BIR Ruling [DA-196-99]

March 30, 1999 BIR RULING [DA-196-99] Castro Cadiz & Carag Suite 6B, Eisenhower Condominium No. 7 Eisenhower Street 1500 Greenhills, San Juan Metro Manila Attention: Atty . Anna Liza M . Ang-Co Gentlemen : This refers to your letter dated September 7, 1998 requesting for a ruling on the tax consequences of the merger of Rico Philippines Industrial Corporation (Rico Philippines) and Philippine Carrageenan Manufacturing Corporation (Philippine Carrageenan). It is represented that both Rico Philippines and Philippine Carrageenan are domestic corporations duly registered with the Securities and Exchange Commission (SEC); that they are engaged in the same business of manufacturing, processing, cultivating, importing and exporting blended agar-agar, carrageenan, seaweeds and other marine products; that they have several common stockholders and are managed by interlocking directors and officers; that said corporations desire to merge with one another under the name of Rico Philippines Industrial Corporation for the following purposes: (a) to strengthen the capital base of the surviving corporation; (b) to eliminate possible conflicts of interest between the constituent companies since all functions will be directly managed by one body and be guided by a unified corporate objective; (c) to obtain operating economies and efficiencies since all departments with similar functions would be combined; and (d) to be able to offer a broader and more complete range of services and products to clients and customers; that both Rico Philippines and Philippine Carrageenan have agreed to merge with one another under the following terms and conditions: (1) Upon approval of the merger by the Securities and Exchange Commission (SEC), the separate corporate personality of Philippine Carrageenan shall be dissolved and Rico Philippines shall thereupon and thereafter possess all the rights, privileges and immunities and franchises of Philippine Carrageenan, and all property, real or personal, and all receivables due an whatever account, including subscriptions to shares and other choses in action, and all and every other interest of or belonging to or due to Philippine Carrageenan shall be taken and deemed to be transferred to and vested in Rico Philippines without further act or deed, except as may be otherwise provided therein; (2) Rico Philippines shall be responsible and liable for all the liabilities and obligations of Philippine Carrageenan in the same manner as if Rico Philippines had itself incurred such liabilities or obligations, and any claim, action or proceeding pending by or against Philippine Carrageenan may be prosecuted by or against Rico Philippines; and (3) Upon approval of the merger by the (SEC), Rico Philippines shall immediately make available shares of stock with aggregate par value equivalent to Philippine Carrageenan's pre-merger net worth. Provided, however, that the corresponding certificate issued by Philippine Carrageenan before merger must first be surrendered and cancelled before the stock certificate of Rico Philippines shall be issued. In connection therewith, you now request confirmation of your opinion that "a. The transactions described above, including the transfer and conveyance of all the assets and liabilities of Philippine Carrageenan to Rico Philippines in exchange for shares of stock of Rico Philippines, constitute a "merger" within the meaning of Section 40(C)(2) and (c)(6)(b) of the National Internal Revenue Code; "b. No gain or loss will be recognized to Philippine Carrageenan upon the transfer and conveyance of its assets to Rico Philippines, and upon the assumption by Rico Philippines of Philippine Carrageenan's liabilities, obligations, and undertakings, in exchange solely for the issuance of Rico Philippines stock directly to Philippine Carrageenan shareholders pursuant to the Plan of Merger; "c. No gain or loss will be recognized to Philippine Carrageenan shareholders upon their receipt of Rico Philippines stock in exchange for Philippine Carrageenan's shares; "d. No gain or loss will be recognized to Rico Philippines upon its receipts of the assets transferred by Philippine Carrageenan and its assumption of the liabilities, undertakings and obligations of Philippine Carrageenan, as well as upon the issuance by Rico Philippines of its shares of stock to Philippine Carrageenan shareholders who surrender their Philippine Carrageenan stock to Rico Philippines, pursuant to the Plan of Merger; "e. No capital gains tax on stock transaction under the provisions of Section 39 of the National Internal Revenue Code is payable either by Rico Philippines or Philippine Carrageenan shareholders upon the issuance by Rico Philippines of its shares to the Philippine Carrageenan shareholders who surrender its Philippine Carrageenan stock to Rico Philippines; and "f. No gift tax is payable by Philippine Carrageenan or Rico Philippines or Philippine Carrageenan shareholders upon the transactions and exchanges made pursuant to the Plan of Merger. llcd In reply, please be informed that your opinion is hereby confirmed as follows: a. The above reorganization is a merger within the contemplation of Section 40(C)(2) and (6)(b) of the Tax Code of 1997, because Rico Philippines will acquire/assume all the assets and liabilities of Philippine Carrageenan solely in exchange for shares of stock of Rico Philippines, the proposed transaction to be undertaken being for a bona fide business purpose and not for the purpose of escaping the burden of taxation. b. The transfer by Philippine Carrageenan of all its assets and liabilities to Rico Philippines 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)(h) of the Tax Code of 1997. c. No gain or loss shall be recognized by the shareholders of Philippine Carrageenan upon the issuance to them of Rico Philippines shares under Section 40(C)(2) of the Tax Code of 1997. d. No gain or loss shall be recognized by Rico Philippines upon its receipts of the assets transferred by Philippine Carrageenan and its assumption of the liabilities of Philippine Carrageenan pursuant to Section 40(C)(4) of the Tax Code of 1997, as well as upon the issuance by Rico Philippines of its shares of stock to Philippine Carrageenan shareholders who surrender their shares to Rico Philippines. e. No capital gains tax on stock transaction under the provisions of Section 39 of the Tax Code of 1997 will be payable by either Rico Philippines or Philippine Carrageenan shareholders upon issuance by Rico Philippines of its shares to Philippine Carrageenan shareholders who surrender their stocks to Rico Philippines. f. The transfer of the assets by Philippine Carrageenan to Rico Philippines for Rico Philippines' shares of stock will not be considered as transfer of property for insufficient consideration subject to gift tax, since there is no intention to donate on the part of the parties and the transaction is effected purely for business reasons. However, the transfer of real properties by Philippine Carrageenan to Rico Philippines for the latter's shares of stock shall be subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997, based on the consideration contracted to be paid for such realty or on its fair market value determined in accordance with Section 6(E) of the said Code, whichever is higher. While the transfer of shares of stock, if any, shall be subject to the documentary stamp tax imposed under Section 176 of the same Code. Moreover, the original issues of the Certificates of Stock by Rico Philippines to Philippine Carrageenan shall be subject to the documentary stamp tax imposed under Section 175 of the Tax Code of 1997. dctai 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 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. (par. 9803-8, F-H 963, ed., p. 9611) 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) 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 and Enforcement Group)