BIR Ruling [DA-001-03]

January 7, 2003 BIR RULING [DA-001-03] S40 (C) (2) 112-96; 10/25/96 SGV &. Co. 6760 Ayala Avenue 1226 Makati City Attention: Atty. J.A. Osana Tax Division Gentlemen : This refers to your letter dated July 1, 2002 requesting, on behalf of your client, ChevronTexaco Global Energy Inc. (CTGEI for brevity), a confirmation of your opinion that no Philippine income tax shall be due on the transfer of assets and liabilities of Texaco Philippines Inc. (TPI for brevity), a Liberian corporation which has a Philippine Branch to ChevronTexaco Malampaya LLC (CTMLLC for brevity), a Delaware limited liability company, as a consequence of the merger of the two foreign companies taking place outside the Philippines. The facts, as you represented, are as follows: CTGEI, a corporation organized under United States laws owns 100% of ChevronTexaco Philippines Ltd. (CTPL for brevity), a Bermuda corporation. The latter, in turn, owns 100% of CTMLLC, a Delaware, United States limited liability company. CTMLLC, on the other hand, owns 100% of TPI, which is a Liberian corporation. TPI, which, as mentioned above, has a license to do business in the Philippines through a branch, is a service contractor of the Philippine Government under Service Contract No. 38 (SC 38) dated December 11, 1990. SC 38 was executed pursuant to Presidential Decree No. 87, otherwise known as "The Oil Exploration and Development Act of 1977". As part of the global corporate reorganization of all Chevron and Texaco companies following the merger of Chevron Corporation and Texaco Corporation, and to facilitate financing efficiency and operational flexibility, as well as to provide support for other business needs that may arise, CTMLLC and TPI shall merge with the following effects: a. The separate existence of TPI shall cease and TPI shall be absorbed by CTMLLC; b. CTMLLC shall possess all rights, privileges, powers, all properties and assume all liabilities and obligations of TPI without further act or deed; c. The Philippine branch of TPI shall by virtue of the merger become the branch of the surviving company, CTMLLC. For this purpose, a Petition to Change Name shall be filed with the SEC to reflect the name of CTMLLC, the surviving company. You assert that under Section 10.5F of Title 5 of the Liberian Code of Laws, a Liberian corporation may merge with a foreign company as follows: " 1. Power to merge or consolidate , One or more Liberian corporations authorized to issue shares or being a non-share corporation may merge or consolidate with one or more limited liability companies, formed under chapter 14 or in another jurisdiction unless the laws of such jurisdiction forbid such merger or consolidation." In this connection, 6 Delaware Code Annotated provides under Section 18-208 Merger and Consolidation, as follows: (b) Pursuant to an agreement of merger or consolidation, 1 or more domestic limited liability companies may merge or consolidate with or into 1 or more business entities formed or organized under the laws of the State of Delaware or any other state or the United States or any foreign country or foreign jurisdiction, or combination thereof, with such domestic limited liability companies or other business entity as the agreement shall provide being the surviving or resulting domestic limited liability companies or other business entity. The same section of the Delaware Code further states the effects of the merger as follows: "(g) When any merger or consolidation shall have become effective under this section, for all purposes of the laws of the state of Delaware, all rights, privileges and powers of each of the domestic limited liability companies and other business entities that have merged or consolidated, and all property, real personal or mixed and all debts due to any of said domestic limited liability companies and other business entities, as well as all other things and causes of action belonging to each of such domestic limited liability companies and other business entities, shall be vested in the surviving limited liability company . . .; but all rights of creditors and all liens upon any property of said domestic limited liability companies and other business entities shall be preserved unimpaired and all debts, liabilities and duties of each of the said domestic limited liability companies and other business entities that have merged or consolidated shall thenceforth attach to the surviving or resulting domestic limited liability company or other business entity, and may be enforced against it to the same extent as if said debts, liabilities and duties had been incurred or contracted by it." TEDaAc Furthermore, under various tax provisions of the U.S. Internal Revenue Code of 1986, as amended, and U.S. Treasury Regulations, the merger will be treated as a tax-free reorganization. Thus, based on the foregoing, no taxable sale, exchange or disposition of property takes place between TPI and CTMLLC pursuant to the merger taking place outside the Philippines, since there is no effective transfer of beneficial ownership. Moreover, considering that the transfer of assets and assumption of liabilities is pursuant to a merger, the said transfer is not considered a transfer for insufficient consideration and therefore is not subject to donor's or gift tax since there is no intention to donate on the part of either or both parties. The transfer of assets by TPI, including the assets of the Philippine Branch to CTMLLC as a consequence of the merger is not subject to the Value Added Tax (VAT). Moreover, one of the privileges granted to TPI as a service contractor of the Philippine Government under Service Contract No. 38 (SC 38) is the exemption from all taxes (which includes DST) except income tax. The same privilege shall be accorded to CTMLLC, which became the service contractor under SC 38 by virtue of the merger. In this connection, Section 12(a) of P.D. No. 87, as amended provides: "SEC. 12. Privileges of contractor . The provisions of any law to the contrary notwithstanding, a contract executed under this Act may provide that the contractor shall have the following privileges: (a) Exemption from all taxes except income tax." While the exemption privileges of service contractors under P.D. No. 87 were repealed by Executive Order No. 93 which took effect on March 10, 1987, the same were restored under Fiscal Incentives Review Board Resolution No. 19-87, with retroactive effect to March 10, 1987. Thus, Section 6.2 of SC No. 38 provides: "6.2 CONTRACTOR shall have the following rights: (a) Exemption from all taxes except income tax; . . ." Accordingly, CTMLLC, is liable only to income tax but exempt from all other taxes, including DST otherwise due on the transfer of any real property. Based on the foregoing, you now request for confirmation that: 1. No gain or loss shall be recognized on the transfer by TPI of all assets, which includes the assets and liabilities of the Philippine branch, to CTMLLC as a consequence of the tax-free merger between two foreign entities taking place outside the Philippines. 2. The transfer of assets by TPI to CTMLLC as a consequence of the merger is not a transfer for insufficient consideration and is therefore not subject to donor's tax. 3. The transfer of assets by TPI to CTMLLC as a consequence of the merger is not subject to VAT. 4. TPI, as well as CTMLLC, who succeeds pursuant to the merger as service contractor of the Philippine Government under SC 38, are exempt from DST on the transfer of any real property, being exempt from all taxes except income tax. In reply, please be informed that in BIR Ruling No. 112-96 dated October 25 1996, citing BIR Ruling No. 595-88 dated December 23, 1988, this Office had the occasion to rule on the tax consequences of a merger between two foreign corporations taking place outside Philippine jurisdiction but having branches within the Philippines. This Office laid down the following precepts: 1. No taxable sale, exchange or disposition of properties/stocks took place between the two foreign branches, since there is no effective transfer of beneficial ownership. In a merger, the surviving corporation succeeds to the rights and liabilities of the absorbed corporation, and merely carries on the identity of the latter. ( Cashman v. Browhee, 27 N.E. 560). Consequently, no gain was realized by the surviving foreign corporation or its Philippine branch. 2. The said transfer shall not be considered as a transfer of property for insufficient consideration and is, therefore, not subject to donor's or to gift tax since there is no intention to donate on the part of either or both parties and the transaction is effected purely for business reasons. 3. The exchange of properties pursuant to a merger is not a disposition or exchange of properties "in the course of trade business" and is, therefore, not subject to VAT. 4. For VAT purposes, the transfer of assets, including tangible and movable properties pursuant to the merger of two foreign corporations will not be subject to any output tax, and any unused input tax of the absorbed foreign corporation will be absorbed by the surviving corporation. Applying the foregoing precepts, this Office hereby confirms your opinion that: 1. No gain or loss shall be recognized on the transfer by TPI of all assets, which includes the assets and liabilities of the Philippine branch, to CTMLLC as a consequence of the merger between two foreign entities taking place outside the Philippines. 2. The transfer of assets by TPI to CTMLLC as a consequence of the merger is not a transfer for insufficient consideration and is therefore not subject to donor's tax. 3. The transfer of assets by TPI to CTMLLC as a consequence of the merger is not subject to VAT. Furthermore, one of the privileges granted to a service contractor of the Philippine Government under SC 38 is the exemption from all taxes except income tax. In this connection, this Office pronounced, in BIR Ruling No. 106-81 dated July 10, 1981, that service contractors under Presidential Decree No. 87 are exempt from all taxes, except income tax. Accordingly, they are exempt from the payment of the documentary stamp tax on all their voucher checks printed by the Security Printing Plant of the Central Bank of the Philippines. Therefore, since, as a result of the merger, CTMLLC succeeded TPI as service contractor of the Philippine Government under SC 38, CTMLLC shall now enjoy the same exemption granted to TPI, i.e., exemption from all taxes, including DST on the transfer of any real property, except income 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 void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MARIO C. BUAG Deputy Commissioner Legal and Inspection Group