Salvador Guevara & Associates

March 8, 2007 BIR RULING [DA-147-07] Sections 40 (C) (2) & (6) (b); BIR Ruling No. 030-99, DA-005-2002-A, DA-016-2002 & DA-017-2002 Salvador Guevara & Associates 815-816, Tower One & Exchange Plaza Ayala Triangle, Ayala Avenue Makati City Attention: Atty. Euney Marie J. Mata-Perez Gentlemen : This refers to your letter dated January 3, 2007 requesting on behalf of your clients, Holcim Philippines Manufacturing Corporation ("HPMC") and Northern Mindanao Transport Co., Inc. ("NOMITRACO") for confirmation of your opinion that the merger of HPMC and NOMITRACO, with HPMC as the surviving corporation, is considered a tax-deferred merger pursuant to Section 40 (C) (2) and (6) (b) of the Tax Code of 1997. It is represented that 1. HPMC is a domestic corporation organized primarily to acquire, own, operate and maintain cement plants for the manufacture of all kinds of cement and cement products, by-products, including its derivatives, as well as to acquire, own, operate and maintain a plant or plants for the manufacture of bags, packages or containers necessary or useful in the production of cement, cement-products and by-products, as well as carbide, dry ice, fertilizers, etc.; to sell the same whether domestically or export to foreign markets; to locate, lease, manage and operate mineral claims containing lime, limestone, shale, silica, gypsum, marble, granite and all other cement material or building stone and clay; mineral deposits of petrochemicals, nickel, silver, copper, iron, manganese, coal, quarries, warehouses, buildings, docks, piers, barges, tugboats, lighters, trucks, railroad, airplanes, shipping and communication facilities, equipment, appliances and apparatus of all kinds, needed or useful in the manufacture, transporting, selling of products of the corporation. HPMC has an authorized capital stock (ACS) of Two Billion Six Hundred Fifty Seven Million Five Hundred Thousand Pesos (PhP2,657,500,000) divided into Two Million Six Hundred Fifty Seven Thousand Five Hundred (2,657,500) common shares with a par value of One Thousand Pesos (PhP1,000) per share, of which Two Million Three Hundred Eight Thousand One Hundred Ninety Three (2,308,193) shares are outstanding. The following are the shareholders of HPMC: No. of Amount Amount Stockholder Shares Subscribed Paid Union Cement Corp. 2,293,245 PhP2,293,245,000.00 PhP2,293,245,000.00 B.V. Holderfin 5,897 5,897,000.00 5,897,000.00 Fractional Shares 1,467 1,467,000.00 1,467,000.00 Jaime G. Lim or Linda G. Lim 385 385,000.00 385,000.00 PCD Nominee Corporation 231 231,000.00 231,000.00 Jose Miguel T. Arroyo 153 153,000.00 153,000.00 Julian Tan 150 150,000.00 150,000.00 Aristeo G. Puyat 139 139,000.00 139,000.00 Enrique Arcenas 99 99,000.00 99,000.00 Salma Pia T. Rasul 78 78,000.00 78,000.00 Others 6,349 6,349,000.00 6,349,000.00 Total 2,308,193 PhP2,308,193,000.00 PhP2,308,193,000.00 ====== ============= ============= 2. On the other hand, NOMITRACO is a domestic corporation organized primarily to purchase, charter, hire, manage or otherwise acquire ships, boats, barges, lighters, launches and vessels of any kind, together with equipment and furnishings therefore and appurtenant thereto and to employ the same in conveyance and carriage of goods, wares and merchandise of every description in Philippine coastwise traffic. NOMITRACO had an ACS of One Hundred Million Pesos (PhP100,000,000) divided into Ten Million (10,000,000) common shares, of which Seven Million Two Hundred Fifty Thousand (7,250,000) shares are outstanding. NOMITRACO is a wholly-owned subsidiary of HPMC. According to its Financial Statements, for the period ending on December 31, 2005, NOMITRACO had unutilized Net Operating Loss Carry-Over (NOLCO) and excess Minimum Corporate Income Tax (MCIT) in the following amounts: Date Incurred Expiry Date NOLCO MCIT December 31, 2003 December 31, 2006 PhP 53,753,054 December 31, 2004 December 31, 2007 196,201,720 December 31, 2005 December 31, 2008 PhP3,920,305 PhP249,954,774 PhP3,920,305 ========== ========== 3. HPMC and NOMITRACO merged, with HPMC as the surviving corporation, to achieve economy of scale and efficiency of operations through the integration of administrative facilities and more productive use of the properties of the two corporations. The merger was effected pursuant to Sections 76 to 80 of the Corporation Code of the Philippines and approved by the Securities and Exchange Commission (SEC) on June 29, 2006. 4. The Plan of Merger executed by and between HPMC and NOMITRACO provided that the effective date of merger shall be the end of the month of the date of SEC approval of the merger. Accordingly, the merger of HPMC and NOMITRACO became effective as of June 30, 2006. 5. The Plan of Merger also provided that HPMC shall be the surviving corporation while NOMITRACO shall be the absorbed corporation. Consequently, on June 30, 2006, NOMITRACO ceased to exist by operation of law and all its assets and liabilities were conveyed, assigned, and transferred to HPMC as a consequence of the merger. As of the effective date of merger NOMITRACO had no investments in shares of stock and no real property in its name to transfer to HPMC by virtue of the merger. 6. Pursuant to sound corporate practice, no shares of stock of HPMC have been issued, on the occasion of the merger, in exchange for the net assets transferred by NOMITRACO to HPMC, considering that NOMITRACO is wholly-owned subsidiary of HPMC. Accordingly, the outstanding certificates of stock of NOMITRACO held by its stockholders (i.e., HPMC and its nominees) have been surrendered for cancellation. We now rule on the issues raised for our consideration: 1. The above reorganization between HPMC and NOMITRACO is a merger within the contemplation of Section 40 (C) (2) and (6) (b) of the Tax Code of 1997 since HPMC acquired/assumed all the assets and liabilities of NOMITRACO although no HPMC share was issued to NOMITRACO since on the effective merger date, NOMITRACO is wholly owned by HPMC, the transaction undertaken being for a bona fide business purpose and not intended to escape the burden of taxation. The tax deferred character of the merger under Section 40 (C) and (6) (b) of the Tax Code of 1997 is not affected by the non-issuance of the surviving corporation of its shares of stock in exchange for the assets and liabilities of the absorbed corporation in cases of merger of a parent corporation and its subsidiary. Since NOMITRACO is a wholly-owned subsidiary of HPMC, the tax-deferred character of the merger of HPMC and NOMITRACO is not affected by the non-issuance by HPMC, the surviving corporation, of its shares of stock in exchange for the assets and liabilities of NOMITRACO, the absorbed corporation. Therefore, no gain or loss shall be recognized by: a. NOMITRACO, the absorbed corporation, as the transferor, on its assignment of all assets and liabilities to HPMC pursuant to the Plan of Merger; and b. HPMC, the surviving corporation, as the transferee, on its receipt of the assets and liabilities of NOMITRACO without issuing shares of stock in exchange therefor. NOMITRACO will not be subject to income tax, capital gains tax, or creditable withholding tax on the transfer of its properties to HPMC since no gain or loss will be recognized to NOMITRACO upon the transfer and conveyance of its properties to HPMC by virtue of the merger. It is understood, however, that upon the subsequent sale or exchange of the assets acquired by HPMC, the gain derived from such sale or exchange shall be subject to income tax. 2. The basis of the assets that will be recognized by HPMC shall be the same as it would be in the hands of NOMITRACO. 3. Since no shares of stock were issued pursuant to the Plan of Merger, Section 174 of the Tax Code of 1997, as amended by Republic Act No. 9243, imposing documentary stamp tax (DST) on original issuance of shares of stock, is inapplicable to the present case. No DST shall also be due on the surrender by the stockholders of their shares in NOMITRACO for cancellation. Since NOMITRACO had no shares of stock or real property in its name to transfer to HPMC pursuant to the merger, neither party shall be liable for DST on transfers or exchanges of shares of stock and real property, under Section 175 and 196 of the Tax Code of 1997, respectively. Moreover, Section 199 (m) of the Tax Code of 1997 exempts from DST transfers of property pursuant to Section 40 (C) (2) of the Tax Code of 1997. 4. The merger is not subject to donor's tax as there is no intention to donate on the part of HPMC or NOMITRACO. DEHaTC 5. The transfer of the assets by NOMITRACO to HPMC pursuant to the plan of merger will not be subject to value-added tax (VAT). Any unused input tax of NOMITRACO as of the effective date of merger will be absorbed by HPMC, as the surviving corporation, pursuant to Revenue Regulations No. 7-95, otherwise known as the "Consolidated Value-Added Tax Regulations." 6. The aggregate NOLCO balances of NOMITRACO, the absorbed corporation may be claimed by HPMC, the surviving corporation as a deduction from gross income under Section 34 (D) (3) of the Tax Code of 1997 subject to the three (3)-year period limitation. The NOLCO balance of the absorbed corporation shall be transferred and vested in the surviving corporation by operation of law. This is because NOLCO balance is among the rights, privileges, property and/or interest of the absorbed corporation and considering further that the merger will be undertaken for a bona fide business purpose and not for the purpose of escaping the burden of taxation and there is no effective change of ownership. Accordingly, HPMC may use NOLCO in the amount of PhP53,753,054 until December 31, 2006 and the amount of PhP196,201,720 until December 31, 2007. 7. The excess MCIT of the absorbed corporation shall be carried forward and credited against the normal income tax due of the surviving corporation for the three immediately succeeding taxable years pursuant to Section 27 (E) (3) of the Tax Code of 1997. Since the excess MCIT of the NOMITRACO are among its rights, privileges, property and/or interest as the absorbed corporation, the excess MCIT of NOMITRACO shall be transferred to and vested in HPMC, the surviving corporation on the effective date of the merger. Thus, the excess MCIT of NOMITRACO shall be carried forward, and credited against the normal corporate income tax of HPMC for the next three (3) immediately succeeding taxable years, or until December 31, 2008. However, in order that the above-described reorganization can be considered as merger under Section 40 (C) (2) of the Tax Code of 1997, the 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. Each corporation, which is a party to the reorganization, 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; 2. A complete statement of the cost or other basis of all properties, 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 thereof 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, who is 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 the stock or securities and other property or money received from the exchange, including any liability assumed upon the exchange, and any liability 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 exchange. 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 liability assumed on the exchange, or any liability 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 stock or securities and other property received from the exchange. (par. 9803-8, Prentice Hall 1963, ed., p. 9611) DCcTHa Finally, the parties shall cause the Register of Deeds to annotate on the Transfer Certificates of Title, the original or historical cost of acquisition of the properties, the date the transaction takes place and the fact that no gain or loss was recognized as a result of the merger, provided, however, that any violation by the Register of Deeds of the provisions of Section 58 (E) of the Tax Code of 1997, shall be subject to penalties under Section 269 of the said Code. The parties shall likewise cause the annotation at the back of the Certificates of Stock of the shares owned by NOMITRACO transferred to HPMC pursuant to the merger, the fact that no gain or loss was recognized as a result of the merger, the date the transaction (merger) takes place and the historical cost of acquisition of the shares transferred. 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, and/or any of the requirements imposed in this letter is not complied with, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service