Board of Trustees, Meralco Pension Fund

January 17, 2008 BIR RULING [DA-022-08] BIR Ruling No. DA-397-06 & DA-528-2004 Board of Trustees, Meralco Pension Fund Lopez Building Ortigas Avenue, Pasig City Attention: Mr. Daniel D. Tagaza Gentlemen : This refers to your letter dated July 20, 2007 requesting for confirmation of your opinion that the sale of Twenty Eight Million Seven Hundred Ninety Three Thousand Three Hundred Twenty One (28,793,321) Class B Common Stock and Thirty Seven Million Six Hundred Twenty Five Thousand Six Hundred Twenty Five (37,625,625) Class A Common Stock in Meralco by Meralco Pension Fund ("MPF" for brevity),inclusive of any adjustments as a result of declassification, stock dividends or capital distribution in favor of First Philippine Holdings Corporation ("FPHC" for brevity) is not subject to capital gains tax. As represented, MPF is a duly qualified pension constituted under and by virtue of the laws of the Philippines. In a ruling dated June 18, 1969, the Bureau of Internal Revenue confirmed that it is exempt from income tax. The MPF has agreed to sell its Class B Common Stock in Manila Electric Company ("Meralco" for brevity) and such number of its Class A Common Stock which shall constitute 6.6% of the issued and outstanding Common Stock of Meralco. The total purchase price is in the amount of Eight Billion Three Hundred Two Million Three Hundred Sixty Eight Thousand Two Hundred Fifty Philippine Pesos (PhP8,302,368,250.00). Under the agreement, any declassification, stock dividend or capital distribution (other than cash or property dividend) will result in an adjustment of the number of shares covered by the transfer. Currently, this would cover Twenty Eight Million Seven Hundred Ninety Three Thousand Three Hundred Twenty One (28,793,321) Class B Common Stock and Thirty Seven Million Six Hundred Twenty Five Thousand Six Hundred Twenty Five (37,625,625) Class A Common Stock in Meralco. In reply, please be informed that this Office had occasion rule in BIR Ruling No. DA-397-06 dated June 26, 2006, as follows: "...Section 60(B) of the Tax Code of 1997 provides that "Sec. 60(B). Exception. The tax imposed by Title II shall not apply to employees' trust which forms part of a pension, stock bonus, or profit-sharing plan of an employer for the benefit of some or all of his employees (1) if contributions are made to the trust by such employer, or employees, or both for the purpose of distributing to such employees the earnings and principal of the fund accumulated by the trust in accordance with such plan, and (2) if under the trust instrument it is impossible, at any time prior to the satisfaction of all liabilities with respect to employees under the trust, for any part of the corpus or income to be (within the taxable year or thereafter) used for, or diverted to, purposes other than for the exclusive benefit of his employees. .. Considering that the PHINMA Retirement Fund is an employees' trust fund established under then R.A. No. 4917 for the exclusive benefit of all the employees and the corpus or income of the fund is not used for or diverted to purposes other than for the exclusive benefit of the members and their beneficiaries, this Office holds that its investments remain exempt from income tax and consequently form withholding tax pursuant to Section 60(B) of the Tax Code of 1997. Accordingly, the gain derived by the Fund from the sale of its 420,383 shares of stock in Bacnotan Consolidated Industries, Inc. is not subject to the capital gains tax imposed under Section 27(D)(2) of the Tax Code of 1997. . . ." Exemption from income tax of the BIR-qualified employees' trust fund applies to all income or earnings of any kind of property held by it in trust ( Commissioner of Internal Revenue vs. The Hon. Court of Appeals, the CTA, GCL Retirement Benefit Plan, G.R. No. 950222, prom. March 23, 1992). In view of the foregoing, this Office hereby confirms your opinion that the sale of 28,793,321 Class B Common Stock and 37,625,625 Class A Common Stock in Meralco by MPF, inclusive of any adjustments as a result of declassification, stock dividends or capital distribution in favor of FPHC is not subject to capital gains tax and consequently from the creditable expanded withholding tax prescribed under Revenue Regulations No. 2-98, as amended. However, the sale of the aforesaid shares of stock in Meralco by MPF to FPHC is subject to documentary stamp tax at the rate of PhP0.75 on each PhP200.00, or fractional part thereof, of the par value of such stock as prescribed in Section 176 of the Tax Code of 1997, as amended by Republic Act No. 9243 and as implemented by Revenue Regulations No. 13-2004 (BIR Ruling No. DA-528-2004 dated October 12, 2004 citing BIR Ruling No. DA-087-02 dated May 2, 2002). 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 as null and void. Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service