BIR Ruling [DA-023-02]

February 19, 2002 BIR RULING [DA-023-02] Atty. Alfonso Y. Go Suite 1201 Federal Tower Center Dasmarias Street corner Mulle de Binondo Manila S i r : This refers to your letter dated November 27, 2001 stating that Third Millennium Oil Mills, Inc. (Third Millennium), is a corporation organized under the laws of the Philippines with principal office at Room 403 CSP Building, 815 Quezon Avenue, Quezon City; that it was organized for the primary purpose of engaging in the business of oil milling using copra as principal raw materials; that it operates a plant in the Municipality of Jimenez, Misamis Occidental, where its oil milling activities are carried out; that the company is registered with the Securities and Exchange Commission (SEC) on December 21, 2000 and started commercial operations on or about July 01, 2001; that it is also duly registered with the Board of Investments under Certificate of Registration No. 2001-065 dated April 23, 2001; that the corporation has an authorized capital stock of P320 million, divided into 3,200,000 shares with a par value of P100.00 per share, of which 800,000 shares worth P80 million have been subscribed and the amount of P60 million has been paid-up as of September 30, 2001; that CBT Cordage Corporation (CBT Cordage) is a corporation duly organized under the laws of the Philippines with principal office at 3525 Dupil Street, Sta. Mesa, Manila; that it was organized for the primary purpose of engaging in the making and manufacture of cords and ropes using abaca as principal raw materials; that the company has stopped commercial operations since 1996 but it has acquired certain assets on October 26, 2000, consisting of oil milling machinery and equipment situated in the Municipality of Jimenez, Misamis Occidental, which are being leased and used by Third Millennium; that it has an authorized capital stock of P8 million, divided into 8 million shares with a par value of P1.00 per share, of which 4 million shares worth P4 million have been subscribed and paid; that on the other hand, Chrysalis Realty Company, Inc. (Chrysalis), is a corporation duly organized under the laws of the Philippines with principal office at Room 403 CSP Building, 816 Quezon Avenue, Quezon City; that it is the registered owner of the land and other permanent improvements situated in the Municipality of Jimenez, Misamis Occidental, which are being leased and used by Third Millennium as the latter's factory and plant for its oil milling operations; that the corporation has an authorized capital stock of P2 million, divided into 20,000 shares with a par value of P100.00 per share, of which 7,160 shares worth P716,000 has been subscribed and paid; that the three corporations are related to each other in that aside from having common stockholders, CBT Cordage owns 25% and 70%, respectively, of the subscribed capital stock of Third Millennium and Chrysalis; that Third Millennium is leasing and using the machinery and equipment of CBT Cordage and the land and permanent improvements of Chrysalis; that the three corporations propose to merge into one single corporation, with Third Millennium as the surviving corporation and the two others as the absorbed corporations; that the merger is being undertaken for a bona fide business purpose and is not intended to escape the burden of taxation; that the reason for the merger is to place the 3 companies under one common ownership and command, to attain synchronization in management, to reduce costs and expenses, and to attain greater operational efficiency, thereby resulting in maximum benefits to the corporations and their stockholders; that for all intents and purposes, it may be said that the three corporations are in reality one and the same in that while CBT Cordage owns a part of Third Millennium and Chrysalis, Third Millennium used the machinery and equipment of CBT Cordage and the land of Chrysalis; that the condensed audited balance sheets of the three corporation as of September 30, 2001 are as follows: Third CBT Chrysalis Total Millennium Cordage Realty Total Assets P274,976,371 P78,722,554 P1,353,410 P355,052,335 Liabilities 220,066,237 74,573,113 620,940 295,260,290 Capital Stock 60,000,000 4,000,000 716,000 64,716,000 Retained Earnings (5,089,866) 149,441 16,470 (4,923,955) Total Liabilities & P274,976,371 P78,722,554 P1,353,410 P355,052,335 Stockholders' Equity and that the salient terms and conditions of the proposed merger are as follows: (1) Third Millennium Oil Mills, Inc. shall be the surviving corporation in whose name all assets and liabilities of the constituent corporations shall be held and their business operations carried on. (2) The transfer of the assets and liabilities of the absorbed corporations to the surviving corporation shall be based on their book values as appearing in the audited financial statements of the absorbed corporations as of September 30, 2001. (3) The absorbed corporations, or their stockholders, shall be issued shares of stock of the surviving corporation at the following rates: (a) One (1) share of the surviving corporation for every 100 shares of CBT Cordage Corporation; and (b) One (1) share of the surviving corporation for every share of Chrysalis Realty Company, Inc. (4) The directors and officers of the surviving corporation shall continue to serve as such until their successors shall have been elected and qualified in accordance with its By-Laws. (5) From and after September 30, 2001, the absorbed corporations shall not declare dividends, increase or decrease capital stock, incur material indebtedness or dispose of major assets. Based on the foregoing representations, you now request for a ruling on the following: "1. Will the transfer of the real properties of the absorbed corporations to the surviving corporation be subject to the following taxes: a) The corporate income tax under Section 27(A) of the Tax Code, and therefore also the expanded withholding tax under Section 57(B) thereof; b) The capital gains tax under Section 27(D)(5); c) The value-added tax under Section 106; and d) The documentary stamp tax under Section 190. "2. Will the transfer to the surviving corporation of the other assets of the absorbed corporations, like the machinery and equipment of CBT Cordage Corporation and its investments in the shares of stock of Third Millennium & Chrysalis Realty, be subject to any or all of the taxes mentioned above." In reply thereto, please be informed as follows: The above reorganization is a merger within the contemplation of Section 40(C)(2) and (6)(b) of the Tax Code of 1997, because Third Millennium will assume/acquire all the assets and liabilities of CBT Cordage and Chrysalis solely in exchange for shares of stock of Third Millennium, the transaction undertaken being for a bona fide business purpose and not for the purpose of escaping the burden of taxation. Accordingly, the transfer by CBT Cordage and Chrysalis of all its assets and liabilities to Third Millennium solely in exchange for the latter's shares of stock shall not give rise to the recognition of gain or loss pursuant to Section 40(C)(2) and (6)(b) of the Tax Code of 1997. No gain or loss shall be recognized by CBT Cordage and Chrysalis upon the distribution of the Third Millennium shares to its sole stockholder, CBT Cordage and Chrysalis, in complete redemption of its stocks under Section (40)(C)(2) of the Tax Code of 1997. No gain or loss shall be recognized by the sole stockholder of CBT Cordage and Chrysalis upon the exchange of its CBT Cordage and Chrysalis shares solely for Third Millennium shares under Section 40(C)(2) of the Tax Code of 1997. The basis of the Third Millennium shares received by CBT Cordage and Chrysalis shall be the same as the basis of the CBT Cordage and Chrysalis shares surrendered in exchange therefor pursuant to the merger. The basis of the assets/properties of CBT Cordage and Chrysalis in the hands of Third Millennium shall be the same as it would be in the hands of CBT Cordage and Chrysalis if the merger had not taken place. Any unused input tax of CBT Cordage and Chrysalis as of the effective date of the merger will be absorbed by Third Millennium as the surviving corporation pursuant to Section 4.100-5(b)(3) of Revenue Regulations No. 7-95. The transfer of the assets and liabilities by CBT Cordage and Chrysalis to Third Millennium for the latter's shares would not be considered as transfer of property for an insufficient consideration subject to donor's tax since there is no intention to donate on the part of the parties inasmuch as the transaction to be effected is purely for business purpose. The assumption of Third Millennium of the assets and liabilities of CBT Cordage and Chrysalis, without further act or deed shall not be subject to value-added tax and documentary stamp tax. However, the transfer by CBT Cordage and Chrysalis to Third Millennium 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 documentary stamp tax imposed under Section 176. On the other hand, the original issuance of the shares of stock to the stockholders of CBT Cordage and Chrysalis on account of the merger shall be subject to the documentary stamp tax imposed under Section 175 both of the Tax Code of 1997. Finally, 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. 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