BIR Ruling [DA-105-02]

June 6, 2002 BIR RULING [DA-105-02] RR 7-95 SGV & Co. 6760 Ayala Avenue Makati City Attention: Atty. E. C. Alcantara Tax Division Gentlemen : This refers to your letter dated May 14, 2002 requesting on behalf of your client, Philippine Sinter Corporation (PSC), for a confirmation that the transfer of its fixed assets in exchange for shares of stock of Island Mineral Processing Corporation (IMPC) under BIR Ruling No. S-40-234-2001 dated November 14, 2001 is not subject to the 10% value-added tax (VAT) pursuant to Section 4.100-5 of Revenue Regulations (RR) No. 7-95. The facts, as stated it the above-cited BIR ruling, are as follows: ". . . IMPC is a domestic corporation duly registered with the Securities and Exchange Commission (SEC) with an original authorized capital stock of One Million Pesos (P1,000,000.00) divided into One Hundred Thousand (100,000) shares with a par value of Ten Pesos (P10.00) per share; that the incorporators of the corporation, with their corresponding number of shares subscribed and paid-up, viz : Name No. of Amount Amount Shares Subscribed Paid Yasuhisa Nagata 5,000 P50,000.00 P50,000.00 Kaname Kanda 5,000 50,000.00 50,000.00 Marcial C. Aguirre 5,000 50,000.00 50,000.00 Onofre H. Molina 5,000 50,000.00 50,000.00 Augustus N. Adis 5,000 50,000.00 50,000.00 25,000 P250,000.00 P250,000.00 ======= ========= ========= that PSC is likewise a domestic corporation duly registered with the SEC; that it is the absolute owner of assets consisting mainly of the following: (a) machine and equipment; (b) buildings and structures; (c) port and marine infrastructure; (d) leasehold improvements; (e) furniture, fixtures and office equipment; and (f) transportation equipment (collectively, referred to as the `Assets'); that the historical cost of acquisition, as well as the book value of the aforestated assets (whose itemized listing are enumerated in Annexes `A' and `B') which will be transferred to IMPC are as follows: A. Movable Assets Subject to Investment in Kind Acquisition Cost Book Value (10E) Machine and Equipment P225,421,563 105,182,076 Furniture, Fixtures and Office Equipment 5,174,766 1,493,555 Transportation Equipment 10,649,914 4,822,623 Total P241,246,243 P111,498,254 B. Immovable Assets Subject to Investment in Kind Acquisition Cost Book Value (10E) Machine and Equipment P118,508,610 58,941,573 Buildings and Structures 56,467,499 41,487,679 Port and Marine Infrastructure 24,862,391 9,554,418 Leasehold Improvements 41,326,232 22,314,506 Total P241,164,732 P132,298,176 C. Investment in kind (Total) Subject to Investment in Kind Acquisition Cost Book Value (10E) Machine and Equipment P343,930,173 P164,123,649 Buildings and Structures 56,467,499 41,487,679 Port and Marine Infrastructure 24,862,391 9,554,418 Leasehold Improvements 41,326,232 22,314,506 Furniture, Fixtures and Office Equipment 5,174,766 1,493,555 Transportation Equipment 10,649,914 4,822,623 Grand Total P482,410,975 P243,796,430 that IMPC had increased its authorized capital stock from One Million Pesos (P1,000,000.00) to Three Hundred Million Pesos (P300,000,000.00) divided into Thirty Million (30,000,000) shares with a par value of P10.00 per share or an increase of Two Hundred Ninety Nine Million Pesos (P299,000,000.00); that on November 1, 2000, a Deed of Assignment was executed by PSC whereby it transferred and conveyed in favor of IMPC the above-mentioned assets as full payment on its subscription of Twenty Four Million Three Hundred Seventy Nine Thousand Six Hundred Forty Three (24,379,643) shares of the increase in authorized capital stock of IMPC valued at Two Hundred Forty Three Million Seven Hundred Ninety Six Thousand Four Hundred Thirty Pesos (P243,796,430.00); that as a result of the above transaction, PSC gained control of IMPC by owning 99.8975% of the total voting stocks of the said corporation as follows: Name No. of Amount Amount Percentage Shares Subscribed Paid Ownership Yasuhisa Nagata 5,000 P50,000.00 P50,000.00 .0205 Kaname Kanda 5,000 50,000.00 50,000.00 .0205 Marcial C. Aguirre 5,000 50,000.00 50,000.00 .0205 Onofre H. Molina 5,000 50,000.00 50,000.00 .0205 Augustus N. Adis 5,000 50,000.00 50,000.00 .0205 Philippine Sinter Corporation 24,379,643 243,796,430.00 243,796,430.00 99.8975 Total 24,404,643 P244,046,430.00 P244,046,430.00 100% =========== =========== =========== ======= xxx xxx xxx In reply thereto, please be informed that pursuant to Section 40, paragraphs (C)(2) and (6)(c) of the Tax Code of 1997, no gain or loss shall be recognized if properties are transferred to a corporation by a person, in exchange for stock in such a corporation of which 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. Control is determined by the amount of stocks received i.e., total subscribed, whether for properties or for services by the transferors or transferor. In determining the 51% stock ownership, only those persons who transferred properties for stocks in the same transaction may be counted up to a maximum of five. Accordingly, no gain or loss shall be recognized both to the transferor and the transferee corporation on the transfer by PSC of its properties in exchange for shares of stock of the transferee corporation, IMPC, considering that as a consequence of the exchange, the transferor gained control of the transferee corporation by owning a total of 99.8975% of its total voting stocks." It is further represented that PSC subsequently disposed of the 24,404,643 shares in IMPC in favor of Philippine Mining Service Corporation (PMSC); that the Chief of the Large Taxpayers Audit and Investigation Division (LTAID) I has refused to issue a Certificate Authorizing Registration (CAR) on the subsequent transfer on the ground that the preceding transfer by PSC of its fixed assets in exchange for the IMPC shares of stock is a deemed-sale transaction subject to 10% VAT as the transfer is in the nature of a transfer, use or consumption not in the course of business of goods or properties originally intended for sale or for use in the course of business. In reply, please be informed that a transfer of property in exchange for shares of stock pursuant to Section 40(C)(2) and (6)(c) of the Tax Code of 1997 is not subject to the 10% VAT under Section 4.100-5 of RR 7-95, which is quoted as follows: "(b) Not subject to output tax. The VAT shall not apply to goods or properties existing as of the occurrence of the following: 1) Change of control of a corporation by the acquisition of the controlling interest of such corporation by another stockholder or group of stockholders, 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." Since the transfer by PSC of its fixed assets in exchange for IMPC shares of stock qualifies as a tax-free transfer of property for shares under what is now Section 40(C)(2) and (6)(c) of the 1997 Tax Code, such transfer is deemed not subject to the 10% VAT. 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Acting Assistant Commissioner Legal Service