BIR Ruling [DA-038-02]

March 07, 2002 BIR RULING [DA-038-02] The Corporate Partnership for Management in Business 41/F Rufino Pacific Tower 6784 Ayala Avenue Makati City Attention: Messrs. Cesar B. Crisol Managing Director and Orlando D. Nepomuceno Corporate Secretary Gentlemen : This refers to your letter dated November 16, 2001 stating that the Corporate Partnership for Management in Business, Inc. (CPMB), Asianpartners Investment and Development Corporation (Asianpartners) and Barclays Development Corporation (Barclays) are all domestic corporations duly organized and existing under the laws of the Philippines with principal office address at 41st Floor, Rufino Pacific Tower, Ayala Avenue, Makati City; that CPMB was established in 1969 primarily for the purpose of rendering management, advisory and consultancy services; that it has an authorized capital stock of P100,000,000.00 with a par value of P10.00 per share, which are fully issued and outstanding; that Asianpartners was established in 1973 for the purpose of identifying or creating investment opportunities and committing its financial and manpower resources thereto under a board program of operations, encompassing any and all undertaking and activities connected with or related to the establishment, promotion, management, funding, and development of any and all kinds of business enterprise and providing management, advisory and consultancy services; that it has a capital stock of 1,000 common shares with no par value, of which 870 shares with an issued value of P17,000,000.00 have been issued and outstanding; that Barclays on the other hand, was established in 1974 with the same purpose as Asianpartners; that it has a capital stock of 15,000 common shares with no par value, of which 12,700 shares have been issued and outstanding at the total issued value of P17,000,000.00; that the three corporations are related to each other in that Asianpartners and Barclays are wholly owned by CPMB, while, Asianpartners and Barclays in turn own 52.12% and 47.88% of CPMB, respectively; that all three corporations are engaged in businesses that are not only supplemental and complementary to each other, but are substantially similar or at times overlapping with each other, that CPMB is primarily engaged in rendering management, advisory and consultancy services; that while Asianpartners and Barclays have been incorporated as investment and development corporations, they also have for their primary purpose rendering of management, advisory and consultancy services; that it was deemed advisable that the said corporations be operated under a single entity to achiever greater efficiency, economy of management, and reduce costs and expenses; that the three corporations propose to merger into one single corporation, with CPMB as the surviving corporation and the two others being the absorbed corporations; that the following is the condensed balance sheet of the three corporations as of October 31, 2001: CPMB Asianpartners Barclays Total Assets 167,268,396 37,410,392 37,370,623 Liabilities 14,655,272 20,365,800 19,656,885 Capital Stock 100,000,000 17,000,000 17,000,000 Retained Earnings 52,613,124 44,592 713,738 Total Liabilities & 167,268,396 37,410,392 37,370,623 Stockholders Equity ========== ========== ========= that the salient terms and conditions of said merger are as follows: (a) All the assets and liabilities of Asianpartners and Barclays as of the proposed date of merger shall be transferred to CPMB in exchange for the shares of stock of the latter; (b) 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; (c) Since Asianpartners and Barclays are wholly owned subsidiaries of CPMB, CPMB shall no longer issue shares of stock to itself arising from the merger; (d) Upon effectivity of the merger, Asianpartners and Barclays shall cease to exist. CPMB shall be the surviving corporation. All the outstanding shares of Asianpartners and Barclays shall be deemed cancelled by reason of the merger. CPMB, as the surviving corporation, shall thereafter be responsible and liable for all the liabilities and obligations of Asianpartners and Barclays in the same manner as if it had itself incurred such liabilities or obligations. Based on the foregoing representations, you now request for a ruling, that the merger of aforementioned corporations qualifies 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 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) 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, 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 CPMB will assume/acquire all the assets and liabilities of Asianpartners and Barclays solely in exchange for the shares of stock of CPMB, 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 Asianpartners and Barclays of all their assets and liabilities to CPMB 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 Asianpartners and Barclays upon the distribution to the CPMB shares to its stockholders, Asianpartners and Barclays, 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 Asianpartners and Barclays upon the exchange of its Asianpartners and Barclays shares solely for CPMB shares under Section 40(C)(2) of the Tax Code of 1997. The basis of CPMB shares received by Asianpartners and Barclays shall be the same as the basis of the Asianpartners and Barclays shares surrendered in exchange therefor pursuant to the merger. The basis of the assets/properties of Asianpartners and Barclays in the hands of CPMB shall be the same as it would be in the hands of Asianpartners and Barclays if the merger had not taken place. Any unused input tax of Asianpartners and Barclays as of the effective date of the merger will be absorbed by CPMB 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 Asianpartners and Barclays to CPMB 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 CPMB of the assets and liabilities of Asianpartners and Barclays, without further act or deed shall not be subject to value-added tax and documentary stamp tax. However, the transfer by Asianpartners and Barclays to CPMB 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 Asianpartners and Barclays 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 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