BIR Ruling [DA-017-02]

February 7, 2002 BIR RULING [DA-017-02] Laya Mananghaya & Co . 22/F Philamlife Tower 8767 Paseo de Roxas Makati City Attention: Attys . Remigio A. Noval Partner, Tax & Corporate Services and Moises R . Villanueva Senior Manager, Tax & Corporate Services Gentlemen : This refers to your letter dated August 14, 2001 stating that A. Brown Chemical, Incorporated (ABCI) is a corporation organized and existing under the laws of the Philippines; that it is duly registered with the Securities and Exchange Commission (SEC) with an authorized capital stock of One Billion Three Hundred Twenty Million Pesos (P1,320,000,000.00); that the said authorized capital stock is divided into One Billion Three Hundred Twenty Million (1,320,000,000) shares with a par value of One Peso (1.00) per share; that on the other hand, A. Brown Chemical Corporation (ABCC) is a corporation organized and existing under the laws of the Philippines; that it is duly registered with the SEC with an authorized capital stock of One Hundred Million Pesos (P100,000,000.00); that the said authorized capital stock is divided into One Hundred Million (100,000,000) shares, with a par value of P1.00 per share; that Geoex Farms, Inc. (GFI) is a corporation organized and existing under the laws of the Philippines; that it is duly registered with the SEC with an authorized capital stock of Fifty Million Pesos (P50,000,000.00); that the said authorized capital stock is divided into Fifty Million shares with a par value of One Peso (P1.00) per share; that Victorsons Trans Cargo Services, Inc. (VTCSI) is a corporation organized and existing under the laws of the Philippines; that it is duly registered with the SEC with an authorized capital stock of Twenty-Five Million Pesos (P25,000,000.00); that said authorized capital stock is divided into Twenty-Five Million shares with a par value of One Peso (P1.00) per share; that Terra Asia Pacific Development Managers, Inc. (TAPDMI) is a corporation organized and existing under the laws of the Philippines; that it is duly registered with the SEC with an authorized capital stock of Sixteen Million Pesos (P16,000,000.00); that said authorized capital stock is divided into Sixteen Million shares with a par value of One Peso (P1.00) per share; that East Pacific Investors Corporation (EPIC) is a corporation organized and existing under the laws of the Philippines, that it is duly registered with the SEC with an authorized capital stock of Two Hundred Fifty Million Pesos (P250,000,000.00); that the said authorized capital stock is divided into Two Hundred Fifty Million shares with a par value of One Peso (P1.00) per share; that of the five (5) absorbed corporations, three (3) are, except for directors' qualifying shares which are beneficially owned by ABCI, wholly owned subsidiaries of ABCI, namely: ABCC, TAPDMI and EPIC; that GFI, on the other hand, is a 99.70% owned subsidiary of ABCI; that as for VTCSI it is, except for directors' qualifying shares, a wholly owned subsidiary of W. Brown and Company, Inc., a corporation organized under Philippine laws, which in turn is wholly-owned by ABCI, save for some qualifying directors' shares which are also beneficially owned by ABCI; that ABCI was incorporated for the primary purpose of engaging in the business of investing; purchasing, or otherwise acquiring and owning, using, selling, assigning, transferring, mortgaging, pledging, exchanging, or otherwise disposing of real and personal property of every kind and description, including shares of stock, bonds, debentures, notes, evidences of indebtedness, and other securities or obligations of any other corporation or association, domestic or foreign, for whatever lawful purpose or purposes the same may have been organized without being a stock broker or dealer and to pay therefor in money or by exchanging therefor stocks, bonds, or other evidences of indebtedness or securities of this or any other corporation and while the owner or holder of any such real or personal property, stocks, bonds, debentures, contracts or obligations, to receive, collect and dispose of the interest, dividends, and income arising from such property and to possess and exercise in respect thereof all the rights, powers and privileges of ownership, provided the corporation shall not exercise the functions of a trust corporation; that ABCC was incorporated for the primary purpose of engaging in the business of manufacturing, importing, exporting, buying, selling or otherwise dealing in, at wholesale and retail such goods as chemicals and chemical formulation including but not restricted to adhesives, sealants, coatings, paints and other by-products and goods of all kinds and nature, and any and all equipment, materials, supplies used or employed in or related to the manufacture of such finished products; that GFI was incorporated for the primary purpose of engaging in the business of agriculture in all its aspects, including but not limited to fishpond and fishpen operations, cattle raising both large cattle and small cattle, hog raising, chicken raising and other related poultry activities and to market, sell or dispose of the same in both the local and foreign market; that VTCSI was incorporated for the primary purpose of engaging in the business of freight and cargo forwarder, hauling, carrying, handling, distributing, loading and unloading of general cargoes and all classes of goods, wares and merchandise and to receive and collect fees for such services; that to engage in air, sea, land, freight, domestic and international, and to undertake and carry a non-vessel operated common carrier, consolidators, break bulk agents (domestic and international), warehousing, packing, coating, and as clearing agent, as well as allied services; that TAPDMI was incorporated for the primary purpose of acting as managers or managing agents in the development, construction, maintenance and administration of any residential, commercial, industrial, or multi-purpose project; to provide services of all types in relation to the project and various phases thereof, including investment studies, feasibility studies, technological research, project planning and control, construction supervision; to assist in the bidding for construction of the projects and in the coordination of services of engineers, architects and other persons or entities necessary in the accomplishment and completion of the various phases of the project; and in general, to render such project and property management services and to perform such acts and things as may be necessary, proper or convenient for the furtherance and accomplishment of the purposes herein mentioned; the EPIC was incorporated for the primary purpose of engaging in dealing, investing and transacting, directly or indirectly, in all forms of business and mercantile acts and transactions concerning all kinds of real property, including but not limited to the acquisition, development, utilization and disposition of residential, commercial and industrial property, and concerning all kinds of personal property, including but not limited to commercial paper, evidence of indebtedness, instruments of value, shares of capital stock of corporations and securities (without engaging in the business of stock brokerage, investment house, and trust company), technical and industrial equipment and machineries, services, and all rights to personal properties; that under the plan of merger, ABCI, as the surviving corporation, shall acquire all the respective rights, businesses, assets and other properties, and shall assume respective liabilities of the five (5) absorbed corporations; that all the outstanding shares of the five (5) absorbed corporations as of the effective date of the merger (which means the subscribed capital stock including the unpaid subscription) shall be deemed cancelled by reason of the merger; that since ABCI is the 100% of all the outstanding shares of ABCC, TAPDMI and EPIC, it shall no longer issue new shares corresponding to the net book value of the assets transferred by the aforementioned three (3) corporations in order not to create treasury shares; that ABCI shall no longer issue new shares equivalent to the net book value of the assets transferred by GFI that correspond to the stockholdings of ABCI in GFI (99.70) to avoid the presence of treasury shares; that minor stockholders of GFI shall have the option of being paid the book value of their shares, in which case they will not be issued ABCI shares or (2) being issued shares of ABCI; that new ABCI shares will be issued at the agreed exchange values to the sole beneficial stockholder of VTCSI, which is W. Brown and Company, Inc. (which is, as earlier mentioned 100% owned by ABCI); that each VTCSI share issued and outstanding on the effective date of the merger shall automatically be converted into and become 127,812 shares of ABCI; that the exchange values are based on the net book value of the shares of stock of ABCI and VTCSI; that after the effective date of merger, the five (5) corporations will cease to exist as legal entities by operation of law; that on the other hand, ABCI's corporate existence shall continue and its Articles of Incorporation and By-Laws shall be the same as its present Articles of Incorporation and By-Laws; that ABCI, as the surviving corporation, will, upon the effective date of merger, acquire and assume all the assets, franchise, licenses, powers, rights, interests, title, equities, privileges, immunities and liabilities of the five (5) absorbed corporations; and that considering the complementary business of GHC and PBJ, the merger becomes necessary and advantageous for the following reasons: 1. The integration of the administrative facilities of the parties to the merger to streamline and simplify operations will result in economies of scale and efficiency of operations; 2. The consolidation of the assets of the parties to the merger will allow the procurement of financing and credit facilities under more favorable terms; and 3. The merger will make possible the more productive use of the properties and facilities of the constituent corporations. Based on the foregoing representations, you now request confirmation of your opinion that "1. No gain or loss shall be recognized by ABCC, GFI, VTCSI, TAPDMI and EPIC, the absorbed corporations, on the transfer of its assets and liabilities to ABCI, surviving corporation, although no new shares (except to VTCSI) were issued by the latter pursuant to a statutory merger; "2. The basis of the assets and liabilities of ABCC, GFI, VTCSI, TAPDMI and EPIC in the hands of ABCI shall be the same as it would be in the hands of the five (5) corporations; "3. The transfer of the properties of ABCC, GFI, VTCSI, TAPDMI and EPIC to ABCI will not be considered as transfer of property for an insufficient consideration subject to gift tax, since there is no donative intent on the part of the five (5) absorbed corporations and the transaction is for a purely business purpose; "4. The transfer of the properties of ABCC, GFI, VTCSI, TAPDMI and EPIC to ABCI pursuant to the plan of merger will not be subject to any output VAT, and any unused input VAT of the five (5) absorbed corporations as of the effective date of merger, will be transferred to and absorbed by ABCI, pursuant to Section 4.100-5 of Revenue Regulations No. 7-95, implementing Section 106 (C) of the Tax Code of 1997; and "5. In the event that there should be any excess minimum corporate income tax (MCIT), such MCIT of the five (5) corporations will be transferred to ABCI and carried forward and credited against the normal income tax due of ABCI for the three (3) immediately succeeding taxable years." In reply thereto, please be informed that your opinion is hereby confirmed as follows: 1. The above reorganization is a merger within the contemplation of Section 40(C)(2) and (6)(b) of the Tax Code of 1997, because ABCI will acquire/assume all the assets and liabilities of the five (5) absorbed corporations solely in exchange for the shares of stock of the latter, the proposed transaction to be undertaken being for a bona fide business purpose and not for the purpose of escaping the burden of taxation. 2. The basis of the assets and liabilities to be received by ABCI shall be the same as it would be in the hands of the five (5) absorbed corporations. The basis of ABCI stocks to be received by the stockholders of aforementioned five (5) corporations shall be the same as the basis of the latter corporations stocks surrendered in exchange therefore. However, it is understood, that upon subsequent sale or exchange of the assets or shares of stock acquired by the parties (which in our case is the surviving corporation) the gains derived from such sale or exchange shall be subject to income tax. 3. The transfer of the properties of the five (5) absorbed corporations to ABCI pursuant to the plan of merger will not be considered as transfer of property for insufficient consideration subject to gift tax, since there is no intention to donate on the part of the parties and the transaction is effected purely for business reasons. However, the transfer by the five (5) absorbed corporations to ABCI of all their real properties shall be subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997, while the transfer of shares of stock and certificate of obligations by the same transferors shall be subject to the documentary stamp tax imposed under Section 176. On the other hand, the original issuance of the shares of stock to the stockholders of the five (5) absorbed corporations shall be subject to the documentary stamp tax imposed under Section 175 both of the Tax Code of 1997. 4. The transfer of the properties of the five (5) absorbed corporations to ABCI pursuant to the plan of merger will not be subject to value-added tax (VAT) and any unused input tax of the absorbed corporations as of the effective date of the merger, will be absorbed by GHC as the surviving corporation, pursuant to Section 4.100-5(b)(3) of Revenue Regulations No. 7-95, as amended. 5. Finally, in BIR Ruling No. 137-99 dated August 31, 1999, the BIR held that the excess minimum corporate income tax (MCIT) of an absorbed corporation shall be carried forward and credited against the normal income tax due of the surviving corporation for the three immediately succeeding taxable years pursuant to Section 27(E)(3) of the Tax Code of 1997. Thus, since the excess MCIT of the absorbed corporation are among the rights, privileges, property and/or interest of the absorbed corporation, the excess MCIT of the absorbed corporations shall be transferred to and vested in ABCI, as the surviving corporation on the effective date of the merger. Accordingly, the excess MCIT of the absorbed corporations shall be carried forward and credited against the normal income tax due of ABCI, as the surviving corporation, for the three (3) immediately succeeding taxable years pursuant to said Section 27(E)(3) of the said Code. Likewise, in the same ruling, this Office had ruled that the aggregate Net Operating Loss Carry Over (NOLCO) balances of the absorbed corporations and the surviving corporation may be claimed by the latter as a deduction from gross income under Section 34(D)(3) of the Tax Code of 1997 subject to the three (3) years period limitation. This is so because since NOLCO balance is among the rights, privileges property and/or interest of the absorbed corporations and considering further 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 of ownership, the surviving corporation can claim as NOLCO deduction the NOLCO balance of the absorbed corporation, which shall be transferred and vested in the surviving corporation, ABCI, by operation of law. However, in order that the above-described reorganization can be considered as merger under Section 40(C)(2) and (6)(b) of the Tax Code of 1997, the parties to the merger should comply with the following requirements: A. The plan of reorganization should be adopted by each of the corporations, parties thereto, the adoption being shown by the acts of its duly constituted responsible officers and appearing upon the official records of the corporation. Each corporation, which is a party to the reorganization, shall file, as part of its return for the taxable year within which the reorganization occurred a complete statement of all facts pertinent to the non-recognition of gain or loss in connection with the reorganization, including: 1. A copy of the plan of reorganization, together with a statement executed under the penalties of perjury, showing in full the purposes thereof and in detail all transactions incident to, or pursuant to the plan; 2. A complete statement of all cost or other basis of all property, including all stocks or securities, transferred incident to the plan; 3. A statement of the amount of stock or securities and other property or money received from the exchange, including a statement of all distribution of other disposition made thereof. The amount of each kind of stock or securities and other property received shall be stated on the basis of the fair market value thereof at the date of the exchange. 4. A statement of the amount and nature of any liabilities assumed upon the exchange, and the amount and nature of any liabilities to which any of the property acquired in the exchange is subject. B. Every taxpayer, other than a corporation, party to the reorganization, who received stock or securities and other property or money upon a tax-free exchange in connection with a corporate reorganization shall incorporate in his income tax return for the taxable year in which the exchange takes place a complete statement of all facts pertinent to the non-recognition of gain or loss upon such exchange, including: 1. A statement of the cost or other basis of the stock or securities transferred in the exchange; and 2. A statement in full of the amount of stock or securities and other property or money received from the exchange, including any liabilities assumed upon the exchange, and any liabilities to which property received is subject. The amount of each kind of stock or securities and other property (other liabilities assumed upon the exchange) received shall be set forth upon the basis of the fair market value thereof at the date of the exchange. C. Records in substantial form shall be kept by every taxpayer who participates in a tax-free exchange in connection with a corporate reorganization showing the cost or other basis of the transferred property or money received (including any liabilities assumed on the exchange, or any liabilities to which any of the properties received were subject), in order to facilitate the determination of gain or loss from subsequent disposition of such stock or securities and other property received from the exchange. (par. 9803-8, F-H 963, ed., p. 9611) In addition to the foregoing requirements, records in substantial form must be kept by the corporation participating in the merger showing the information listed above in order to facilitate the determination of gain or loss from a subsequent disposition of the stock received as a consequence of the merger. ( BIR Ruling No. 472-93 dated December 3, 1993 ) 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.) MILAGROS V. REGALADO Acting Assistant Commissioner Legal Service