BIR Ruling [DA-216-02]

November 22, 2002 BIR RULING [DA-216-02] 34 (D) (3), RR 14-2001 030-2000; DA-052-02 Asea Brown Boveri, Inc . Km. 20 South Superhighway Sucat, Paraaque City Attention: Atty. Belinda E. Dugan Tax and Legal Manager Gentlemen : This refers to your letter dated October 24, 2001 requesting for a confirmation of your opinion that the merger of a subsidiary, ABB Industry, Inc. which has a Net Operating Loss Carry-Over (NOLCO) into its parent corporation, Asea Brown Boveri, Inc. (ABB, Inc.) entitles the absorbing corporation to deduct from its gross income the absorbed corporation's NOLCO. It is represented that ABB, Inc., formerly Asea (Philippines), Inc. is a domestic corporation and a wholly-owned subsidiary of ABB Asea Brown Boveri, Ltd.; that it was organized on July 18, 1968 with an authorized capital stock of P130,000,000.00; that it was established primarily to buy, import, manufacture, assemble, repair and sell at wholesale all kinds of goods, wares and merchandise of every class and description; that as of December 31, 2000, ABB, Inc. had total assets of P1,352,569,244.00 total liabilities of P429,554,490.00 and stockholders' equity of P923,014,754.00; that ABB Industry, Inc. is also a domestic corporation and a wholly-owned subsidiary of Asea Brown Boveri, Inc.; that it was organized on December 27, 1995 with an authorized capital stock of P200,000.00; that as of December 31, 2000, ABB Industry, Inc. had total assets of P260,779,952.00, total liabilities of P253,135,114.00 and stockholders' equity of P7,644,838.00; that ABB Industry, Inc. has a deferred income tax asset on NOLCO amounting to P29,985,847.00 as of December 31, 2000, broken down as follows: 1999 P10,391,193.00 2000 19,594,054.00 TOTAL P29,985,247.00 ============ and that in support of your request, you submitted to this Office the following documents: 1. Articles of Incorporation of ABB, Inc.; 2. Latest Audited Financial Statement of ABB, Inc.; 3. Articles of Incorporation of ABB Industry, Inc.; 4. Latest Audited Financial Statement of ABB Industry, Inc.; 5. Board Resolution and Stockholders' approval of merger; 6. Plan of Merger; 7. Articles of Merger; and 8. SEC Certificate of Approval dated October 11, 2001. In reply, please be informed that Section 34(D)(3) of the Tax Code of 1997 states as follows: "(3) Net Operating Loss Carry-over . The net operating loss of the business or enterprise for any taxable year immediately preceding the current taxable year, which had not been previously offset as deduction from gross income shall be carried over as a deduction from gross income for the next three (3) consecutive taxable years immediately following the year of such loss: Provided, however, That any net loss incurred in a taxable year during which the taxpayer was exempt from income tax shall not be allowed as a deduction under this Subsection: Provided, further , That a net operating loss carry-over shall be allowed only if there has been no substantial change in the ownership of the business or enterprise in that "(i) Not less than seventy-five percent (75%) in nominal value of outstanding issued shares, if the business is in the name of a corporation, is held by or on behalf of the same persons; or xxx xxx xxx "For purposes of this Subsection, the term ' net operating loss ' shall mean the excess of allowable deduction over gross income of the business in a taxable year: xxx xxx xxx" Furthermore, Sections 2.4 and 3.12 of Revenue Regulations No. 14-2001 provides, viz : "Section 2.4. NOLCO shall also be allowed if there has been no substantial change in the ownership of the business or enterprise in that not less than 75% in nominal value of outstanding issued shares or not less than 75% of the paid up capital of the corporation, if the business is in the name of the corporation, is held by or on behalf of the same persons. "The 75% equity, ownership or interest rule prescribed in these Regulations shall only apply to transfer or assignment of the taxpayer's net operating losses as a result of or arising from the said taxpayer's merger or consolidation or combination with another person. In case the transfer or assignment of the taxpayer's net operating losses arises from the said taxpayer's merger, consolidating or combination with another person, the transferee or assignee shall not be entitled to claim the same as deduction from gross income unless, as a result of the said merger, consolidation or combination, the shareholders of the transferor/assignor, or the transferor (in case of other business combinations) gains control of at least 75% or more in nominal value of the outstanding issued shares or paid up capital of the transferee/assignee (in case the transferee/assignee is corporation) or 75% or more interest in the business of the transferee/assignee (in case the transferee/assignee is other than a corporation)." EcDYSIs xxx xxx xxx "Section 3.12. By or on Behalf of the Same Persons . The term "By or on Behalf of the Same Persons" shall refer to the maintenance of ownership despite change as when: xxx xxx xxx 2. No actual change in ownership is involved as in the case of merger of the subsidiary into the parent company. xxx xxx xxx "Notwithstanding the above, in determining whether there is actual change in ownership, each and every step of the transaction shall be considered and the whole transaction or series of transactions shall be treated as a single unit." Based on the foregoing provisions, NOLCO and the absorbed corporation is not affected where there is no actual chase in ownership. When the subsidiary is merged into the parent corporation no actual change in ownership in case of such a merger is deemed to take place. Nonetheless, in determining whether there is actual change in ownership, each and every step of the transaction shall be considered and the whole transaction or series of transactions shall be treated as a single unit. This ruling is being issued solely for the purpose of confirming the application of the above principles as provided in Revenue Regulations No. 14-2001 to the facts as represented. It is, however, not a ruling on the amount of loss properly allocable to either activity, as this is a question of fact and not of law. Furthermore, 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.) EDMUNDO P. GUEVARA Deputy Commissioner Legal and Inspection Group