BIR Ruling [DA-113-05]

April 5, 2005 BIR RULING [DA-113-05] 32 (B) (6) (a); 049-97 Baniqued & Baniqued Suite 803, 8/F Jollibee Centre San Miguel Avenue, Ortigas Center Pasig City Attention: Attys. Carlos G. Baniqued and Terence Conrad H. Bello Gentlemen : This refers to your letter dated February 22, 2005 stating that your client, Jardine Davies, Inc. (JDI) is a corporation organized and existing under the laws of the Philippines with principal place of business at Jardine Davies Building, 222 Sen. Gil J. Puyat Avenue, Makati City; that it is engaged in the business of wholesale distribution of agri-chemical products and construction supplies in the Philippines; that Jardine Distribution and Jardine Davies Investments, Inc. (JDII) are also corporations organized and existing under the laws of the Philippines, and are wholly-owned subsidiaries of JDI; that Jardine Distribution and JDII both hold office at Jardine Davies Building, 222 Sen. Gil J. Puyat Avenue, Makati City; that as disclosed by JDI to the public through the Securities and Exchange Commission (SEC) and the Philippine Stock Exchange (PSE), the Board of Directors of JDI approved JDI's plan of internal reorganization; that pursuant to the plan of reorganization, JDI, Jardine Distribution, and JDII commenced undertaking the following steps: 1. JDI transferred its agri-chemical and construction supplies distribution business (Distribution Business) to Jardine Distribution in exchange for stock of Jardine Distribution; 2. JDI also transferred its shareholdings in two domestic corporations (Jardine Pacific Finance, Inc. and Pasig Land Corporation) (or the Head Office Holdings), as well as certain miscellaneous corporate assets, in favor of JDII in exchange for stock of JDII; 3. Following the above transfers, Jardine Distribution and JDII will absorb JDI employees assigned to the latter's Distribution Business (Distribution Business Employees) and Head Office Holdings (Head Office Holdings Employees), respectively, as if no change was effected; 4. Distribution Business Employees and Head Office Holdings Employees will remain the same and will continue to receive the same benefits under Jardine Distribution and JDII as in JDI. Among the benefits said employees will continue to receive are those they expect to receive under the Jardine Davies, Inc. Multi-Employer Employees' Retirement Plan (JDI-MEERP) as if there was no interruption of their employment and no loss of tenure or credited years of service. Thus, Distribution Business Employees and Head Office Holdings Employees will continue to be covered in the event of retirement, disability, separation from service, or death; ASaTCE 5. In order to fully segregate the Distribution Business and the Head Office Holdings, JDI will amend the JDI-MEERP to include Jardine Distribution and JDII as participating employers. In this regard, the portion of JDI's retirement fund relating to, and equivalent to the accrued benefits of, the Distribution Business Employees (Jardine Distribution Retirement Fund) will be transferred to Jardine Distribution, while the remaining portion of JDI's retirement fund relating to Head Office Holdings Employees (JDII Retirement Fund) will be transferred to JDII; 6. Thereafter, Jardine Distribution, as successor employer, will take over the Jardine Distribution Retirement Fund, consisting of bank deposits, JDI-MEERP's investment in a parcel of land located at Paraaque City (covered by Transfer Certificate of Title No. 161632)(the Analog Site), as well as certain fund investments made by the JDI-MEERP Trustee (which is Union Bank of the Philippines); 7. Similarly, JDII, as successor employers, will take over the JDII Retirement Fund, consisting of bank deposits, JDI-MEERP's investment in a parcel of land located at Paraaque City (covered by Transfer Certificate of Title Nos. 161630, 161631, 114336, 1144337, 114338, 114339, 114340, and 114341)(the Paraaque Lot), as well as other fund investments made by the JDI-MEERP Trustee; 8. After the Head Office Holdings Employees and their actuarial accrued benefits are transferred to the new JDII Retirement Plan, the Plan Trustee will sell the Paraaque Lot. Based on the foregoing, you now request confirmation of your opinion that "1. Not being prejudicial to JDI Retirement Plan employee-members, Jardine Distribution and JDII can succeed as employers of Jardine Distribution Retirement Fund and JDII Retirement Fund, respectively; "2. The Jardine Distribution Retirement Fund and JDII Retirement Fund, when taken over by Jardine Distribution and JDII as successor employers, will maintain their tax-exempt status; and thus, the future sale or transfer by the new JDII Retirement Plan Trustee of the Paraaque Lot is exempt from tax; "3. The transfer of actuarial accrued benefits of former JDI employees to the new Jardine Distribution and JDII Retirement Plan is exempt from tax; "4. The excess funds of the new JDII Retirement Plan, including the proceeds from future sale or transfer of the Paraaque Lot, after transfer of the actuarial accrued benefits of the Head Office Holdings Employees to the new JDII Retirement Plan, and after payment of any Plan liabilities, if any, will revert to JDII as successor employer and taxable to JDII and not to JDI; "5. The transfer of title over the Analog Site and the Paraaque Lot from JDI Retirement Plan to the new Jardine Distribution Retirement Plan and the new JDII Retirement Plan, respectively, are conveyances not in connection with a sale and are without monetary consideration; hence, said transfers of title are not subject to documentary stamp tax under Section 196 of the National Internal Revenue Code; In reply thereto, please be informed that this Office has already occasioned to rule on the matter where it said in BIR Ruling No. 049-97 dated April 14, 1997 that ". . . since the foregoing reorganization and consequent succession by SBRL as the employer of what used to be the SPII Retirement Plan are not prejudicial to the employee-members of the existing SBRL Retirement Plan and to the absorbed employee-members of what used to be the SPII Retirement Plan, they will not affect SBRL Retirement Plan's qualification under R.A. No. 491 [now Section 28(b)(7)(A) of the Tax Code as amplified by Revenue Regulations No. 1-82] and therefore, the fund created to implement the provisions of the plan and the retirement pay to qualified retirees remain exempt pursuant to said law as decided in BIR Ruling No. DA201-96 dated June 18, 1996." Considering that the above-cited ruling is similar in all fours to the instant case, this Office holds that 1. Since the aforesaid reorganization is not prejudicial to JDI Retirement Plan employee-members, Jardine Distribution and JDII can succeed as "employers" of Jardine Distribution Retirement Fund and JDII Retirement Fund, respectively; 2. The Jardine Distribution Retirement Fund and JDII Retirement Fund, when taken over by Jardine Distribution and JDII as successor employers, will maintain their tax-exempt status; and thus, the future sale or transfer by the new JDII Retirement Plan Trustee of the Paraaque Lot is exempt from tax; ACTaDH 3. The transfer of actuarial accrued benefits of former JDI employees to the new Jardine Distribution and JDII Retirement Plans is exempt from tax; 4. The excess funds of the new JDII Retirement Plan, including the proceeds from the future sale or transfer of the Paraaque Lot, after transfer of the actuarial accrued benefits of the Head Office Holdings Employees to the new JDII Retirement Plan, and after payment of any Plan liabilities, if any, will revert to JDII as successor employer and taxable to JDII and not to JDI; and 5. Finally, Section 185 of Revenue Regulations No. 26, otherwise known as the Documentary Stamp Tax Regulations, provides that conveyances of realty, not in connection with a sale, to trustees or other persons without consideration are not taxable. Since the transfer of the titles over the Analog Site and the Paraaque Lot from JDI Retirement Plan to the new Jardine Distribution Retirement Plan and the new JDII Retirement Plan, respectively, is a conveyance not in connection with a sale and are without monetary consideration, said transfer of titles is not subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997. 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, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group