BIR Ruling [DA-037-02]

July 7, 2002 BIR RULING [DA-037-02] Multinational Bancorporation (Insurance Agency & Management Services) 41/F Rufino Pacific Tower 6784 Ayala Avenue Makati City Attention: Mr. Romeo G. Rodriguez President and Ms. Violeta J. Josef Treasurer Gentlemen : This refers to your letter dated November 14, 2001 stating that Multinational Bancorporation (Insurance Agency and Management Services) (MBIAMS), Multinational Bancorporation (Human Settlements) (MBHS) and Multinational Bancorporation (General Merchants) (MBGM) are corporations duly organized and existing under the laws of the Philippines; that MBIAMS was organized in 1974 primarily for the purpose of conducting insurance agency business; that it has a capital stock of 500 common shares with no par value, all of which have been fully issued and outstanding with a total issued value of P1,500,000.00; that MBHS was established in 1975 for the purpose of engaging in real estate brokerage and dealership business; that it has a capital stock of 1,000 common shares with no par value, which are fully issued and outstanding with a total issued value of P5,000,000.00; that MBGM on the other hand, was established in 1973 for the purpose of conducting a general trading business; that it has a capital stock of 100,000 preferred shares with par value of P100.00 and 5,000 common shares with no par value; that of the 100,000 preferred shares, 40,000 shares which were previously issued have been redeemed and retired, with 60,000 shares still remaining unissued; that with respect to the common shares, 4,300 shares have been issued and outstanding with a total issued value of P4,500,000.00; that the three corporations are related to each other in that all are wholly owned by the Corporate Partnership for Management in Business, Inc.; that all three corporations are engaged in businesses that are supplemental and complementary to and at times overlapping with each other; that except for insurance agency business, which requires a special license, each of these three corporations has been carrying out businesses that the other parties to the merger are also engaged in; that it was deemed advisable that the said corporations be operated under a single entity to achieve greater efficiency, economy of management, and reduce costs and expenses; that the three corporations propose to merge into one single corporation, with MBHS as the surviving corporation with the two others being the absorbed corporations; that the following is the condensed balance sheets of the three corporations as of October 31, 2001: MBIAMS MBHS MBGM Total Assets 22,158,476 66,384,150 30,611,805 Liabilities 21,291,706 54,592,862 25,819,375 Capital Stock 1,500,000 5,000,000 4,500,000 Retained Earnings (633,231) 4,791,288 292,430 (Deficit) Total Liabilities & 22,158,476 64,384,150 4,792,430 Stockholders Equity ========= ========= ========== that the salient terms and conditions of said merger are as follows: (a) The present no par value capital stock of MBHS shall first be converted into shares with par value of P10.00 per share on the basis of five hundred (500) shares with par value of ten pesos (P10.00) per share for each common no par value share so converted. Correspondingly, the authorized capital stock will be Merger; (b) Simultaneous with this conversion, all the assets and liabilities of MBIAMS and MBGM as of the proposed date of merger shall be transferred to MBHS in exchange for the newly converted shares of stock in the latter; (c) The transfer of the assets and liabilities of the absorbed corporations to the surviving corporation shall be based on their book value as appearing in the audited financial statements of the absorbed corporation as of the proposed effective date of merger; (d) The stockholders of the absorbed corporations shall surrender their shares in exchange for shares in the surviving corporation in accordance with the following basis: (i) 300 common shares in the surviving corporation with par value of P10.00 per share for every one (1) share in MBIAMS surrendered; (ii) 105 common shares in the surviving corporation with par value of P10.00 per share for every one (1) share in MBGM surrendered. (e) Upon effectivity of the merger, MBIAMS and MBGM shall cease to exist. MBHS shall be the surviving corporation. All the outstanding shares of MBIAMS and MBGM shall be deemed cancelled by reason of the merger. MBHS, as the surviving corporation, shall thereafter be responsible and liable for all the liabilities and obligations of MBIAMS and MBGM in the same manner as if it had itself incurred such liabilities or obligations; (f) The surviving corporation shall change its name, tentatively, to: Multinational Bancorporation (Insurance Agency and Trading Services). Based on the foregoing representations, you now request for a ruling that the merger of the aforementioned corporations qualities as a tax free merger under Section 40(C)(2)(a) of the Tax Code of 1997 and more specifically the following: (1) Will the transfer of 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) of the Tax Code of 1997; (c) The documentary stamp tax under Section 196 of the Tax Code of 1997. (2) Will the transfer to the surviving corporation of the other assets of the absorbed corporations, which are not real properties, e.g., shares of stock, money market placements, etc., be subject to any 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 MBHS will assume/acquire all the assets and liabilities of MBIAMS and MBGM solely in exchange for the shares of stock of MBHS, the transaction undertaken being for a bona fide business purpose and not the purpose of escaping the burden of taxation. Accordingly, the transfer by MBIAMS and MBGM of all their assets and liabilities to MBHS 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 MBIAMS and MBGM upon the distribution to the MBHS shares to its stockholders, MBIAMS and MBGM, 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 stockholders of MBIAMS and MBGM upon the exchange of its MBIAMS and MBGM shares solely for MBHS shares under Section 40(C)(2) of the Tax Code of 1997. The basis of MBHS shares received by MBIAMS and MBGM shall be the same as the basis of the MBIAMS and MBGM shares surrendered in exchange therefor pursuant to the merger. The basis of the assets/properties of MBIAMS and MBGM in the hands of MBHS shall be the same as it would be in the hands of MBIAMS and MBGM if the merger had not taken place. Any unused input tax of MBIAMS and MBGM as of the effective date of the merger will be absorbed by MBHS 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 MBIAMS and MBGM to MBHS 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 MBHS of the assets and liabilities of MBIAMS and MBGM, without further act or deed shall not be subject to value-added tax and documentary stamp tax. However, the transfer by MBIAMS and MBGM to MBHS of all its 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 MBIAMS and MBGM 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 in 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 the cost or other basis of all properties, 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 or 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; and 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 the stock or securities and other property or money received from the exchange, including any liability 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 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 a 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 file 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