BIR Ruling [DA-025-02]

February 20, 2002 BIR RULING [DA-025-02] S40 (C) (2); 031-2001; 5/8/01 Joaquin Cunanan & Co. 29/F Philamlife Tower 8767 Paseo de Roxas Avenue Makati City Attention: Atty. Reinerio B. De Veyra Senior Manager Tax Services Department Gentlemen : This refers to your letter dated October 5, 2001 requesting, on behalf of your client, Integrated Device Technology (Philippines), Inc. (IDT-Phil for brevity) for confirmation of your opinion that: 1. The transfer of IDT-Phil shares from its parent company, Integrated Device Technology, Inc. (IDT-US for brevity) to Integrated Device Technology, Inc. Cayman Islands Corporation (IDTC-1 for brevity), a wholly owned subsidiary of IDT-US, in exchange for the latter's shares of stock, will qualify as a tax-free exchange under the last paragraph of Section 40(C)(2) of the National Internal Revenue Code of 1997, as amended, considering that as a result of the transfer, IDT-US will take further control of IDTC-1; and 2. The subsequent merger between IDT-Phil with Integrated Device Technology, Inc. (Philippines), Ltd. (IDTC-2 for brevity), a wholly owned subsidiary of IDTC-1, will qualify as a tax-free merger under the same Section 40(C)(2) and Section 40(C)(6)(b) of the Tax Code. It is represented that IDT-Phil is a domestic corporation duly registered with the Securities and Exchange Commission (SEC for brevity) on June 21, 1995 under SEC Registration Certificate No. ASO95-005639. It is also registered with the Philippine Economic Zone Authority (PEZA for brevity) as an export enterprise under PEZA Registration No. 95-84 dated September 5, 1995. It is engaged in backgrinding, scribing and breaking of wafers into die, and assembling and testing of integrated circuits and semi-conductor products for export. It has an authorized capital stock of 2,000,000 shares with a par value of 100 per share of which 1,898,158 shares are issued and outstanding in the name of IDT US and 5 qualifying shares are issued and outstanding in the names of nominee directors of IDT US. IDT-US is IDT-Phil's parent company, organized and existing under the laws of the U.S.A. IDTC-1 (a wholly-owned subsidiary of IDT-US) and IDTC-2 (a wholly-owned subsidiary of IDTC-1) are both organized and existing under the laws of the Cayman Islands; that none of these corporations are residents of the Philippines. The IDT group of companies is undertaking a global reorganization in order to, among other purposes, achieve operational efficiencies, provide an appropriate structure for its increasing global business and optimize shareholder value. In line with the reorganization, IDT-US will transfer all of its shares in IDT-Phil to IDTC-1 in exchange for the latter's shares of stock without cash payment. Further, the following transactions shall be undertaken: 1. IDTC-2 will establish a Philippine branch; 2. IDT-Phil will be merged with IDTC-2, with the latter as the surviving entity; and 3. After the merger, IDTC-2, through its Philippine branch, will assume and operate the business of IDT-Phil; IDTC-1 has an authorized capital stock of US$200,000 divided into 20,000,000 shares with a par value of $0.01 per share. Before the transfer of IDT-Phil shares from IDT-US to IDTC-1, the number of IDTC-1 shares subscribed and paid-up are as follows: No. of Par value of Subscribed Shares Subscribed Name of Subscriber Shares and Paid Up Percentage Integrated Device Technology, Inc. (IDT-US) 5,010,000 $50,100 100% Total 5,010,000 $50,100 100% ======== ======== ======== IDT-US will transfer its 1,898,158 IDT-Phil shares and five (5) qualifying shares held by nominee directors to IDTC-1 in exchange for the same number of IDTC-1 shares. The stockholder, of IDTC-1 and the number of shares subscribed and paid up after the said transfer will accordingly be as follows: No. of Par value of Subscribed Shares Subscribed Name of Subscriber Shares and Paid Up Percentage Integrated Device Technology, Inc. (IDT-US) 6,908,163 US$69,081.63 100% Total 6,908,163 US$69,081.63 100% ======== =========== ======== IDTC-2's authorized capital stock is US$2,000,000 divided into 2,000,000 shares with a par value of US$1.00 per share, of which Fifty Thousand (50,000) shares have been subscribed and paid-up. Under the Plan of Merger, IDT-Phil and IDTC-2 will be merged into one corporation with IDTC-2 as the surviving entity. The merger shall be effected by the transfer of all assets of IDT-Phil to IDTC-2, through its Philippine branch, in consideration of the assumption by IDTC 2, through its Philippine branch, of all of the liabilities of IDT-Phil and the distribution of IDTC-2 shares to IDT-Phil's stockholders. IDT-Phil and IDTC-2, through its Philippine branch, shall execute a Deed of Transfer of Assets and Assumption of Liabilities, upon the effective date of merger. IDT-Phil shall then take all the steps necessary to dissolve and liquidate in accordance with Philippine laws. On the effective date of merger, all assets, rights, powers, privileges, immunities and business of IDT-Phil as a going concern, as well as all its properties, contractual and property rights, claims, bank deposits, retained earnings, investments and all receivables due on whatever account, and every other interest of or belonging to or due to IDT-Phil shall be taken and deemed to be transferred to and vested in IDTC-2 through its Philippine branch. All the liabilities of and obligations falling due from IDT-Phil shall be assumed by IDTC-2 as the surviving corporation in the same manner and to the same extent as if IDTC-2 had itself incurred the same or contracted therefor. All the stockholders of IDT-Phil will be stockholders of IDTC-2, and for this purpose, the holders of all the outstanding shares of IDT-Phil will surrender the corresponding certificates, duly endorsed to IDT-Phil which shall cancel the same and in exchange therefor, each IDT-Phil stockholder will receive the certificates of stock representing the appropriate number of IDTC-2 shares. In support of your request and in compliance with the requirements set forth under Revenue Memorandum Order No. 26-92, you submitted the following documents: a. Proposed Deed of Assignment covering the transfer of IDT-Phil shares by IDT-US to IDTC-1 in exchange for the latter's shares of stock; b. Certification by the corporate secretary of IDTC-1 of its authorized capitalization, the par value of its shares of stock and percentage of IDT-US ownership in IDTC-1 as a result of the exchange of shares between IDT-US and IDTC-1; c. Certification by the corporate secretary of IDTC-2 of its authorized capitalization, the par value of its shares of stock; d. A copy each of BIR Ruling Nos. 202-99 and 224-93; e. Proposed Plan of Merger; f. Articles of Incorporation of IDT-Phil duly registered with SEC; and g. Articles of Incorporation of IDTC-2. In reply, please be informed of the following: 1. Pursuant to the last paragraph of Sec. 40(C)(2) of the Tax Code, no gain or loss shall be recognized if property is transferred to a corporation by a person in exchange for stock or unit of participation in such a corporation of which as a result of such exchange said person, alone or together with others, not exceeding four (4) persons, gains control of said corporation. The term "control" shall mean ownership of stocks in a corporation possessing at least fifty-one percent (51%) of the total voting power of all classes of stocks entitled to vote. Accordingly, no gain or loss shall be recognized on the transfer from IDT-US to IDTC-1 of its shares in IDT-Phil considering that as a result of the exchange of the IDT-Phil shares with those of IDTC-1, IDT-US will continue and further gain control of IDTC-1 in accordance with the aforecited last paragraph of Section 40(C)(2) of the 1997 Tax Code; 2. However, the transfer of IDT-Phil shares from IDT-US to IDTC-1 shall be subject to documentary stamp tax imposed under Section 176 of the 1997 Tax Code; 3. On the other hand, the merger of IDT-Phil and IDTC-2 with the latter as the surviving corporation is a merger within the contemplation of Section 40(C)(2) and 40(C)(6)(b) of the 1997 Tax Code, because IDTC-2 will acquire/assume all the assets and liabilities of IDT-Phil, solely in exchange for shares of stock of IDTC-2, and the merger is being undertaken for a bona fide business purpose and not for the purpose of escaping the burden of taxation. Therefore, no gain or loss shall be recognized: a. To IDT-Phil as the transferor, and IDTC-2 as the transferee, on the aforesaid transfer by IDT-Phil of all its assets and liabilities to IDTC-2 in exchange for IDTC-2 shares of stock pursuant to the Plan of Merger; b. To the stockholders of IDT-Phil on the exchange of their shares of stock of IDT-Phil solely for IDTC-2 shares of stock pursuant to the Plan of Merger. 4. The issuance by IDTC-2 of its own shares of stock to the shareholders of IDT-Phil in exchange for the surrendered shares of IDT-Phil shall not be subject to DST. 5. The above-mentioned transactions shall not be subject to the gift tax as there is no intention to donate on the part of any of the parties. 6. The basis of the IDTC-2 shares of stock to be received by the stockholders of IDT-Phil is the same as their basis in IDT-Phil shares of stock surrendered and exchanged pursuant to the Plan of Merger and the basis of the assets received by IDTC-2 shall be the same as it would be in the hands of IDT-Phil. It should be emphasized, however, that Section 40(C)(2) and Section 40(C)(6)(c) of the Tax Code of 1997 merely defer recognition of the gain or loss from such transaction, for in determining the gain or loss from the subsequent transactions of the property or of the stocks involved in the exchange, the original or historical cost of the property or stocks is considered. Thus, if the IDT-US later sells or exchanges the shares of stock acquired by it in the exchange, it shall be subject to income tax on gains derived from such sale or exchange unless qualified as a tax-free transfer, taking into consideration the substituted basis of the stock received by IDT-US and the substituted basis of the property transferred in the hands of IDTC-1 which, in this case, is the total par value of the IDT-Phil shares transferred by IDT-US to IDTC-1 pursuant to Sec. 2 of Revenue Regulations (RR) 18-2001. It should be noted, further, that for the above transactions to be considered as a tax free transfer under Section 40(C)(2) and Section 40(C)(6)(b) of the Tax Code of 1997, the requirements under RR 18-2001 must be complied with as follows: i. Filing of an application for the issuance of a certification by this Office to the effect that the exchange qualifies as a tax free exchange using herein ruling as the basis for said certification; ii. Payment of a processing certification fee of P5,000.00; iii. Submission by IDT US of a sworn certification/declaration on the basis of the share of stock to be transferred. The basis of each share of stock must be itemized in the certification in order to enable the BIR to determine the basis for subsequent disposition and the corporate secretary to annotate the information on such basis for the shares of stock on the reverse side of the Certificate of Stock. Said sworn declaration must be executed by an official of IDT US with a rank of no less than the Chief Financial Officer or his equivalent. iv. Submission of certified true copies of the certificates of stock evidencing shares of stock to be transferred. v. Annotation on the reverse side of the IDT Phil Certificate of Stock of the following: "The acquisition of the property described in this title/certificate is by virtue of a tax-free exchange pursuant to Section 40(C)(2) of the National Internal Revenue Code of 1997 per Deed of Exchange/Assignment dated ______________. The substituted basis pursuant to Section 40(c)(5) of the National Internal Revenue Code of 1997 is in the amount of _______________________." vi. Inclusion in the Deed of Assignment of shares that IDT-US and IDTC-1 shall execute of a stipulation that said parties undertake to comply with the applicable provisions of RR 18-2001. 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, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Acting Assistant Commissioner Legal Service