BIR Ruling [DA-043-98]

February 6, 1998 BIR RULING [DA-043-98] Sycip Gorres Velayo & Co. 6760 Ayala Avenue Makati City Attention: Atty. C. P. Noel Gentlemen : This refers to your letter dated March 18, 1997 requesting in effect for a supplemental ruling on the transfer of properties by Carlos A. Gothong Lines, Inc. ("Gothong Lines") with principal office address at Quezon Blvd., Reclamation Area, Cebu City, and Aboitiz Transport System, Inc. ("Aboitiz" formerly known as Aboitiz Shipping Corporation) with principal office address at No. 110 Legaspi Village, Makati City, solely in exchange for the shares of stocks of William Gothong and Aboitiz, Inc. ("WG&A") with office address at Sergio Osmea, North Reclamation Area, Cebu City, pursuant to a merger under Section 40 (C) (2) & (6) (b) of the Tax Code of 1997. It is represented that Gothong Lines, Aboitiz and WG&A are corporations duly organized and existing under and by virtue of the laws of the Republic of the Philippines and are all duly authorized to engage in the shipping business; that the said three (3) companies have entered into a de facto merger whereby Gothong Lines and Aboitiz, will transfer substantially all their assets consisting of receivables, inventories, vessels, and real properties as well as liabilities solely in exchange for the shares of stock of WG&A; that pursuant to their plan of a de facto merger, Gothong Lines and Aboitiz have entered into a Subscription Agreement with WG&A whereby Gothong Lines and Aboitiz will subscribe to Two Hundred Eighty Four Million Three Hundred Fifty Three Thousand Seven Hundred Forty One (284,353,741) shares and Four Hundred Twenty Six Million Five Hundred Thirty Thousand Six Hundred Twelve (426,530,612) shares in WG&A, respectively; that as full payment of their subscription in the aggregate amount of Seven Hundred Ten Million Eighty Hundred Eighty Four Thousand Three Hundred Fifty Three Pesos (P710,884,353.00), Gothong Lines and Aboitiz will assign, transfer and convey the following: Aboitiz Gothong Lines Total Assets to be Transferred P3,016,736,698.35 P630,668,281.73 P3,647,404,980.08 Liabilities to be Transferred 344,029,386.00 405,000,000.00 749,029,386.00 Net Assets to be Transferred P2,672,707,312.35 P225,668,281.73 P2,898,375,594.08 ============== ============= ============== that the assets to be transferred by Aboitiz and Gothong Lines pursuant to the de facto merger and in exchange for their subscription of WG&A shares of stocks, represents more than 80% of their respective total assets; that on February 27, 1997, the Bureau of Internal Revenue issued BIR Ruling No. 019-97 and characterized the reorganization of the shipping companies as a "tax-free exchange" merger pursuant to then Section 34 (c) (2) and (6) (b) of the Tax Code, as amended; that BIR Ruling No. 19-97, however, was not able to address the second issue raised in your letter request dated June 21, 1996 that no gain or loss is recognized by the shareholders of Gothong Lines and Aboitiz when the companies distribute WG&A shares to its shareholders in complete redemption of the stocks. In reply, please be informed that the above described reorganization is a merger within the contemplation of Section 40 (C) (2) and (6) (b) of the Tax Code of 1997, because WG&A acquired substantially all (at least 80%) the assets and assumed the liabilities of Aboitiz and Gothong Lines, solely for WG&A shares of stocks as confirmed by BIR Ruling No. 019-97 dated February 1997. Consequently, your opinion that no gain or loss shall be recognized upon the distribution of the WG&A shares of stocks to the stockholders of Aboitiz and Gothong Lines, in exchange and in complete redemption of the respective Aboitiz and Gothong Lines shares of stocks held by the said stockholders, is hereby confirmed. 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, and/or any of the requirements imposed in BIR Ruling No. 019-97 dated February 27, 1997 are not complied with, then this ruling shall be considered null and void. (BIR Ruling No. 377-92 dated December 28, 1992; BIR Ruling No. 472-93 dated December 3, 1993.) Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal and Enforcement Group)