Bank of Commerce Ruling

October 9, 2006 BIR MEMORANDUM FOR : All Regional Directors All Revenue District Officers SUBJECT : Bank of Commerce Ruling Please be informed that the Commissioner of Internal Revenue has issued BIR Ruling No. 010-2006 addressed to Bank of Commerce dated October 6, 2006, which states as follows: "xxx xxx xxx "As this Office has already concluded that the Purchase and Sale Agreement between TRB and Bancommerce did not result to a merger, and that the deficiency assessment cannot be enforced against Bancommerce, the processing and/or issuance of the Certificate Authorizing Registration (CAR) on the sale by Bancommerce of the real properties included in the Purchase and Sale Agreement, should now be undertaken by the respective Revenue District Offices. These, of course, after payment of the corresponding taxes that may have accrued on the purchase of the assets from Bancommerce by the buyers and should not be conditioned upon payment of the deficiency tax assessment issued against TRB." aDATHC For strict compliance. (SGD.) ATTY. JAMES H. ROLDAN Assistant Commissioner Legal Service ATTACHMENT October 6, 2006 BIR RULING NO. 010-06 40(C) (b) Bank of Commerce Phil. First, 6764 Ayala Avenue Makati City Attention: Mr . Raul de Mesa President Gentlemen : This refers to your letter dated August 8, 2006 requesting in effect for a ruling on the taxability of Bank of Commerce (Bancommerce for brevity) relative to its purchase of certain identified recorded assets of Traders Royal Bank (hereinafter referred to as TRB) in consideration of the assumption of certain identified recorded liabilities of TRB. Records show that TRB (now Royal Traders Holdings Co., Inc.) was a commercial bank established and existed under and by virtue of the laws of the Republic of the Philippines. Its banking operation has been uncertain for years and this necessitated TRB to sell some of its properties to Bancommerce. Consequently, the parties executed a Purchase and Sale Agreement on November 9, 2001. The Purchase and Sale Agreement states that "TRB desires to sell and Bancommerce desires to purchase identified recorded assets of TRB in consideration of Bancommerce assuming identified recorded liabilities of TRB including booked contingent accounts per Consolidated Statement of Condition as of August 31, 2001, subject to adjustment at the closing date as may be agreed upon by Bancommerce and TRB and subject further to the approval of Bangko Sentral ng Pilipinas (BSP) and Philippine Deposit Insurance Corporation (PDIC)." With respect to the assumption of liabilities of TRB, Article II of the same Agreement provides: "In consideration of the sale of recorded assets and properties covered by this Agreement, BANCOMMERCE shall assume identified recorded TRB's liabilities including booked contingent liabilities as listed and referred to in its Consolidated Statement of Condition as of August 31, 2001, in the total amount of PESOS: TEN BILLION FOUR HUNDRED ONE MILLION FOUR HUNDRED THIRTY SIX THOUSAND (P10,401,436,000.00), provided that the liabilities so assumed shall not include: CcAESI 1. Liability for the payment of compensation, retirement pay, separation benefits and any labor benefit whatsoever arising from incidental to, or connected with employment in, or rendition of employee services to TRB, whether permanent, regular, temporary, casual or contractual. 2. Items in litigation, both actual and prospective, against TRB which include but are not limited to the following: 2.1 Claims of sugar planters for alleged undervaluation of sugar export sales coursed through TRB; particularly the case entitled Lopez, et al. vs. Traders Royal Bank, et al . docketed as Civil Case No. 00-11178, Bacolod Regional Trial Court, Branch 41 and Lacson, et al. vs. Benedicto et al., originally docketed as Civil Case 95-9137, Bacolod Regional Trial court, Branch 44 now pending appeal before the Supreme Court under S.C. G.R. No. 141508, and other related cases which might be filed in connection therewith; 2.2 Claims of the Republic of the Philippines for peso-denominated certificates supposed to have been placed by the Marcos family with TRB: 2.3 Other liabilities not included in said Consolidated Statement of Condition; and 2.4 Liabilities accruing after the effectivity date of this Agreement that were not incurred in the ordinary course of business." On November 8, 2001, the Monetary Board of Bangko Sentral Ng Pilipinas (BSP) approved the purchase and assumption of the identified recorded assets and liabilities of TRB. It is noted that TRB retained its corporate existence and it is now known as "Royal Traders Holding Company, Inc.". Bancommerce did not absorb the employees of TRB as they were all retired and their retirement benefits were paid by the latter. Moreover, it did not issue or exchange its shares of stock for the assets acquired from TRB because the consideration was the assumption of specified recorded liabilities of TRB. The above transaction was considered as a merger by the Bureau of Internal Revenue when it made a reply to the letter of Atty. Dominador Santiago's request for opinion relating to the same set of facts. Thus, the Bureau concluded that the Purchase and Sale Agreement between TRB and Bancommerce is a "merger" citing as basis thereto Section 80 of the Corporation Code of the Philippines. In concluding that the said transaction is a merger, the Bureau stated in closing that "Bancommerce cannot excuse itself from the obligations and liabilities (of TRB) on the theory that said corporations are distinct and separate." (Citing Rivera vs. Litam & Co., Inc., 4 SCRA 1072, April 1962). Stating further, "Bancommerce cannot close its eyes to answer for the deficiency taxes being assessed and collected by the BIR per Collection Letter dated September 13, 2004." (BIR Ruling No. DA-045-2005 dated January 28, 2005). On the other hand, Bancommerce has been selling real estate assets acquired from TRB but the BIR Revenue District Offices from where the respective Certificate Authorizing Registration (CAR) is being sought refused to issue the CAR unless Bancommerce settles the pending tax assessments issued against TRB which the latter claims the same to be enforceable against Bancommerce by reason of the merger. HETDAC As a consequence of such refusal, the buyers of these real estate assets have filed complaint against Bancommerce with the BSP and have sent demand letters to Bancommerce threatening to file suits for damages. In view of the urgency of the matter, you now request for a ruling on the following concerns: 1. There was no merger, de facto or otherwise, since the facts upon which the 2005 ruling was issued were not properly and accurately presented, hence the ruling should be set aside. 2. Since there was no merger, the tax deficiency assessment against TRB cannot be enforced against Bancommerce, not being one of those liabilities expressly and specifically assumed by Bancommerce under the Purchase and Sale Agreement of November 9, 2001, and that the respective RDOs be directed to issue the CARs upon payment of the capital gains, documentary stamp and other taxes that may apply to the purchase of the assets from Bancommerce by the buyers without requiring Bancommerce to settle the tax assessments against TRB. In reply, please be informed of the following: 1. Section 40(C)(b) of the Tax Code of 1997 defines merger as follows: "(b) The term "merger" or "consolidation", when used in this Section, shall be understood to mean: (1) the ordinary merger or consolidation, or (ii) the acquisition by one corporation of all or substantially all of the properties of another corporation solely for stock; provided that for a transaction to be regarded as a merger or consolidation within the purview of this Section, it must be undertaken for a bona fide business purpose and not solely for the purpose of escaping the burden of taxation; . . . ." One distinctive characteristic for a merger to exist under the second part of the aforequoted provision is that, it is not enough for a corporation to acquire all or substantially all the properties of another corporation but it is also necessary that such acquisition is solely for stock of the absorbing corporation. Stated differently, the acquiring corporation will issue a block of shares equal to the net asset value transferred, which stocks are in turn distributed to the stockholders of the absorbed corporation in proportion to their respective share. After a careful perusal of the facts presented as well as the details of the instant case, it is observed by this Office that the transaction was purely concerning acquisition and assumption by Bancommerce of the recorded liabilities of TRB. The Agreement did not mention with respect to the issuance of shares of stock of Bancommerce in favor of the stockholders of TRB. Such transaction is absent of the requisite of a stock transfer and same belies the existence of a merger. As such, this Office considers the Agreement between Bancommerce and TRB as one of "a sale of assets with assumption of liabilities" rather than "merger". Generally, where one corporation sells or otherwise transfers all its assets to another corporation, the latter is not liable for the debts and liabilities of the transferor. (Edward J. Niel Co. vs. Pacific Farms, Inc., 15 SCRA 415). But, if in the agreement, the corporation that acquired the assets and properties, assumed the obligations and liabilities, the acquiring corporation cannot excuse itself from said obligations and liabilities on the theory that said corporations are distinct and separate. (Rivera vs. Litam & Co., Inc., 4 SCRA 1072) In a sale of assets, the acquiring corporation barring fraud of creditors need assume only those obligations set forth explicitly in the agreement. (see H. de Leon, The Corporation Code of the Philippines, 1999 Edition, p. 627) EaScHT In the case at bar, Bancommerce purchased identified recorded assets and properties of TRB. In consideration thereof, Bancommerce assumed certain liabilities of TRB which were identified in the Consolidated Statement of Condition as of August 31, 2001. In this wise, the liabilities of TRB assumed by Bancommerce were limited only to those already identified as of August 31, 2001 amounting in all to Ten Billion Four Hundred One Million Four Hundred Thirty Six Thousand Pesos (P10,401,436,000.00). (See attached Consolidated Statement of condition which shall form part of this ruling and mark as Annex "A") More so, liabilities that were not assumed by Bancommerce should not be enforced against it. And this includes, at this instance, the tax assessment against Royal Traders Holdings Co., Inc. for taxable year 2000 (issued under the new corporate name of TRB) involving the aggregate amount of P66,845,571.81. In line with the preceding discussion, the internal revenue tax assessment graphically described below, viz. : Year Covered: 2000 Date Issued: 12/12/2003 Ass./Demand Nos. GRT-00-000025 / EWT-00-000092 / FT-00-000033 TAX TYPE BASIC SURCHARGE INTEREST TOTAL GRT P1,962,496.45 - P1,189,326.62 P3,151,823.07 EWT 885,194.30 - 536,452.00 1,421,646.30 FT 38,773,997.60 - 23,498,104.84 62,272,102.44 TOTAL P41,621,688.35 - P25,223,883.46 P66,845,571.81 cannot be charged against Bancommerce because the 2000 deficiency tax assessment has not been determined yet as of the time of the signing of the agreement. Therefore, it would be unreasonable and unjust to hold Bancommerce liable for the foregoing assessment considering that it did not intend to assume the same. The nature of deficiency taxes involved are direct taxes which can solely be assessed directly against TRB. Considering the above presentation, BIR Ruling No. DA-045-2005 dated January 28, 2005 is hereby revoked and considered not having been issued. The same, however, should be looked into as a shield that temporarily sheltered TRB from the collection process that should have been executed by the BIR. In addition to the discussion in the preceding paragraphs, the ruling failed to ascertain the extent of liabilities to be assumed by Bancommerce. Otherwise stated, the ruling has failed to indicate the composition of the liabilities assumed as mentioned in the Purchase and Sale Agreement that caused confusion, particularly, in the issuance of the Assessment Notices. In short therefore, no merger ever existed by virtue of the Purchase and Sale Agreement between TRB and Bancommerce. 2. Much have been said that the transaction between TRB and Bancommerce is not a merger within the contemplation of Section 40(C)(b) of the Tax Code of 1997. To reiterate, this Office has ruled in the foregoing discussion that the transaction is one of sale of assets with assumption of identified recorded liabilities of TRB. As such, the liabilities assumed by Bancommerce amounted only to P10,401,436,000.00 with some enumerated exclusion in the Agreement. Yet, it did not include deficiency taxes that may be imposed by the BIR because such liability was not yet determined at the time of the execution of the Agreement. As aptly said, it would be unreasonable and unjust to hold Bancommerce liable for the deficiency assessment against TRB in which Bancommerce did not expressly assume in the Agreement. As this Office has already concluded that the Purchase and Sale Agreement between TRB and Bancommerce did not result to a merger, and that the deficiency assessment cannot be enforced against Bancommerce, the processing and/or issuance of the Certificate Authorizing Registration (CAR) on the sale by Bancommerce of the real properties included in the Purchase and Sale Agreement, should now be undertaken by the respective Revenue District Offices. These, of course, after payment of the corresponding taxes that may have accrued on the purchase of the assets from Bancommerce by the buyers and should not be conditioned upon payment of the deficiency tax assessment issued against TRB. TSacID 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.) JOSE MARIO C. BUAG Commissioner of Internal Revenue