[PROPERTY TRANSFERS DUE TO THE NULLITY OF MARRIAGE ARE GENERALLY NOT SUBJECT TO CGT, DONOR’S TAX, OR DST] [THE COURT-ORDERED FORFEITURE OF CONJUGAL PROPERTIES IN A VOID MARRIAGE IS CONSIDERED A LEGAL PROPERTY SETTLEMENT & IS NOT TREATED AS A TAXABLE TRANSACTION] [WHILE PROPERTY DIVISION IN VOID MARRIAGES IS GENERALLY TAX-EXEMPT, ANY UNEQUAL DISTRIBUTION MAY BE SUBJECT TO CGT & DST]

M filed a Petition for the Declaration of Nullity of Marriage against D in 2011. The Regional Trial Court (RTC) of Manila granted the Petition in 2016, and the decision attained finality in 2017. During their marriage, the couple acquired several properties. As part of the Court’s ruling, the share of D in these conjugal properties was forfeited in favor of their common children, pursuant to Article 147 of the Family Code, which mandates that the guilty spouse’s share in a void marriage shall be allocated to the children. The Court further ordered that D’s share be equally divided among their children and registered under their names. Seeking clarification on the tax implications of the transfer, M requested confirmation from the BIR on whether the transaction would be subject to Capital Gains Tax (CGT), Donor’s Tax, or Documentary Stamp Tax (DST). In ruling, transfer of the conjugal properties to M and her children, as mandated by the court decision, is not subject to CGT under Section 24(D)(1) of the Tax Code, as the transfer was not a sale or other disposition involving monetary consideration. Likewise, it is not subject to Donor’s Tax under Section 98(A) of the same Code, since there was no donative intent, and the transfer merely complied with the legal property settlement. As further emphasized, properties adjudicated to the children should be treated as advances on their presumptive legitimize under Article 50 of the Family Code and must be annotated accordingly for estate tax purposes. While the transfer itself is not subject to estate tax, the properties will form part of the gross estate upon the death of either parent and will be subject to estate tax, if applicable. Furthermore, while the court-approved property division is not considered a taxable event, any excess allocation beyond equal partition between the co-owners may be considered an “other disposition” of property, which could be subject to CGT. In summary, the BIR confirmed that the transfer of conjugal properties pursuant to the Declaration of Nullity of Marriage is not subject to CGT and Donor’s Tax provided that the properties are divided equally. Any excess allocation beyond equal division may be considered a taxable disposition. The adjudicated properties should also be properly annotated for estate tax purposes in the future. [BIR RULING NO. OT 062-2024, OCTOBER 18, 2024]

DOWNLOAD FULL TEXT

[THE TEST OF TAXABILITY IS THE SOURCE & THE SOURCE OF AN INCOME IS THAT ACTIVITY WHICH PRODUCED THE INCOME] [INCOME PAYMENTS MADE FOR SERVICES RENDERED, TO THE EXTENT THAT THE SUBJECT SERVICES ARE NOT PERFORMED IN THE PHILIPPINES, ARE NOT SUBJECT TO INCOME TAX, WITHHOLDING TAX & VAT]

Anti-Money Laundering Council (AMLC) is seeking confirmation whether the payments to Ms. J., a non-resident foreign consultant, for services outside the Philippines are exempt from Income Tax, Withholding Tax, and Value-Added Tax (VAT) under the Consultancy Agreements aimed at removing the Philippines from the Financial Action Task Force (FATF) Greylist and European Union's List of Jurisdictions with Strategic AML/CFT Deficiencies (EU List on AML/CFT). As represented, AMLC entered into a Consultancy Services Agreement with a Canadian consultant renewable at the option of the AMLC. All services under the Renewal Contract and the Consultancy Services Agreement were rendered outside the Philippines, including desk-based reviews, emails, video conferences, and online delivery workshops. In reply, Section 42 (A) (3) and (C) (3) of the Tax Code states that compensation for labor or personal services is derived from sources within the Philippines if the services are performed therein, and outside if performed abroad. In addition, BIR Ruling No. 212-12 reiterates that the situs of tax for services is the place where the service is rendered. Further, in the case of CIR v. Japan Airlines, Inc., G.R. No. 60714, dated March 6, 1991, the Court held that the situs of the income derived from labor or personal services is determined solely by the place where service is rendered. In the present case, since the consultant is a non-resident alien not doing business in the Philippines and her professional fees or compensation constitute income derived from sources outside the Philippines, the same are not subject to income tax, and consequently, to the withholding tax. On the other hand, pursuant to Section 108 (A) of the Tax Code, the service fees to be paid by the AMLC to the consultant, to the extent that the subject services are not performed in the Philippines, are exempt from VAT. [BIR RULING NO. 049-2024, OCTOBER 7, 2024]

DOWNLOAD FULL TEXT

[THE DEED OF ASSIGNMENT WITH THE ASSUMPTION OF OBLIGATIONS DOES NOT EQUATE TO A SALE] [IN AN ASSIGNMENT OF RIGHTS, THE ASSIGNEE TAKES ON THE ASSIGNOR'S RIGHTS WITHOUT GAINING ANY SUPERIOR CLAIM] [NO GAIN IS REALIZED DUE TO EQUAL PAYMENTS, EXEMPTING THE ASSIGNMENT FROM CWT/EWT OR CGT]

C Co. is requesting confirmation whether the assignment of its rights, interests, and obligations under a Contract to Sell covering various parcels of land to its designated assignee is not subject to Capital Gains Tax (CGT), Expanded Withholding Tax (EWT), Value-Added Tax (VAT) and Documentary Stamp Tax (DST). As represented, C Co. and the Sellers entered into a Contract to Sell four (4) parcels of land. With notice to the Sellers, C Co. executed a Deed of Assignment and Assumption of Liability in favor of P Co., assigning its rights and obligations over the unpaid balance, which was paid by P Co. In reply, citing Section 24(D)(1) of the Tax Code, which imposes a 6% final withholding tax on gains from the sale or disposition of real property in the Philippines classified as capital assets, based on the higher of the gross selling price or fair market value. Section 2.57.2 (F) of Revenue Regulation (RR) No. 02-98, as amended, the BIR ruled that if the property is assigned before full payment, the taxable amount is the difference between the assignor-assignee consideration and the assignor’s actual payment to the original seller, subject to CGT or CWT/EWT. As C Co. has not fully paid the original sellers and the Assignee’s payment matches C Co., no gain is realized, making the assignment not subject to CWT/EWT or CGT. Furthermore, citing BIR Ruling No. 304-2022, an assignment of rights in real property is not a sale but a transfer of rights pertaining to the property. Therefore, the assignment of rights from C Co. to P Co. is not considered a sale. As no sale, barter, exchange, or lease occurred, VAT does not apply. Additionally, the assignment is not subject to DST under Section 196 of the Tax Code. However, DST under Section 196 of the Tax Code applies to installment sales of real property, accruing upon the execution of the Deed of Absolute Sale. The Assignee, assuming the rights and obligations under the Contract to Sell, is responsible for paying the DST at that time. [BIR RULING NO. 029-2024, MAY 29, 2024]

DOWNLOAD FULL TEXT

[CWT IS WITHHELD PER PAYMENT, BASED ON THE HIGHER OF THE GROSS SELLING PRICE OR FAIR MARKET VALUE] [LEGAL EFFECT OF CONVEYANCE RETROACTS TO THE CONTRACT’S PERFECTION WHEN GAIN OR PROFIT IS REALIZED]

F Co. is requesting confirmation of the basis for the computation of the Creditable Withholding Tax (CWT) and Documentary Stamp Tax (DST) on its transaction involving the sale of real property on installment. As represented, F Co. and P Co. initially entered into a Contract of Lease, which was later mutually rescinded, replacing it with a Purchase and Sale Agreement for the agricultural lot. The agreement stipulated that F Co. would execute the Deed of Sale upon full payment, providing a clear title and related documents. P Co. sought reclassification of the land to be industrial, which was approved through a special ordinance and reflected in the Tax Declaration.  P Co. subsequently paid for the second installment, for which F Co. issued an official receipt. In reply, citing Section 3(J) of Revenue Regulation (RR) No. 17-2003, the DST accrues upon the execution of the Deed of Absolute Sale and is based on the gross selling price or fair market value of the property at the time of the contract to sell. For installment sales, CWT is withheld per payment based on the Contract to Sell, applied to the higher gross selling price or fair market value at execution. Under Article 1475 of the New Civil Code, the Contract to Sell and Deed of Sale confirm the sale’s validity and timeline. The notarized deed of sale, when submitted to the RDO, triggers CWT computation. While private conveyances are valid between parties, a public document is required to bind third parties and transfer real rights under Article 1358. The conveyance’s legal effects retroact to the contract’s perfection when gain or profit is realized. Hence, the computation of CWT and DST should be based on the gross selling price or fair market value of the subject portion, whichever is higher, at the time of the execution of the subject agreement pursuant to Section 3 (J) of RR No. 17-2003. [BIR RULING NO. 028-2024, MAY 29, 2024]

DOWNLOAD FULL TEXT

TERMINATION FEE AS A RESULT OF INDEMNIFICATION FROM BREACH OF CONTRACT & COMPENSATION FOR THE LOSS OF ANTICIPATED PROFITS IS SUBJECT TO INCOME & VAT

A Co. is seeking confirmation on whether the termination fee it will receive from P Co. following the termination of their Supply Agreement is subject to Income Tax and Value-Added Tax (VAT). In ruling, Sections 4.105-1 and 4.105-2 of Revenue Regulations (RR) No. 16-2005, as amended, states that VAT is levied on any individual, trust, estate, partnership, corporation, joint venture, cooperative, or association on their sale, barter, exchange or lease of goods or properties and services in the Philippines and the importation of goods into the Philippines. The proceeds of the Termination Agreement represent not only the indemnification from breach of contract perpetuated by P Co. but also a full compensation for costs, expenses, and efforts, as well as all other claims relative to the installation equipment. Therefore, the termination fee is subject to VAT as it is tied to A Co.’s business activities. Meanwhile, the Termination Fee, which compensates for the loss of anticipated profits, is also subject to income tax based on Section 27(A) of the Tax Code. The term "income" is broadly defined as covering cash or its equivalent or any amount of money received. [BIR RULING NO. OT-022-2024, APRIL 11, 2024]

DOWNLOAD FULL TEXT