BIR Ruling [DA-134-99]

March 5, 1999 BIR RULING [DA-134-99] Satelec-Pierre Rolland Philippines Corporation 3F King's Court II Bldg. cor. Pasong Tamo & Dela Rosa Sts. Legaspi Village Makati City Attention: Mr . Juanito Guzman Chief Accountant and Ms. Emelie Chio-Gonzales Assistant-Vice President Gentlemen : This refers to your letter dated December 22, 1997 stating that Satelec-Pierre Rolland Philippines Corporation (Satelec) is a domestic corporation duly registered with the Securities and Exchange Commission (SEC); that it is engaged primarily in the business of operating, conducting and maintaining the business of manufacturing, importing, exporting, buying, selling or otherwise dealing in, at wholesale and retail such goods as dental equipment and supplies, any goods relating to dental care, health care products and others; that as shown in its unaudited financial statements for the years 1996 and 1997, it has suffered net operating losses in the amount of P884,333.00 and P695,311.00, respectively; that it is very much affected due to the devaluation of peso; and that much to its desire to save its operation and employees status, its mother company in Bordeaux, France agreed to convert the accounts payable of Satelec in the amount of P6,374,796.18 paid-in capital to restructure its capital stock and help wipe out the capital deficit of the latter without issuing additional shares, as follows: Invoices' Original Rate Rate End of Exchange Amount in FF Number December Losses 99798 647,359.81 849,653.60 -202,293.79. 122,960.00 Partial Payment -356,917.75 -468,451.15 111,533.40 -67,793.22 99980 10,114.00 13,439.95 -3,325.95 1,945.00 99985 16,463.20 21,877.06 -5,413.86 3,166.00 99993 383,092.50 504,222.70 -121,130.20 72,970.00 99995 3,312,40 4,401.67 -1,089.27 637.00 99997 5,912.40 7,856.67 -1,944.27 1,137.00 100017 2,572.50 3,385.90 -813.40 490.00 100137 8,440.50 11,436.05 -2,995.55 1,655.00 100219 630,972.00 854,905.20 -223,933.20 123,720.00 100204 21,825.00 31,419.77 -9,594.77 4,547.00 100234 29,616.00 42,634.70 -13,018.70 6,170.00 100241 336.00 483.70 -147.70 70.00 100270 19,200.00 27,640.00 -8,440.00 4,000.00 100379 24,960.00 35,932.00 -10,972.00 5,200.00 100395 133,443.36 192,102.84 -58,659.48 27,800.70 100403 759,284.60 1,093,023.80 -333,739.20 158,180.00 100719 2,243,488.50 3,131,819.30 -888,330.80 453,230.00 100404 11,817.60 17,012.42 -5,194.82 2,462.00 4,595,292.62 6,374,796.18 1,779,503.56 922,546.48 -257,525.84 and that your books will show the corresponding decrease of the deficit and an increase in the capital contribution without increasing the number of shares issued. Based on the foregoing, you are requesting for a ruling as to whether or not the conversion of accounts payable of Satelec-Pierre Rolland Philippines Corporation to its mother company in Bordeaux, France to paid-in capital is considered additional capital contribution of its mother company without the necessity of issuing additional shares of stock and which will merely increase the bases of the principal stockholder's stocks, but not their proportional equity in the corporation and therefore not subject to donor's tax as well as income tax. In reply, please be informed that since the amount of P6,374,796.18 converted into paid-in capital represents additional contribution by the mother company in Bordeaux, France, it is a capital investment which is not included within the purview of the term "taxable income" as defined in Section 31, in relation to Section 32, both of the Tax Code of 1997. Hence, the mother company's contribution consisting of the amount of P6,374,796.18 is not subject to income tax as well as to the donor's tax. (BIR Ruling No. 270-87 dated September 8, 1987) 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.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal & Enforcement Group)