REVENUE MEMORANDUM CIRCULAR NO. 3-2014 issued on January 15, 2014 circularizes the modification of BIR Ruling DA (C-133) 431-2008. 

         When preferred shares are redeemed for retirement in accordance with its nature, pursuant to Revenue Regulations No. 6-2008, the capital gain or capital loss derived 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. The capital gain or capital loss shall be subject to the regular Income Tax rate under the Tax Code, as amended, on individual taxpayers or to the corporate Income Tax rate under the Tax Code, in case of corporations.

         On the part of Bonifacio Conversion and Development Authority (BCDA), any gain realized by it on the redemption of shares by Fort Bonifacio Development Corporation (FBDC) shall be subject to corporate Income Tax and to creditable Withholding Tax. On the part of FBDC, the transaction is not subject to Income Tax considering that the redeeming corporation does not realize any gain or loss on the redemption of its shares. The shares so redeemed or reacquired shall be considered retired and no longer issuable, and hence, no gain shall be realized by the redeeming corporation. Accordingly, FBDC as a redeeming corporation, is not subject to Income Tax on its receipt of the shares surrendered by BCDA pursuant to the redemption.

         Considering that FBDC is a real estate developer which owns substantial parcels of land, all real properties it acquired, whether developed or undeveloped as of the time of acquisition; all real properties it holds primarily for sale or for lease to customers in the ordinary course of its trade or business or which would properly be included in its inventory if on hand at the close of the taxable year; and all real properties used in its trade or business are considered its ordinary assets.

         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.”

         The conveyance by FBDC of its real properties to BCDA in partial redemption of the Preferred “B” shares owned by BCDA is in the nature of a transfer, use or consumption not in the course of business of goods or properties which are originally intended for sale or for use in the course of business. It is a transaction “deemed sale” which is subject to VAT under the said provisions. The VAT shall be based on the gross selling price defined as the consideration or the fair market value of the properties, whichever is higher.

       In the instant case, the gross selling price is whichever is higher of the consideration received by the FBDC (i.e., the redemption price for the preferred shares) and the Fair Market Value (FMV) of the real property transferred (i.e., the FMV as shown in the Real Property Tax Declarations issued by the Assessor’s Office or the zonal value, whichever is higher).

         Likewise, the Tax Code of 1997 imposes a Documentary Stamp Tax (DST) on the sale and conveyances of real property under Section 196. Thus the conveyance of certain real properties by FBDC in partial redemption of Preferred “B” shares owned by BCDA is subject to Income Tax, Documentary Stamp Tax and VAT.