BIR Ruling [DA-184-02]

October 11, 2002 BIR RULING [DA-184-02] Secs. 40 (C) (2) and (6) (b) 472-93 dated December 3, 1993 Quiason Makalintal Barot Torres & Ibarra 21st Floor, Robinsons-Equitable Bank Tower ADB Avenue Corner Pedro Poveda Road Ortigas Center Pasig City Attention: Atty. Ruelito Q. Soriano Gentlemen : This refers to your letter dated July 20, 1999 requesting for ruling on the tax consequences of the merger between and among Bayan Telecommunications, Inc. (BTI), Butuan City Telephone Company, Inc. (Butelco), and Eastern Visayas Telephone Company, Inc. (Evtelco), with BTI as the surviving corporation, pursuant to Section 40(C)(2) of the Tax Code of 1997. It is represented that BTI, Butelco and Evtelco are all domestic corporations duly registered with the Securities and Exchange Commission (SEC) organized for the establishment, operation and maintenance of telecommunications systems in various parts of the Philippines; that prior to the merger, BTI, has an authorized capital stock of P5,000,000,000.00 divided into 50,000,000 shares of common stock with a par value of P100.00 per share; that the total subscribed capital stock of BTI then stood at P3,049,382,200.00; that on January 28, 1999, BTI, Butelco and Evtelco executed Articles and Plan of Merger whereby the aforesaid companies will merge and BTI will become the surviving corporation; that with the merging of the said corporations, the outstanding shares of stock of Butelco and Evtelco shall, after the effective merger date and upon surrender by the registered owners of the stock certificates, be exchanged with shares of stock of BTI determined on the basis of the amount of the net assets of each of Butelco and Evtelco, as of September 30, 1998; that upon the effective merger date, each of Butelco and Evtelco's corporate existence shall cease and all of their respective rights, privileges, powers and franchises, all of their properties, real and personal, including receivables on whatever account, and all of their other interests shall be assumed by, and be vested in BTI without further act of deed; that all debts, liabilities and obligations of Butelco and Evtelco, as well as pending claims actions and proceedings shall likewise vest in, attach to and be assumed by BTI, and may be enforced against BTI as if they had been originally contracted or incurred by it without further act or deed; that the merger will achieve mutually advantageous and beneficial business purposes, such as but not limited to (1) increased financial strength; (2) a focused operational management; and (3) rationalization of overall business expenses, particularly administrative expenses; that BTI would then increase its capital stock from P5,000,000,000.00 to P12,000,000,000.00 and revalue its shares from P100.00 per share to P1.00 per share; and that the stockholders of record of Butelco and Evtelco, with exception of BTI (being the majority owner of Butelco and Evtelco and issue a total of 242,608,392 shares of common stock in BTI (with a par value of P1.00 per share) to the said stockholders. In connection therewith, you now request confirmation of your opinion that "1. The merger of BTI, Butelco and Evtelco qualifies for non-recognition of gain or loss for income tax purposes in accordance with Section 40(C)(2) of the Tax Code, such that no gain or loss shall be recognized to BTI, Butelco and Evtelco upon the assumption of the assets and liabilities of BTI, Butelco and Evtelco pursuant to the merger; SAHaTc "2. No gain or loss shall be recognized by the shareholders of Butelco and Evtelco upon the issuance and distribution of BTI's shares to them in exchange for their shares of Butelco and Evtelco pursuant to and as a consequence of the merger; "3. The basis of the BTI shares of stock to be received by the stockholders of Butelco and Evtelco shall be the same as their basis in Butelco and Evtelco shares of stock surrendered and in exchange pursuant to the plan of merger; "4. The basis of the properties of Butelco and Evtelco in the hands of BTI shall be the same as it would be in the hands of Butelco and Evtelco; "5. The assumption by BTI of the assets of Butelco and Evtelco will not be considered as a transfer of property for an insufficient consideration subject to gift tax, since there is no intention to donate on the part of either party and the transaction is purely for legitimate business purposes; "6. The assumption by BTI of the assets of Butelco and Evtelco shall not be subject to the value-added tax pursuant to Section 4.100-5(b)(3) of Revenue Regulations No. 7-95; "7. The assumption by BTI of the assets of Butelco and Evtelco shall not be subject to the documentary stamp tax under Sec. 196 of the Tax Code, as amended; and "8. The surrender of the shares of stock in Butelco and Evtelco by the latter's shareholders shall not be subject to the documentary stamp tax under Sec. 176 of the Tax Code, as amended, considering that there is a mere continuance of the investment of the stockholders in the said telephone companies through the surviving entity, BTI." In reply, please be informed that your opinion is hereby confirmed as follows: 1. The above reorganization is a merger within the contemplation of Section 40(C)(2) and (6)(b) of the Tax Code of 1997, because BTI will assume/acquire all the assets and liabilities of Butelco and Evtelco solely in exchange for shares of stock of BTI, the transaction undertaken being for a bona fide business purpose and not for the purpose of escaping the burden of taxation. Accordingly, the transfer by Butelco and Evtelco of all its assets and liabilities to BTI solely in exchange for the latter's shares of stock shall not give rise to the recognition of gain or loss pursuant to Section 40(C)(2) and (6)(b) of the Tax Code of 1997. 2. No gain or loss shall be recognized by the stockholders of Butelco and Evtelco upon the exchange of their Butelco and Evtelco shares solely for BTI shares under Section 40(C)(2) of the Tax Code of 1997. 3. The basis of the BTI shares to be received by the stockholders of Butelco and Evtelco shall be the same as their basis in Butelco and Evtelco shares surrendered and exchange therefor pursuant to the merger. 4. The basis of the properties of Butelco and Evtelco in the hands of BTI shall be the same as it would be in the hands of Butelco and Evtelco if the merger had not taken place. 5. The assumption by BTI of the assets of Butelco and Evtelco will not be considered as transfer of property for an insufficient consideration subject to donor's tax since there is no intention to donate on the part of the parties inasmuch as the transaction to be effected is purely for business purpose. 6. The assumption by BTI of the assets of Butelco and Evtelco shall not be subject to value-added tax pursuant to Section 4.100-5(b)(3) of Revenue Regulations No. 7-95. If pursuant to the exchange transaction and as part of the consideration, the transferee corporation assumes the liability of the transferor or acquires from the transferor property subject to a liability, such assumed or acquired liability shall not be treated as money and/or other property, and shall not prevent the exchange from being tax free [see Sec. 40(C)(4)(a) of the Tax Code of 1997]. If the amount of the liabilities assumed, plus the amount of the liabilities to which the property is subject, exceed the total of the adjusted basis of the property transferred pursuant to such exchange, then such excess shall be considered as a gain from the sale or exchange of a capital asset or of property which is not a capital asset as the case may be. ( Sec . 40(C)(4)(b) of the Tax Code of 1997 ) DETACa 7. The assumption by BTI of the assets (real property) of Butelco and Evtelco without further act or deed shall be subject to documentary stamp tax imposed under Section 176 of the Tax Code of 1997. 8. The surrender of the shares of stock in Butelco and Evtelco by the latter's shareholders shall be subject to documentary stamp tax imposed under Section 176 of the Tax Code of 1997. Finally, in order that the above-described reorganization can be considered as merger under Section 40(C)(2) and (6)(b) 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 all 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 of 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; 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, 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. C. 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 subsequent disposition of such stock or securities and other property received from the exchange. In addition to the foregoing requirements, 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 stock received as a consequence of the merger. ( BIR Ruling No. 472-93 dated December 3, 1993 ) 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, 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 the penalties under Section 269 of the said Code. The surviving corporation shall cause the annotation at the back of the newly issued Certificates of Stock, the original or historical cost of acquisition of the cancelled shares of stock, and the fact that no gain or loss was recognized as a result of the merger. 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. aETAHD Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service