BIR Ruling [DA-039-02]

March 07, 2002 BIR RULING [DA-039-02] Central Bancorporation 4/F Rufino Pacific Tower 6784 Ayala Avenue Makati City Attention: Messrs. John Paul M. Cabaliza President and Arnold C. Marquez Treasurer Gentlemen : This refers to your letter dated November 20, 2001 stating that Central Bancorporation General Merchants, Inc. (CBGM) and Philippine Islands Corporation for Tourism Development, Inc. (PICTD) are both domestic corporations duly organized and existing under Philippines laws with principal office address at 41st Floor, Rufino Pacific Tower, Ayala Avenue, Makati City; that CBGM was established in 1991 primarily for the purpose of engaging in the general trading business; that one of its secondary purposes if to engage in tourism related business; that it has an authorized capital stock of P12,000,000.00 with a par value of P1.00 per share, of which P10,000,000.00 worth of shares have been issued and outstanding; that PICTD, on the other hand, was established in 1991 to undertake any and all forms of business related to the tourism industry; that it has a capital stock of 100,000 common shares with no par value, of which 65,000 shares with an issued value of P8,000,000.00 have been issued and outstanding; that both are related to each other in that CBGM owns 24.62% of PICTD, while, PICTD in turn, owns 50% of CBGM; that both have a common stockholder in the person of Cencorp (Trade, Travel, Territorial and Technical Services), Inc., which owns 50% of the capital stock of CBGM and 75.38% of PICTD; that both 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 while CBGM is primarily engaged in general trading, it is also engaged in tourism related businesses, a business in which PICTD is 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 CBGM and PICTD propose to merger into one single corporation, with CBGM as the surviving corporation; that the following is the condensed balance sheet of the merging corporations as of October 31, 2001: CBGM PICTD Total Assets 22,450,481 21,452,960 Liabilities 15,438,949 12,999,900 Capital Stock 10,000,000 8,000,000 Retained Earnings (Deficit) (2,988,468) 453,060 Total Liabilities & 22,450,481 21,452,960 Stockholders Equity ========= ========= that the salient terms and conditions of said merger are as follows: (a) All the assets and liabilities of PICTD of the proposed date of merger shall be transferred to CBGM in exchange for the shares of stock in 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 CBGM, the absorbing corporation, owns 24.62% of PICTD, the absorbed corporation, CBGM shall no longer issue to itself shares of stock corresponding to its ownership in PICTD; (d) Upon effectivity of the merger, PICTD shall cease to exist. CBGM shall be the surviving corporation. All the outstanding shares of PICTD shall be deemed cancelled by reason of the merger. CBGM, as the surviving corporation, shall thereafter be responsible and liable for all the liabilities and obligations of PICTD in the same manner as if it had itself incurred such liabilities or obligations; and (e) The surviving corporation shall change its name, tentatively, to: Central Bancorporation (Trading and Leisure), Inc. 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 corporation 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 corporation, 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 CBGM will assume/acquire all the assets and liabilities of PICTD solely in exchange for the shares of stock of CBGM, 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 PICTD of all its assets and liabilities to CBGM 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 PICTD upon the distribution to the CBGM shares to its sole stockholder, PICTD, 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 PICTD upon the exchange of its PICTD shares solely for CBGM shares under Section 40(C)(2) of the Tax Code of 1997. The basis of CBGM shares received by PICTD shall be the same as the basis of the PICTD shares surrendered in exchange therefor pursuant to the merger. The basis of the assets/properties of PICTD in the hands of CBGM shall be the same as it would be in the hands of PICTD if the merger had not taken place. Any unused input tax of PICTD as of the effective date of the merger will be absorbed by CBGM 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 PICTD to CBGM 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 CBGM of the assets and liabilities of PICTD, without further act or deed shall not be subject to value-added tax and documentary stamp tax. However, the transfer by PICTD to CBGM 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 transferor 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 PICTD 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