BIR Ruling [DA-077-06]

March 6, 2006 BIR RULING [DA-077-06] Secs. 98 & 99 (B) of the Tax Code DA-419-2004 Aranas Consunji & Barleta Law Office Unit 106 G/F Le Metropole Tordesillas Cor. Dela Costa Salcedo Village, Makati City Attention: Atty . Jesus Clint O . Aranas Partner Gentlemen : This refers to your request for confirmation of your opinion that the condonation made by Taisei Oncho Co., Ltd. [ hereinafter referred to as "TOC" for brevity ] in favor of Oncho Philippines Inc. ( hereinafter referred to as "OPI" ) is not subject to donor's tax. It is represented that TOC is a corporation duly organized and existing under the laws of Japan with principal office address at 1-47-1 Oi, Shinagawa-ku, Tokyo, Japan; that OPI, on the other hand, is a corporation incorporated and existing under the laws of the Philippines, with SEC Reg. No. ASO95-006110 and with principal office address at the 7th Floor, Rufino Building, 6784 Ayala Avenue, Makati City 1226 Philippines; that Both TOC and OPI are similarly engaged in the business of designing and manufacturing air conditioning systems for commercial and industrial facilities, and have a long-standing mutual support for each other's projects in Japan and the Philippines; that throughout the course of its business in the Philippines, TOC has extended advances to OPI to assist the latter in its business operations; that as a result thereof, OPI had advances and interests payable to TOC, which, as of December 29, 2004, consisted of the following: 1. Payable to TOC in the amount of Three Hundred Forty Two Thousand Six Hundred Dollars, United States Currency (US$ 342,600.00), which is the outstanding amount from the advances extended. by TOC to OPI on March 31, 1996, and interest payable thereon in the amount of Two Million Eight Hundred Thirty Eight Thousand One Hundred Eighty Pesos and Seventy Four Centavos, Philippine Currency (Php 2,838,180.74); EDIHSC 2. Payable to TOC in the amount of One Hundred Fifty Thousand Dollars, United States Currency (US$ 150,000.00), which is the outstanding amount from the advances extended by TOC to OPI on April 9, 2002, and interest payable thereon in the amount of Six Hundred Thirty Four Thousand Five Hundred Sixty Nine Pesos, Philippine Currency (Php 634,569.00). That as of December 29, 2004, the foregoing advances by OPI from TOC were booked at current exchange rate, pursuant to generally accepted accounting principles in the respective amounts of Nineteen Million Three Hundred Two Thousand Four Hundred Twenty Six Pesos and Sixty Centavos, Philippines Currency (Php 19,302,426.60) and Eight Million Four Hundred Fifty One Thousand One Hundred Fifty Pesos, Philippine Currency (Php 8,451,150.00); that the Taisei Oncho Group of companies is presently initiating to internally restructure its group to provide for a better financial position to attract potential investors that it will be negotiating with; that pursuant to this restructuring effort, and premised on the business relations fostered between TOC and OPI, since the latter has been assisting the former in some of its projects as well as to comply with the regulatory requirements of the Philippine Contractors Accreditation Board [PCAB] in light of the continuing capital deficiency and financial difficulty of OPI, TOC and OPI entered into a condonation agreement for the remission of the above-mentioned payables of OPI to TOC; that the said remission was covered by a Deed of Condonation executed on December 29, 2004, whereby for and in consideration of the foregoing premises and business purposes, TOC and OPI agreed to the remission of the above-enumerated payables of OPI to TOC, representing the outstanding advances extended by TOC to OPI on March 31, 1996 and April 9, 2002 and the interest payable thereon as of December 29, 2004. It is finally represented that the resulting condonation income was duly reported as non-operating income of OPI in its 2004 income tax return. In reply, please be informed that in BIR Ruling No. DA-419-04 dated August 4, 2004, the BIR held as follows: "Thus, the condonation of the CPI's debt to SJ shall not be subject to income tax considering that CPI is in a capital deficiency position and will remain insolvent before and after the said condonation considering that the amount to be condoned would only be P84,198,555.20. Moreover, the condonation is likewise not subject to gift tax since there is no donative intent on the part of SJ but solely for business consideration." Thus, we hereby confirm your opinion that the condonation made by Taisei Oncho Co., Ltd. in favor of Oncho Philippines Inc. is not subject to donor's 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 void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service