BIR Ruling [DA-172-98]

April 27, 1998 BIR RULING [DA-172-98] Sycip Gorres Velayo & Co. 6760 Ayala Avenue Makati City Attention: Mr . Joel L . Tan-Torres Gentlemen : This refers to your letter dated December 18, 1997 requesting for a ruling on the tax consequences of the merger of Monterey Farm Corporation ( MFC ) with San Miguel Properties Philippines, Inc. ( SMPPI ). LexLib It is represented that SMPPI and MFC are domestic corporations duly organized and existing under and by virtue of Philippine laws; that SMPPI has an authorized capital stock of Two Billion Pesos (P2,000,000,000.00) divided into One Billion Two Hundred Million (1,200,000,000) class "A" shares and Eight Hundred Million (800,000,000) class "B" shares, all with par value of One Peso (P1.00) each; that of the total authorized capital stock of Five Hundred Ninety Three Million Seven Hundred Twenty Three Thousand Two Hundred Eight One (593,723,281) class "A" shares and Three Hundred Ninety Five Million One Hundred Forty Nine Thousand Twenty (395,149,020) class "B" shares are outstanding; that MFC has an authorized capital stock of Eighty Million Pesos (P80,000,000.00) divided into Five Million Two Hundred Thousand (5,200,000) class "A" common shares and Two Million Eight Hundred Thousand (2,800,000) class "B" common shares with par value of Ten Pesos (P10.00) each; that out of the authorized capital stock, Three Million Seven Hundred Sixteen Thousand Three Hundred Forty Thousand Four Hundred Twenty Five (1,833,425) class "B" shares are outstanding; that pursuant to the Plan of Merger, SMPPI and MFC will be merged into one corporation with MFC as the surviving corporation; that the main business of the surviving corporation will be on real estate development; that the merger will allow MFC and SMPPI to avail of and benefit from the various operational advantages that will be realized from the consolidation of their respective businesses, such as, but not limited to, an effective and optimum utilization of their resources and properties and the rationalization of their respective structures and facilities; that after the effective date of merger, SMPPI will cease to exist as a corporation by operation of law, and its stockholders will be deemed stockholders of MFC; that, for this purpose, each holder of an outstanding certificate of stock of SMPPI will surrender the same, duly endorsed, to MFC for cancellation, and in exchange, each SMPPI stockholder will then receive the certificates of stock representing the appropriate number of MFC shares, that MFC, as the surviving corporation will, upon the effectivity date of merger, acquire/assume all the assets, franchise, licenses, powers, rights, interests, titles, equities, privileges, immunities and liabilities of SMPPI ; that in exchange for the transfer by SMPPI to MFC of all its assets and liabilities, MFC will issue to all the stockholders of SMPPI their corresponding shares of MFC's capital stock as follows: SMPPI Stockholder SMPPI Shares to be Surrendered MFC Shares to be Issued San Miguel Corporation Class "A" shares 583,982,312 Class "B" shares 388,662,521 108,248,610 San Miguel Foundation Class "A" shares 1,515,418 Class "B" shares 1,003,450 280,332 Philippine Breweries Class "A" shares 8,225,551 Class "B" shares 5,483,049 1,525,672 that to enable it to issue One Hundred Ten Million Fifty Four Thousand Six Hundred Fourteen (110,054,614) shares of its capital stock to the stockholders of SMPPI, MFC will remove the classification of its "A" and "B" common shares and increase its authorized capital stock to One Billion Two Hundred Eighty Million Pesos (P1,280,000,000.00) divided into One Hundred Twenty Eight Million (128,000,000) unclassified common shares with par value of Ten Pesos (P10.00) each; that MFC will absorb all the existing employees of SMPPI and will consider their original date of hire by SMPPI for purposes of determining their tenure; that after the merger, MFC will succeed SMPPI as employer in the now existing SMPPI Employee's Retirement Plan. You now request confirmation of your opinion that: 1. The merger of SMPPI and MFC with the latter as the surviving corporation, is a merger within the contemplation of Section 34(c)(2) and 34(c)(6)(b) of the Tax Code, because MFC will acquire/assume all the assets and liabilities of SMPPI, solely in exchange for shares of stock of MFC, and the merger is being undertaken for a bona fide business purpose and not for the purpose of escaping the burden of taxation. Therefore, no gain or loss shall be recognized: (a) To SMPPI as the transferor, and MFC as the transferee, on the aforesaid transfer by SMPPI of all its assets and liabilities to MFC in exchange for MFC's shares of stock pursuant to the Plan of Merger; (b) To SMPPI on the distribution of the MFC shares of stock to SMPPI stockholders in complete redemption of their SMPPI shares of stock pursuant to the Plan of Merger; (c) To the stockholders of SMPPI on the exchange of their shares of stock of SMPPI solely for MFC shares of stock pursuant to the Plan of Merger; and (d) That the basis of the MFC shares of stock to be received by the stockholders of SMPPI is the same as their basis in the SMPPI shares of stock surrendered and exchanged pursuant to the Plan of Merger and the basis of the assets received by MFC shall be the same as it would be in the hands of SMPPI. 2. The issuance by MFC of its own shares of stock to the shareholders of SMPPI in exchange for the surrendered certificate of shares of SMPPI shall be subject to documentary stamp tax (DST) at the rate of Two Pesos (P2.00) on each Two Hundred Pesos (P200.00), or fractional part thereof, based on the total par value of the MFC shares of stock issued pursuant to Section 175 of the Tax Code. 3. The SMPPI Employee's Retirement Plan, when taken over by MFC as successor employer, will maintain its tax exempt status and will not affect the retirement plan's qualification under Section 28(b)(7)(A) of the Tax Code, as amended [now Section 32(B)(6)(a) of the Tax Code of 1997] since the take-over is not prejudicial to the employee-members of the said retirement plan. 4. The Plan of Merger between MFC and SMPPI shall not be subject to any documentary stamp tax. In reply thereto, I have the honor to inform you that the merger of SMPPI and MFC, is a merger within the contemplation of Section 34(c)(2) and 34(c)(6)(b) of the Tax Code, as amended [now Section 40(C)(2) and 40(c)(6)(b) of the Tax Code of 1997], because a corporation, MFC, will acquire all the assets and assume all the liabilities of SMPPI, solely for shares of stock, the transaction being for a bona fide business purpose and not solely for the purpose of escaping the burden of taxation. Accordingly, pursuant to the aforesaid Section 34(c)(2) of the Tax Code, as amended [now Sec. 40(C)(2) of the Tax Code of 1997], no gain or loss shall be recognized: (a) To SMPPI as the transferor, and MFC as the transferee, on the aforesaid transfer by SMPPI of all its assets and liabilities to MFC in exchange for MFC's shares of stock pursuant to the Plan of Merger; (b) To SMPPI on the distribution of the MFC shares of stock to SMPPI stockholders in complete redemption of their SMPPI shares of stock pursuant to the Plan of Merger; and (c) To the stockholders of SMPPI on the exchange of their shares of stock of SMPPI solely for MFC shares of stock pursuant to the Plan of Merger. The basis of the MFC shares of stock to be received by the stockholders of SMPPI is the same as their basis in the SMPPI shares of stock surrendered and exchanged pursuant to the Plan of Merger and the basis of the assets received by MFC shall be the same as it would be in the hands of SMPPI. It is understood, however, that upon the subsequent sale or exchange of the assets or shares of stocks 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) of the Tax Code, as amended [now 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 the 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 stocks or securities and other properties 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 properties received shall be stated on the basis of the fair market value thereof at the date of the exchange. prcd (4) A statement of the amount and nature of any liability assumed upon the exchange, and the amount and nature of any liabilities to which any of the properties 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 properties 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 gains 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 properties 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 properties (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. 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 in 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 properties received from the exchange (par. 9803-8, P-H 1963 ed., p. 9611). In addition to the foregoing requirements, permanent records in substantial form must be kept by the corporation participating in the merger showing the information listed above in order to facilitate the determination of gain or loss from a subsequent disposition of the stocks received as a consequence of the merger. Moreover, your opinion to the effect that (1) The issuance by MFC of its own shares of stock to the shareholders of SMPPI in exchange for the surrendered certificate of shares of SMPPI shall be subject to documentary stamp tax (DST) at the rate of Two Pesos (P2.00) on each Two Hundred Pesos (P200.00), or fractional part thereof, based on the total par value of the MFC shares of stock issued, which shall attach upon the effectivity of the merger regardless of the actual delivery of the certificates of stock pursuant to Section 175 of the Tax Code [also Section 175 of the Tax Code of 1997]; (2) That the SMPPI Employee's Retirement Plan, when taken over by MFC as successor employer, will maintain its tax exempt status and will not affect the retirement plan's qualification under Section 28(b)(7)(A) of the Tax Code, as amended [now Section 32(B)(6)(a) of the Tax Code of 1997], since the take-over is not prejudicial to the employee-members of the said retirement plan; and cdpr (3) That the Agreement of Merger executed between SMPPI and MFC is not subject to documentary stamp tax, are hereby confirmed. (BIR Ruling No. 472-93 dated December 3, 1993) 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 are not complied with then this ruling shall be considered null and void. Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal & Enforcement Group)