BIR Ruling [DA-042-03]

February 18, 2003 BIR RULING [DA-042-03] 28 (B) (5) (c); 176; 171-92; DA 008-01 January 30, 2001 Punongbayan & Araullo Ernst & Young International 20th Floor; Tower I The Enterprise Center 6766 Ayala Avenue Makati City Attention: Atty. Romeo H. Duran Tax Director Gentlemen : This refers to your letter dated June 20, 2002 stating that your client, Sunward Technologies International Ltd. (Sunward-HK), is a non-resident foreign corporation organized and existing under the laws of the Hong Kong Special Administration Region of the People's Republic of China; that Read Rite Philippines, Inc. (ReadRite-Phils), is a domestic corporation with address at Lot 8, Phase 2B, Carmelray Industrial Park, Canlubang, Calamba, Laguna; that on the other hand, Read Rite International (ReadRite-US), is a corporation organized and existing under the laws of Delaware, USA; that on September 25, 2001, Sunward-US merged with and into Read-Rite-US, consequently, Sunward-US shares of stocks in Sunward-HK totaling 7,219,999 shares at HK$1, representing 99.99% ownership of the total 7,220,000 shares were transferred to the surviving corporation, ReadRite-US; that Sunward-HK, in turn, owns 99.99% of the shares of stock or 499,979 shares of Read-Rite-Phils out of the total P500,000 shares; that pursuant to a global corporate restructuring, Sunward-HK was dissolved on March 1, 2002 and as a consequence of which, 500,000 shares of stock in ReadRite-Phils in the name of Sunward-HK was distributed to its principal stockholder, ReadRite-US, in the form of liquidating dividends. In connection therewith, you now request confirmation of your opinion that "1. The transfer of ReadRite-Phils shares from Sunward-HK to ReadRite-US as a consequence of the dissolution of Sunward-HK is not subject to the capital gains tax imposed under Section 28(B)(5)(c) of the Tax Code of 1997; "2. The transfer of ReadRite-Phils shares from Sunward-HK to ReadRite-US is subject to the documentary stamp tax at the rate of P1.50 per P200.00 or a fractional part thereof of the par value of the shares transferred in accordance with Section 176 of the Tax Code of 1997." In reply thereto, please be informed that your opinion is hereby confirmed as follows: EaCSTc 1. The transfer of the ReadRite-Phils shares of stock in the name of Sunward-HK to its principal stockholder, ReadRite-US pursuant to a global corporate restructuring is not subject to the capital gains tax imposed under Section 28(B)(5)(c) of the Tax Code of 1997 inasmuch as the distribution of the assets of Sunward-HK to its parent corporation as a result of a liquidation arising from a corporate restructuring is merely a re-alignment of stock holdings, hence no gain is realized from such transaction. Under Section 42(E), in relation to Section 23(F), of the Tax Code of 1997, only the gains from the sale of shares of stock in a domestic corporation, in this case ReadRite Phil. shares of stock, shall be treated as derived entirely from sources within the Philippines regardless of where the said shares are sold. The word "sale" includes in its meaning an "exchange." In this case, no sale or exchange is taking place or has taken place; the shares of stock in the name of Sunward-HK, a non-resident corporation, is being transferred to ReadRite-US in order to give effect and substance to the merger of Sunward-US, the parent corporation of Sunward-HK, into ReadRite-US. The transfer by the liquidating corporation, that is, Sunward-HK, of its remaining assets, which includes the ReadRite Phil. shares of stock, to its stockholders, that is, ReadRite-US, is not considered a sale of these assets. ( BIR Ruling No. 171-92 dated May 28, 1992 ) Such being the case, the transfer of the shares in ReadRite-Phils from Sunward-HK to ReadRite-US as a consequence of the dissolution of Sunward-HK is not subject to the 5%/10% capital gains tax imposed under Section 28(B)(5)(c) of the Tax Code of 1997. ( BIR Ruling No. DA-008-2001 dated January 30, 2001 ) 2. However, the transfer of the ReadRite-Phils shares of stock from Sunward-HK to ReadRite-US is subject to the documentary stamp tax imposed under Section 176 of the Tax Code; of 1997 at the rate of P1.50 for every P200.00 or fractional part thereof, of the par value of the shares transferred. HEDaTA This ruling is being issued on the basis on 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.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group