BIR Ruling [DA-076-05]

March 10, 2005 BIR RULING [DA-076-05] 40 (A); RMC 74-99 DA-023-2003 SGV & Co. 6760 Ayala Avenue 1226 Makati City Attention: Atty. E. C. Alcantara Tax Services Gentlemen : This refers to your letter dated December 21, 2004 requesting on behalf of your client, Panasonic Communications Imaging Corporation of the Philippines (PCIP),for a ruling on the tax consequences of the proposed transfer of its selected assets and liabilities to Panasonic Communications Corporation of the Philippines (PCP) in pursuance of its corporate reorganization. The facts as you represented are as follows: PCIP is a corporation duly organized and existing under and by virtue of Philippine laws. It is engaged in the business of manufacturing and export of all equipment, apparatus, appliances, instruments and devices concerned with information handling, such as but not limited to copiers, scanners, and printers and other goods of similar nature. PCIP is a wholly-owned subsidiary of Panasonic Holding (Netherlands) B.V. (PHN),a corporation duly organized and existing under and by virtue of the laws of Netherlands. PHN, on the other hand, is wholly-owned by Matsushita Electric Industrial Co.,Ltd.,(MET) a corporation organized and existing under the laws of Japan. PCIP is registered with the Philippine Economic Zone Authority (PEZA) as manufacturer and exporter of the following products and enjoys the incentives indicated opposite each of the products described below: Product Code Description Incentive LC2 Analog Copiers 5% Gross Income Tax LCN, LSU Analog Copiers Income Tax Holiday Laser-scanning units Income Tax Holiday L4, L5, L7, LL Digital fax machines Income Tax Holiday Multi-function products Income Tax Holiday L2 Multi-function products Income Tax Holiday As part of the restructuring of MEI's Philippine operation aimed at eliminating inefficiencies of the current Philippine structure, PCIP proposes to sell, at book value, the following assets and liabilities to PCP, also a corporation duly organized and existing under and by virtue of Philippine laws: Assets Liabilities Inventories Estimated liabilities for warranty, Rental Deposits customers' claims and other provisions Deferred Tax Asset Property and Equipment PCP is also registered with PEZA as manufacturer and exporter of CD-R/RW and slim DVD Combination Drives. It is proposed that the transfer by PCIP to PCP of its selected assets and liabilities, as well as the PEZA incentives applicable to the above products will take effect on April 1, 2005. PCIP will thereafter cease business operations and will be subsequently dissolved. HacADE Based on the foregoing, you now request for confirmation of your opinions that: 1. The transfer by PCIP to PCP of its selected assets and liabilities at their book values pursuant to MEI's Philippine restructuring plan will not result to any income tax consequence; 2. The transfer by PCIP, a PEZA-registered enterprise, to PCP, also a PEZA-registered enterprise, of its selected assets and liabilities are exempt from the 10% value-added tax (VAT); 3. The transfer by PCIP to PCP of its machinery and equipment placed on leased real properties, including other personal properties, shall not be subject to documentary stamp tax (DST). In reply, please be informed that: 1. Under Section 40(A) of the Tax Code of 1997, any gain or loss for income tax purposes shall be determined as follows: "(A) Computation of Gain or Loss . The gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the basis or adjusted basis for determining gain, and the loss shall be the excess of the basis or adjusted basis for determining loss over the amount realized. The amount realized from the sale or other disposition of property shall be the sum of money received plus the fair market value of the property (other than money) received;" Thus, if the transfer of assets is made at book value, no taxable gain will be realized. Consequently, the transfer by PCIP of its selected assets and liabilities at their book value, assuming the same to be at arms' length, shall not result in a taxable gain or loss on the part of PCIP. 2. Pursuant to Section 5(3) of Revenue Memorandum Circular No. 74-99 dated October 15, 1999, which provides, viz : "(3) Sale Of Goods, By A PEZA Registered Enterprise, To Another PEZA Registered Enterprise ( i.e., Intra ECOZONE Sales Of Goods) . Its sale of goods or property to another zone enterprise shall be exempt from VAT, pursuant to Sec. 109(q), NIRC, in relation to Sec. 24, R.A. 7916, as implemented by Sec. 1, Rule VIII, PART V, of the PEZA implementing rules and regulations." Likewise, in BIR Ruling No. DA-023-2003 dated January 28, 2003, this Office has clarified that the sale by and between two (2) PEZA-registered enterprises of its properties and assets is not subject to the 10% VAT, pertinent portion of the aforesaid Ruling states that: "In interpreting and applying the above-cited section of the Tax Code and in relation to Section 24 of R.A. No. 7916, as amended by R.A. No. 8748, this Office in Revenue Memorandum Circular No. 74-99 declared that sale of goods or property by a PEZA-registered enterprise to another PEZA-registered enterprise shall be exempt from value-added tax. Considering that Seagate is a PEZA registered enterprise, the sale of its properties, consisting of the building and equipment, within the ECOZONE whether to foreign or local buyers shall be exempt from value-added tax pursuant to Section 109(q) of the Tax Code of 1997. (BIR Ruling No. DA-090-01 dated May 16, 2001)." Applying the foregoing, it can be said that the sale by PCIP, a PEZA-registered enterprise to PCP, another PEZA-registered enterprise of its selected assets and liabilities is deemed exempt from the 10% VAT. SEHaDI 3. The machinery and equipment placed and/or installed by PCIP on its leased parcels of land and buildings are considered personal properties. Inasmuch as only the consideration attributed to the sale of real properties are subject to documentary stamp tax under Sec. 196 of the 1997 Tax Code, the transfer by PCIP to PCP of its machinery and equipment on its leased real properties shall not be subject to documentary stamp tax. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group