BIR Ruling [DA-141-A-97]

April 1, 1997 BIR RULING [DA-141-A-97] SGV & Co. 6760 Ayala Avenue, Makati City Attention: Atty . C . P . Noel Gentlemen : This refers to your letter dated November 4, 1996 stating that your client, Bank of America NT & SA (BA NT & SA) is restructuring its merchant card business; that BA International Finance Corporation (BIFC) is a wholly owned subsidiary of BA NT & SA, while BA Card on the other hand is a wholly owned local subsidiary of BIFC; and that the corporate restructuring of the merchant card business entails the following: "(a) BIFC shall transfer its shares of stock in BA Card to BA NT & SA by way of property dividends; cdpr "(b) BA NT & SA shall in turn transfer its newly acquired shares of stock in BA Card to BA Merchant Services, Inc. (BAMSI), a US Corporation, in exchange for the latter's shares of stock, without cash payments for the same; (c) BAMSI shall then establish a Philippine branch, to operate its merchant card business locally; and "(d) The Philippine subsidiary, BA Card, will subsequently be merged into BAMSI, the US parent. In connection therewith, you now request confirmation of your opinion to the effect that "1. The transfer of BIFC of its shares of stock in BA Card is exempt from Philippine capital gains tax since there was no effective transfer of beneficial ownership of BA Card shares by BA NT & SA to BAMSI and thus, no sale took place in the transfer of BA Card shares by BA NT & SA (as foreign parent) to BAMSI (another foreign subsidiary); "2. The dividend declaration of BIFC to BA NT & SA is not Philippine source income subject to tax; and "3. The merger of BA Card, the Philippine subsidiary into BAMSI, the US parent corporation, as part of the corporate restructuring or reorganization, qualifies as a tax-free transfer for Philippine income tax purposes, under Section 34 (c) of the NIRC. In reply, please be informed that your opinions are hereby confirmed that 1. Since no sale took place in the transfer of the BA Card shares by BIFC, which is a wholly owned subsidiary of BA NT & SA (as foreign parent) to BAMSI (another foreign subsidiary) the same being an integral part of an ongoing reorganization of the BA NT & SA to which BIFC and BA Card belong, such that BIFC will be wholly owned by BAMSI, which in turn will be wholly owned by BA NT & SA, consequently no gain will be realized by BA NT & SA for income tax purposes. (BIR Ruling Nos. 347-87 dated November 5, 1987; 264-88 dated June 27, 1988; 385-93 dated September 30, 1993). 2. Pursuant to Section 36 (a) (2) (B) of the Tax Code, as amended, property dividends consisting of shares in a domestic corporation received from a foreign corporation shall be treated as income from sources within the Philippines unless less than fifty per centum (50%) of the gross income of such foreign corporation for the three year period ending with the close of its taxable year preceding the declaration of such dividends (or for such part of such period as the corporation has been in existence) was derived from sources within the Philippines. prcd Considering that during the three year period, from 1993 to 1995 preceding the declaration of the property dividend by BIFC to BA NT & SA not more than 50% of the gross income of BIFC was derived from Philippine sources as certified by Ernst & Young International Ltd., the property dividend declared by BIFC to BA NT & SA cannot be considered as income derived from sources within the Philippines subject to Philippine tax. (BIR Ruling Nos. 252-91 dated November 20, 1991; 385-93 dated September 30, 1993) 3. Pursuant to Section 34, paragraphs (c) (2) and (6) (b) of the Tax Code, as amended, no gain or loss shall be recognized if in pursuance of a plan of merger or consolidation (a) a corporation which is a party to a merger or consolidation exchanges property solely for stock in a corporation which is a party to the merger or consolidation, (b) a shareholder exchanges stock in a corporation which is a party to the merger or consolidation solely for the stock of another corporation also a party to the merger or consolidation. The term "merger" or "consolidation" shall be understood to mean: (1) the ordinary merger or consolidation or (2) the acquisition by one corporation of all or substantially all the properties of another corporation solely for stock; Provided, that for a transaction to be regarded as merger or consolidation within the purview of this Section, it must be undertaken for a bona fide business purpose and not solely for the purpose of escaping the burden of taxation: Provided, further, that in determining whether a bona fide business purpose exists each and every step of the transaction or series of transactions shall be treated as a single unit: Provided, finally, that in determining whether the property transferred constitutes a substantial portion of the property of the transferor the term "property" shall be taken to include the cash assets of the transferor. Under the terms of the reorganization, BA NT & SA, the US parent, to whom the shares of stock in BA Card were transferred by BIFC, shall further transfer the shares of stock to BAMSI, a foreign subsidiary, in exchange for the shares of stocks of the latter. Thereafter, BA Card shall be merged with BAMSI. This transaction qualifies as a tax-free transfer in accordance with Section 34 (c) (2) (6) (b) of the Tax Code, as amended, which provides that no gain or loss shall be recognized if a shareholder exchanges stock in a corporation which is a party to a merger or consolidation solely for stock of another corporation also a party to the said merger or consolidation. The above reorganization is a merger within the contemplation of Section 34 (c) (2) and (6) (b) of the Tax Code, as amended because a corporation (BAMSI) will acquire all these assets and assumed all the liabilities of BA Card, a wholly-owned subsidiary of the former, and solely for BAMSI stocks, the transaction undertaken being for a bona fide business purpose and not solely for the purpose of escaping the burden of taxation. Furthermore, the transfer by BA Card of all its assets and liabilities to BAMSI solely in exchange for the latter's shares of stock shall not give rise to the recognition of gain or loss pursuant to Section 34 (c) (2) of the Tax Code. (BIR Ruling No. 413-96 dated September 11, 1996) prll Accordingly, no gain or loss shall be recognized: (a) both by the transferor and the transferee corporation on the transfer by BA Card of all its assets and liabilities to BAMSI, solely in exchange for the latter's shares of stock pursuant to a merger; (2) on the distribution of shares to BA Card shareholders in complete redemption of their BA Card shares, as a necessary consequence of the merger; and (3) on the exchange of BAMSI shares by the stockholders of BA Card for their BA Card shares, pursuant to the merger and consolidation. The basis of BAMSI shares of stock received by the stockholders of BA Card shall be the same as the basis of the respective BA Card shares of stock surrendered in exchange therefor. The basis of the assets received by BAMSI shall be the same as it would be in the hands of BA Card. The transfer of assets and liabilities of BA Card solely in exchange for the shares of stock of BAMSI will not be subject to the gift tax since there is no intention to donate on the part of any of the parties and the transaction is effected purely for business reasons. If the total liabilities to be assumed by BAMSI upon effective merger date exceed the historical or original acquisition cost (cost basis) of the assets transferred by BA Card, the excess shall be recognized as gain of the transferor corporation. (Section 34 (c) (4) (b), Tax Code, as amended by P.D. No. 1773). It is understood, that upon the subsequent sale or exchange of the assets or shares of stock acquired by the parties, the gain derived from such sale or exchange shall be subject to income tax. However, in order that the above-described reorganization can be considered as merger under Section 34 (c) (2) and (6) (b) of the Tax Code, as amended, parties to the merger should comply with the following requirements: A. The plan of reorganization should be adopted by each of the corporations, parties thereto, the adoption being shown by the acts of its duly constituted responsible officers and appearing upon the official records of the corporation. BA Card, shall file as part of its return for the taxable year within which the reorganization occurred a complete statement of all facts pertinent to the non-recognition of gain or loss in connection with the reorganization, including: (1) A copy of the plan of reorganization, together with a statement, executed under the penalties of perjury, showing in full the purposes thereof and in detail all transactions incident to, or pursuant to the plan; LLpr (2) A complete statement of the cost or other basis of all property, including all stocks or securities, transferred incident to the plan; (3) A statement of the amount of stock or securities and other property or money received from the exchange, including a statement of all distribution or other disposition made thereof. The amount of each kind of stock or securities and other property received shall be stated on the basis of the fair market value at the date of the exchange; and (4) A statement of the amount and nature of any liabilities assumed upon the exchange, and the amount and nature of any liabilities to which any of the property acquired in the exchange is subject. B. Every taxpayer, other than a corporation, a party to the reorganization, who received stock or securities and other property or money upon a tax-free exchange in connection with a corporate reorganization shall incorporate in his income tax return for the taxable year in which the exchange takes place a complete statement of all facts pertinent to the non-recognition of gain or loss upon such exchange including: (1) A statement of the cost or other basis of the stock or securities transferred in the exchange; and (2) A statement in full of the amount of stock or securities and other property or money received from the exchange, including any liabilities assumed upon the exchange, and any liabilities to which property received is subject. The amount of each kind of stock or securities and other property (other liabilities assumed upon the exchange) received shall be set forth upon the basis of the fair market value thereof at the date of the exchange. cdti C. Permanent records in substantial form shall be kept by every taxpayer who participates in a tax-free exchange in connection with a corporate reorganization showing the cost or other basis of the transferred property or money received (including any liabilities assumed on the exchange, or any liabilities to which any of the properties received were subject), in order to facilitate the determination of gain or loss from a subsequent disposition of such stocks or securities and other property received from the exchange. (par. 9803-B, P-H 1963 ed., p. 9611) This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, then this ruling shall be considered null and void. Very truly yours, ALICIA P. CLEMENO Assistant Commissioner (Legal Service) By: ALICIA L. TOMACRUZ Head Revenue Executive Assistant (Legal Service)