BIR Ruling [DA-040-98]

February 5, 1998 BIR RULING [DA-040-98] Romulo, Mabanta, Buenaventura Sayoc & De Los Angeles 30th Floor, CITIBANK Tower CITIBANK Plaza 8741 Paseo de Roxas Makati City Attention: Attys . Edmundo P . Guevara and Priscilla B . Valer Gentlemen : This refers to your letter dated January 14, 1998 requesting on behalf of your client, Concepcion Industries, Inc. (CII), for a ruling on the tax consequences of its on-going corporate reorganization. cdtech It is represented that CII is a domestic corporation duly registered with the Securities and Exchange Commission (SEC); that it is organized for the purpose of, among others, engaging in the heating air conditioning and ventilating (HVAC) business in the Philippines; that CII is in the process of reorganizing its various businesses, including the HVAC business by, among others, the divisionalization of such businesses into various subsidiaries, including the formation of joint ventures with third parties to engage in such businesses; that among such joint ventures is the Concepcion-Carrier Air Conditioning Company (CCAC), a joint venture between CII and Carrier Air Conditioning Philippines, Inc. (CACPI), a domestic corporation duly registered with the SEC and organized for the purpose of, among others, manufacturing, importing, buying, selling, servicing or otherwise dealing in at wholesale such goods as airconditioning and refrigeration machines; that CCAC was formed on December 3, 1997 with the intention that subject to further discussions between the partners, the partners would engage in the HVAC business in the Philippines through such partnership; that CII and CACPI contributed, respectively, the amounts of P99,000.00 and P1,000.00 to the capital of CCAC; that as a consequence of which, CCI and CACPI owned, respectively 99% and 1% of the partnership interest in CCAC; that on December 16, 1997, after further discussions and upon agreeing to continue the partnership through CCAC for the purposes mentioned above, CII and CACPI agreed to increase their respective capital contributions to CCAC; that pursuant to such agreement, CII and CCAC executed a Deed of Assignment dated December 16, 1997 but made effective as of December 29, 1997, whereby on December 29, 1997, CII contributed certain CII assets used in its HVAC business (Assets) with an aggregate historical cost of P908,500,000.00 net of CII's trade liabilities (Assumed Liabilities) which CCAC assumed; that the historical cost of the Assets exceeds the amount of the Assumed Liabilities; that no immovable or real property will be transferred to CCAC; that pursuant to the above-mentioned agreement between CII and CACPI, CACPI and CCAC executed a Capital Contribution Agreement dated December 16, 1997 but made effective as of December 29, 1997, whereby on December 29, 1997, CACPI contributed the amount of P34,769,701.00 to CCAC; that as a result of these transactions, CII and CACPI continued to own 99% and 1% of the partnership interest in CCAC, respectively; that Concepcion Airconditioning is a wholly-owned subsidiary of CII, incorporated for the purpose of investing in the HVAC business pursuant to the above-mentioned corporate reorganization whereby, CII intends to realign and divisionalize its various businesses and other interests; that Concepcion Airconditioning Corporation has an authorized capital stock of P100,000,000.00 divided into 1,000,000 shares with a par value of P100.00 per share; that the subscribers to the capital stock and the amount paid in to the subscriptions are as follows: Name No. of Shares Amount paid-up Concepcion Industries, Inc. 249,995 P6,250,000.00 Raul Joseph Concepcion 1 100.00 Raul Stephen Concepcion 1 100.00 Raul Patrick Concepcion 1 100.00 Renna H. Angeles 1 100.00 Rafael Felipe C. Hechanova 1 100.00 Total 250,000 P6,250,000.00 ====== ========= that pursuant to the corporate reorganization and divisionalization of business interests, CII intends to transfer a 49% partnership interest in CCAC with a historical value of P462,296,119.00 to Concepcion Airconditioning Corporation in full payment of its 249,995 shares; that Concepcion Airconditioning Corporation will not issue additional shares, instead, Concepcion Airconditioning Corporation will book the excess of the historical cost of the partnership interest over the subscription payable of P18,750,000.00 as paid-in surplus; that as a result or the aforesaid transfer, CII shall further retain control of Concepcion Airconditioning Corporation; and that pursuant to CII's reorganization and the agreement of the partners, CII reduced, and CACPI increased, their respective partnership interests in CCAC, by CACPI purchasing certain partnership interests in CCAC from CII. In connection therewith, you now request confirmation of your opinion that "1. No gain or loss shall be recognized on the transfer by CII of its Assets to CCAC whereby CII will continue to own a 99% partnership interest in CCAC, pursuant to Section 34, paragraphs (c)(2) and (6)(c) of the Tax Code, as amended by Republic Act No. 4522 and P.D. Nos. 1705 and 1773, otherwise known as the National Internal Revenue Code of 1977. No gain or loss shall likewise be recognized on such transfer despite CCAC's assumption of the Assumed Liabilities, since the historical cost of the Assets transferred exceeds the amount of Assumed Liabilities (Section 40(c)(4) NIRC of 1997; "2. The transfer of the Assets by CII to CCAC will not be subject to the value-added tax (VAT) pursuant to Section 4.100-5(b)(1) of Revenue Regulations No. 7-95, as amended, the said transfer being considered a transaction "not subject to output tax" under said Section; "3. Effective January 1, 1998, Republic Act No. 8424 (otherwise known as the Tax Reform Act of 1997) shall govern the taxation of any of the above-described transactions which may take place after the said date. Accordingly, under Section 22(B) of the Tax Reform Act of 1997, CCAC is considered for income tax purposes as a corporation. Consequently, under Section 22(L) of the Tax Reform Act, the partnership interests in CCAC are considered "shares of stock", the same being "units of participation in a partnership . . . taxable as corporations"; "4. No gain or loss shall be recognized on the transfer by CII of its 49% partnership interests in CCAC to Concepcion Airconditioning Corporation pursuant to Section 40(C)(2) of the Tax Reform Act of 1997, since as a result thereof, CII shall gain further control of Concepcion Airconditioning Corporation. Furthermore, there is no effective transfer of beneficial ownership because Concepcion Airconditioning Corporation is a wholly-owned subsidiary of CII and no monetary consideration is involved. Concepcion Airconditioning Corporation will not be subject to income tax on the excess of the historical cost over the subscription payable which Concepcion Airconditioning Corporation will book as paid-in surplus (Section 55, Income Tax regulations). Furthermore, no donor's tax shall be due on such paid-in surplus; "5. The transfer of the 49% partnership interests in CCAC by CII to Concepcion Airconditioning Corporation will not be subject to VAT since CII is not a dealer in securities. On the other hand, the term securities includes shares of stock in a corporation which in turn includes units of participation in a partnership; "6. The Two Hundred Forty Nine Thousand Nine Hundred and Ninety Five (249,995) shares of stock issued by Concepcion Airconditioning Corporation will be subject to documentary stamp tax (DST) of P2 on each P200 or fractional part thereof of their par value pursuant to Section 175 of the tax Reform Act of 1997; "7. The transfer of the partnership interests in CCAC by CII to Concepcion Airconditioning Corporation will be subject to the DST imposed under Section 176 of the Tax Reform Act. For purposes of imposing the DST, such partnership interest shall be considered as a shared of stock without par value; "8. The net capital gains which CII may realize from the sale of partnership interests in CCAC to CACPI shall be subject to capital gains tax of 5% on the net capital gain not exceeding P100,000 and 10% on the net capital gain exceeding P100,000 imposed under Section 27(D)(2) of the Tax Reform Act of 1997. The net capital is the excess of the selling price of the partnership assets over their historical cost; "9. The notarial certification on the deeds of assignment of the Assets from CII to CCAC and thereafter, of the 49% partnership interest from CII to Concepcion Airconditioning Corporation will be subject to the DST of P15 each pursuant to Section 188 of the Tax Reform Act of 1997; "10. The DST imposed on the transactions described above shall be payable within ten (10) days after the close of the month in which the applicable taxable document was made, signed, issued, accepted or transferred pursuant to Section 200(B) of the Tax Reform Act of 1997; and "11. Apart from the foregoing, no other tax shall be due on the above described transactions." In reply, please be informed that your opinion is hereby confirmed, as follows: LLphil (1) Pursuant to the then Section 34(c)(2) and (6)(c) of the Tax Code, as amended by Republic Act No. 4522 and P.D. Nos. 1705 and 1773 [now Sec. 40(C)(2) and (6)(c) of the Tax Code of 1997], no gain or loss shall be recognized if property is transferred to a corporation by a person, in exchange for stock in a corporation of which as a result of such exchange, said person, alone or together with others, not exceeding four persons, gains control of said corporation. The term ''control'' shall mean ownership of stocks in a corporation possessing at least 51% of the total voting power of all classes of stocks entitled to vote. Although the above-cited provision, refers to the transfer of property to a corporation, nevertheless, not only a corporation but a partnership can be a transferee of property under said provision since the term "corporation" as defined in the then Section 20(b) of the Tax Code, as amended, includes inter alia partnerships, no matter how created or organized. Consequently, no gain or loss shall be recognized to partnership or to any of its partners in the case of a contribution of property to the partnership in exchange for an interest in the partnership. (See Helvering vs. Walbridge, 70F 2d 683 (2d. Cir. 1934) (BIR Ruling No. 105A-94 dated May 20, 1994). Moreover pursuant to Section 40(C)(4) of the Tax Code of 1997, no gain or loss shall likewise be recognized on such transfer despite CCAC's assumption of the Assumed Liabilities, since the historical cost of the Assets transferred exceeds the amount of Assumed Liabilities; (2) Pursuant to Section 4.100-5(b)(1) of Revenue Regulations No. 7-95, as amended, a change of control or a corporation by the acquisition of the controlling interest of such corporation by another stockholder or group of stockholders shall not be subject to output tax. Example: transfer of property to a corporation in exchange for its shares of stock under Section 34(c)(2) and (6)(c) of the Code. Consequently, the transfer of the Assets by CII to CCAC will not be subject to value-added tax; (3) Effective January 1, 1998, the above-described transactions shall be governed by the Tax Code of 1997. Since the term "corporation" includes partnership no matter how created or organized, CCAC shall be considered for income tax purposes as a corporation under Section 22(B) of the said Code. Moreover, its units of participation in a partnership are considered as shares of stock under Section 22(L) of the same Code; (4) Since Section 40(C) (2) and (6)(c) of the Tax Code of 1997 on the non-recognition of gains or loss applies to the aforementioned transfer and exchange, no gain or loss shall be recognized both to the transferor and the transferee corporation on the transfer by CII of its 49% partnership interests in CCAC to Concepcion Airconditioning Corporation, considering that as a consequence of the said transfer CII shall gain further control of Concepcion Airconditioning Corporation. Furthermore, considering that the transfer by CII of its 49% partnership interests in CCAC to Concepcion Airconditioning Corporation is without monetary consideration and there is no transfer of beneficial ownership, the same shall not be subject to income tax. (BIR Ruling No. 38-89 dated March 20, 1989) Moreover, Concepcion Airconditioning Corporation will not be subject to income tax on the excess of the historical cost over the subscription payable, which Concepcion Airconditioning Corporation will book as paid in surplus. (Sec. 55, Income Tax Regulations) It shall not be subject to donor's tax imposed under Section 98 of the Tax Code of 1997; (5) The transfer of the 49% partnership interests in CCAC by CII to Concepcion Airconditioning Corporation is not subject to value-added tax, since CII is not a dealer in securities as defined under Section 22(U) of the Tax Code of 1997. (See RMC No. 13-96); (6) The 249,995 shares of stock issued by Concepcion Airconditioning Corporation shall be subject to documentary stamp tax of P2.00 on each P200.00 or fractional part thereof of the par value of such shares of stock imposed under Section 175 of the Tax Code of 1997; (7) Under Section 176 of the Tax Code of 1997, in the case of stock without par value, the amount of the documentary stamp tax prescribed therein shall be equivalent to 25% of the documentary stamp tax paid upon the original issue of said stock pursuant to Section 175 of the same Code. However, since prior to January 1, 1998, the original issuance of an interest in partnership was not subject to documentary stamp tax under the then Section 175 of the Tax Code of 1977, the documentary stamp tax on the transfer of the partnership interests in CCAC by CII to CACPI and Concepcion Airconditioning Corporation, respectively, shall be subject to a documentary stamp tax equivalent to 25% of the documentary stamp tax that would have been paid upon the original issuance of the partnership interests by CCAC to CII had such original issuance been subject to the documentary stamp tax imposed under Section 175 of the Tax Code of 1997 on the original issuance of shares of stock without par value; (8) Pursuant to Section 27(D)(2) of the Tax Code of 1997, a final tax at the rates prescribed below shall be imposed on net capital gains realized during the taxable year from the sale, exchange or other disposition of shares of stock in a domestic corporation: Not Over P100,000 5% Amount in excess of P100,000 10% Accordingly, the net capital gain which is the excess of the selling price of the partnership interests over the historical cost, which CII may realize from the sale of partnership interests in CCAC to CACPI shall be subject to the capital gains tax imposed under Section 27(D)(2) of the Tax Code of 1997. (9) However, the notarial certification on the deeds of assignment of the Assets from CII to CCAC and thereafter, of the 49% partnership interest from CII to Concepcion Airconditioning Corporation shall be subject to the documentary stamp tax of P15.00 for every deed of assignment pursuant to Section 188 of the Tax Code of 1997; (10) The documentary stamp tax imposed on the above transactions shall be paid and the DST return shall be filed within ten (10) days following the month when the document or transaction was made, signed, issued, accepted or transferred pursuant to Section 200(B) of the Tax Code of 1997. (See RMC 1-98); (11) Furthermore, the above described transactions shall not be subject to any other tax imposed under the Tax Code of 1997. 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. casia Very truly yours, (SGD.) SIXTO ESQUIVIAS IV Deputy Commissioner (Legal & Enforcement Group)