BIR Ruling

October 3, 1973 Messrs. Sycip, Gorres, Velayo & Co. P. O. Box 589, Manila Gentlemen : This refers to your letter dated September 14, 1973 requesting opinion on the tax consequences of the proposed plan of your client, Esso Philippines, Inc. (EPI) to convert its foreign obligations to equity or additional capital stock. It is represented that EPI is a wholly-owned local subsidiary of Esso Eastern Inc. (EEI); that EPI has dollar loans from International Eastern Inc. and Knickerbocker Investment Corporation, both of which are foreign corporation organized and existing under the laws of the State of Delaware, U.S.S.; that both loans were duly registered with the Central Bank of the Philippines in 1966 and 1968, respectively; that as of June 30, 1973, the balance of the principal amounts of the aforesaid loans amounted to P30,409,766; that the said loans were recorded in the books of EPI at the prevailing rate of exchange at the time the loans were extended; that in view of the financial position of EPI (its books showed a P13.4 million tax loss of 1972 and an estimated tax loss of P29.7 million for the first two quarters of 1973 or a total tax loss of P14.1 million), EPI is planning to have the aforesaid loans assigned by International Eastern, Inc. and Knickerbocker Investment Corporation to EEI, the parent company of EPI; that EEI will convert the balance of the loan receivables from EPI into paid-in-capital on the basis of the recorded peso value of said loans for common stock at the par value of P1,000 per share; that portion of this amount will be used to pay for the outstanding subscription receivable from EEI as of December 31, 1972; that the conversion of EEI of the said loans will release EPI from the payment of these obligations and thus improve its financial condition; and that under the plan EEI will be able to assist EPI in its operations and in its business generally and also improve EPI's borrowing capacity. In reply thereto, I have the honor to inform you that the conversion by Esso Eastern Inc. of its loan receivables from the local subsidiary, Esso Philippines, Inc., into paid in capital on the basis of its peso value at the time the aforesaid Loans were extended represents a contribution to the capital stock of Esso Philippines, Inc. by Esso Eastern, Inc. In view thereof, this Office is of the opinion and so holds that the conversion of the aforesaid liability into equity does not give rise to any taxable consequence in the Philippines to either Esso Eastern, Inc. or Esso Philippines, Inc. aisadc Very truly yours, (SGD.) MISAEL P. VERA Commissioner of Internal Revenue TAN-1601-593-5 "TAXPAYERS SHOULD INDICATE THEIR TAN IN ALL COMMUNICATIONS TO THE BIR."