BIR Ruling [DA-221-02]

November 25, 2002 BIR RULING [DA-221-02] Punongbayan & Araullo 20th Floor, Tower I The Enterprise Center 6766 Ayala Avenue Makati City Attention: Atty. Romeo H. Duran Principal Gentlemen : This refers to your letter dated October 17, 2001 stating that your client, Vivendi Water Systems (Philippines), Inc., formerly known as U.S. Filter (Philippines), Inc. (Vivendi-Phils.), is a legal entity organized and existing under the laws of the Philippines with an authorized capital stock of Twenty Million Pesos (P20,000,000.00) divided into Two Hundred Thousand (200,000) shares with a par value of One Hundred Pesos (P100.00) per share; that of the said number of shares, Fifty Two Thousand Three Hundred Twenty (52,320) shares, with a total par value of P5,232,000.00 have been subscribed, thus, leaving 147,680 shares (with a par value of P14,768,000.00) as unsubscribed; that the major stockholder of Vivendi-Phils. is US Filter Finance BV (US Filter), a legal entity organized and existing under the laws of the Netherlands, with postal address at Wattstraat 64, 2723 RD Zoetermee, The Netherlands; that US Filter subscribed to a 99.9% of the issued and outstanding stock of Vivendi-Phils.; that US Filter subscribed to a total of 52,312 shares with a total par value of P5,231,200.00, while 8 individual stockholders subscribed to one (1) share each; that in order to augment the working capital of Vivendi-Phils., its Board of Directors has, through a Resolution, called for the infusion by its shareholders of additional capital contributions into the company coffers; that the authorized capital stock of Vivendi-Phils. would not be increased, and neither would Vivendi-Phils. issue additional shares from the unissued portion of its capital stock; and, that there will, therefore, be no increase in the outstanding shares of stock of Vivendi-Phils. as the major shareholder, US Filter, was assessed to voluntarily infuse additional cash in the amount of US$1,416,000, with a peso equivalent of approximately P70,800,000.00. In connection therewith, you now request confirmation of your opinion that "1. The infusion by US Filter, major stockholder of Vivendi-Phils., of additional paid-up capital (APIC) into Vivendi-Phils. is in the nature of additional funds to be used as capital of the corporation for which no corresponding shares of stock will be issued; "2. APIC is not considered income nor a donation; and "3. APIC is not subject to documentary stamp tax." In reply thereto, please be informed that your opinion is hereby confirmed as follows: 1. Query Nos. 1 & 2. Section 56 of Revenue Regulations No. 2 provides that where a corporation requires additional funds for conducting its business and obtains said funds through voluntary payments by its shareholders, the amounts so received being credited to its surplus account or to a special capital account, will not be considered income, although there is no increase in the outstanding shares of stock of the corporation. The payments in such circumstances are in the nature of voluntary assessments upon, and represent an additional price paid for, in shares of stock held by the individual shareholders, and will be treated as an addition to and as part of the operating capital of the company. Corollarily, in BIR Ruling No. 586-88 dated December 19, 1988, this Office had the occasion to rule that the additional contribution in the form of donated surplus without the necessity of issuing additional shares of stock is deemed capital investment which is not included within the purview of the term "taxable income" and is not subject to income tax. In another occasion, this Office ruled that additional capital contribution without necessarily issuing additional shares of stock, which merely increase the basis of the stockholders' stock but not their proportionate equity in the corporation, is a transaction not subject to income or gift taxes. ( BIR Ruling Nos. 270-87 dated September 8, 1987; 127-89 dated June 13, 1989 ) Accordingly, the infusion of APIC by US Filter into Vivendi-Phils. is in the nature of additional funds which will be used as, and forms part of, the latter's working capital for which no corresponding shares of stock will be issued. As such, the APIC does not constitute an income on the part of Vivendi-Phils. 3. Considering that the infusion of the APIC will not result in the issuance of shares of stock by Vivendi-Phils., the same shall not be subject to documentary stamp tax imposed under Section 175 of the Tax Code of 1997. 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, (SGD.) EDMUNDO P. GUEVARA Deputy Commissioner Legal & Inspection Group