addition to the foregoing requirements, permanent records in substantial form must be kept by the taxpayers participating in the exchange, showing the information listed above in order to facilitate the determination of gain or loss from a subsequent disposition of stocks/properties received in the exchange. HICSaDFurthermore, your opinion on the following are likewise hereby confirmed:(1) Pursuant to Section 4.100-5(b)(1) of Revenue Regulations No. 7-95, as amended, a change of control of a corporation by the acquisition of the controlling interest of such corporation by another stockholder or group of stockholders shall not be subject to output tax. Example: transfer of property to a corporation in exchange for its shares of stock under Section 40(C)(2) and (6)(c) of the 1997 Tax Code. Consequently, the transfer of the Receivables by NHMFC to Balikatan will not be subject to value added tax;(2) The transfer of the Receivables by NHMFC to Balikatan in exchange for common shares, redeemable preferred shares, and debt instruments shall not be subject to donor's tax since there is no donative intent involved in the transfer. (BIR Ruling No. 224-93 dated May 18, 1993)(3) The certificates of stocks to be issued by Balikatan are subject to the documentary stamp tax at the rate of P1.00 for every P200.00, or a fractional part thereof, of the par value of

the shares issued pursuant to Section 174 of the Tax Code, as amended by Republic Act No. 9243, which shall attach upon issuance by the SEC of Balikatan's Certificate of Incorporation.(4) The documentary stamp tax due on the issuance of the Senior Debt Instrument, Series "A" Subordinated Debt Instrument, Series "B" Subordinated Debt Instrument and the Additional Senior and Subordinated Debt Instruments by Balikatan shall be subject to P1.00 for every P200.00, or a fractional part thereof, of the issue value of the debt instruments pursuant to Section 179 of the Tax Code, as amended by Republic Act No. 9243. However, the subsequent assignment, transfer or amendment of such debt instruments by NHMFC shall not be subject to DST provided that there is no increase in the amount or change in the maturity date from that of the original instrument pursuant to Section 199(f) of the Tax Code of 1997, as amended by Republic Act No. 9243. ADTCaIThis ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different and/or any of the requirements imposed in this letter is not complied with, then this ruling shall be considered null and void. THIAaDVery truly yours,Commissioner of Internal RevenueBy:(SGD.) JAMES H. ROLDANAssistant CommissionerLegal Service