BIR Ruling [DA-009-05]

January 17, 2005 BIR RULING [DA-009-05] 34 (D) (3); 137-99 Laya Mananghaya & Co . 22/F Philamlife Tower 8767 Paseo de Roxas Makati City Attention: Atty . Francisco G . Tagao Partner and Atty . Floripe B . Garcia Assistant Manager Gentlemen : This refers to your letter dated January 10, 2005 stating that your client, Indo Phil Group of Companies is comprised of three (3) BOI-registered enterprises, Indo Phil Textile Mills, Inc. (IPTMI),Indo Phil Acrylic Manufacturing Corporation (IPAMC) and Indo Phil Cotton Mills, Inc. (IPCMI) and two (2) holding companies, Rapid Growth Holdings Co.,Inc. (Rapid) and Nirvana Holdings Co.,Inc. (Nirvana);that the ownership structure of the five (5) companies is such that they are either directly or indirectly related through common and cross ownership of shares; that moreover, IPCMI, IPAMC, Rapid and Nirvana are substantially owned directly or indirectly by IPTMI, as follows: IPTMI 20% of its capital stock is owned by O.M. Financial, Inc. 17.7% by International Industrial Management, 13% by Sisval Enterprises, Inc.,11.7% by Nirvana, 9.6% by Birla Group Holdings, 7.5% by Gasanco, Inc. and 7.5% by New Summit International, Inc. or a total of 87%; Its minority shareholders include, among others, Maloo, Jamora, Gagoomal, B. Sison and E. Sison; IPAMC 67.1% of its capital stock (27.1% common shares and 40% preferred shares) is owned by IPTMI; AaHDSI 17.1% of its capital stock is owned by Rapid which is majority owned by IPTMI; IPTMI's stockholders, Gasanco, Inc. and Sisval Enterprises, respectively own 6.9% each of the capital stock of IPAMC; and Its minority shareholders include, among others, Maloo, Jamora, Gagoomal and B. Sison; IPCMI 90.9% of its capital stock is owned by IPTMI while the 7.27% thereof is owned by Nirvana which is majority owned indirectly by IPTMI; IPTMI's stockholders, Gasanco, Inc. and Sisval Enterprises, respectively own .2% each of IPCMI's capital stock; and Its minority shareholders include, among others, Salako Limited, Maloo, Jamora, B. Sison and E. Sison. Rapid 70% of its capital stock is owned by IPTMI; HIAESC IPTMI's stockholders, Gagoomal and New Summit Int'l, Inc.,respectively own 7.5% each of Rapid's capital stock; and Its minority shareholders include, among others, Maloo, Jamora, Gagoomal, B. Sison and E. Sison. Nirvana 55.5% of its capital stock is owned by Rapid and 40% owned by Salako Limited; and Its minority shareholders include, among others, Maloo, Jamora, Gagoomal, B. Sison and E. Sison. that the Group intends to streamline the operation of its businesses by combining the different business entities and centralize it into one company and transfer to this company, the respective assets and liabilities of the five (5) companies, including the respective NOLCO of IPAMC and IPCMI, the absorbed companies; and that accordingly, the five (5) companies will be merged together with IPTMI as the surviving entity. Based on the foregoing representations, you now request confirmation of your opinion that "1. The merger of IPTMI, IPAMC and IPCMI will not result in a substantial change in the ownership of these companies; and "2. The respective NOLCO of IPAMC and IPCMI can be assumed and used by IPTMI." SCEHaD In reply thereto, please be informed that your opinion is hereby confirmed as follows: 1. Section 34(D)(3) of the Tax Code of 1997 provides that the net operating loss of the business or enterprise for any taxable year immediately preceding the current taxable year, which had not been previously offset as deduction from gross income shall be carried over as a deduction from gross income for the next three (3) consecutive taxable years immediately following the year of such loss: Provided, however, that any net loss incurred in a taxable year during which the taxpayer was exempt from income tax shall not be allowed as a deduction under this Subsection: Provided, further, That a net operating loss carry-over shall be allowed only if there has been no substantial change in the ownership of the business or enterprise in that (i) Not less than seventy-five percent (75%) in nominal value of outstanding issued shares, if the business is in the name of a corporation, is held by or on behalf of the same persons; or (ii) Not less than seventy-five percent (75%) of the paid up capital of the corporation, if the business is in the name of a corporation, is held by or on behalf of the same persons. For purposes of this Subsection, the term "net operating loss" shall mean the excess of allowable deduction over gross income of the business in a taxable year. As represented, since IPTMI owns more than 75% of both the equity of IPAMC and IPCMI and has the power to control and elect the management thereof, IPTMI is deemed the parent company of IPAMC and IPCMI. Thus, this is a case of merger of the parent company and its subsidiaries. Accordingly, there is no substantial change in the ownership of these companies. aATHES (2) Pursuant to the above-quoted Section and considering that the merger will be undertaken for a bona fide business purpose and not for the purpose of escaping the burden of taxation and there is no effective change in ownership, since this is a merger of the parent company and its subsidiaries, IPTMI being the parent company and IPAMC and IPCMI as the subsidiaries. Such being the case, the surviving corporation can claim as NOLCO deduction the NOLCO balance of the absorbed corporations, which shall be transferred and vested in the surviving corporation by operation of law pursuant to statutory merger. 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 Deputy Commissioner Legal & Inspection Group