SGV & Co.

April 25, 2007 BIR RULING [DA-257-07] 105; 107; 400-93; 112-96 SGV & Co. 6760 Ayala Avenue Makati City Attention: Atty. Wilfredo U. Villanueva Principal, Tax Services Gentlemen : This refers to your letter dated December 6, 2006 requesting for confirmation of your opinion that the transfer of assets and liabilities by Tomen Corporation Manila Branch (Tomen Branch) to Toyota Tsusho Corporation Manila Branch (Toyota Branch), as a result of the merger of their respective head offices, Toyota Tsusho Corporation Japan (Toyota Japan) and Tomen Corporation Japan (Tomen Japan), with Toyota Japan as surviving corporation, shall not be subject to income and value-added tax. It is represented that Toyota Japan is a corporation duly registered under Japanese laws to engage and deal in automobiles, textile machinery, heavy equipment and machinery and related articles; that Toyota Japan was duly licensed by the Securities and Exchange Commission (SEC) to do business in the Philippines through Toyota Branch, primarily to engage in business as importer and exporter of automobiles, textile machinery, heavy equipment and machinery and related articles; that Tomen Japan is a corporation duly registered under Japanese laws to engage in, among others, the importation and exportation, purchase and sale, factorage and brokerage in domestic and foreign commodities and contracting business for construction; that Tomen Japan was duly licensed by the SEC to do business in the Philippines through Tomen Branch, primarily to engage in the purchase, importation, exportation and sale, exclusively on wholesale basis, of domestic and foreign commodities and also to engage in the factorage, brokerage and construction businesses; that as of March 31, 2006, Tomen Branch has total assets of P195,703,945.00 consisting of cash, trade and other receivables, inventories, prepayments and other current assets, investments in proprietary membership clubs, transportation and office equipment and other non-current assets; that Tomen Japan and Toyota Japan agreed to merge effective April 1, 2006, with Toyota Japan as surviving company and Tomen Japan as the absorbed company; that under the Merger Agreement, Tomen Japan shall deliver to Toyota Japan on the merger date all of its assets, liabilities and all other rights and obligations showing on its balance sheet and other calculations as of September 30, 2005, with additions or reductions thereto corresponding to the period from September 30, 2005 up to the merger date, and that Toyota Japan shall assume all such assets, liabilities and other rights and obligations. Based on the foregoing premises, you request for confirmation of your opinion that 1. The transfer of assets and liabilities by Tomen Branch to Toyota Branch is a mere consequence of the merger of their respective head offices in Japan, namely, Tomen Japan and Toyota Branch and, therefore, no taxable sale, exchange, or disposition of properties took place between the parties." No gain or loss was realized by Tomen Branch as a result of the transfer of its assets and liabilities to Toyota Branch pursuant to the Merger Agreement between their respective head offices in Japan. No gain or loss was realized by Toyota Branch as a result of its receipt of the assets and its assumption of the liabilities of Tomen Branch pursuant to the Merger Agreement between their respective head offices in Japan." 2. The transfer of assets by Tomen Branch to Toyota Branch shall not be subject to any output VAT, since the same is not a disposition or exchange of assets in the course of trade or business. Any unused input VAT of Tomen Branch will be transferred for the use or tax credit against the output VAT liabilities of Toyota Branch. 3. The transfer of assets by Tomen Branch to Toyota Branch shall not be subject to donor's tax. 4. The transfer of investments in shares of golf clubs by Tomen Branch to Toyota Branch shall be subject to Documentary Stamp Tax (DST) at the rate of P0.50 on each P200 or fractional part thereof, of the face value of such certificate, pursuant to Section 177 of the Tax Code, as amended. In reply, please be informed that your opinion is hereby confirmed as follows: (1) Section 80(4) of the Corporation Code of the Philippines provides that in a merger, all properties belonging to the absorbed corporation shall be taken and deemed to be transferred to and vested in the surviving corporation, without further act or deed. When the merger between Tomen Japan and Toyota Japan became effective on April 1, 2006, Tomen Japan, being the absorbed corporation, automatically ceased to exist. Being a mere extension of its head office, Tomen Branch also automatically ceased to exist. Thus, in the case of Marubeni Corporation (formerly Marubeni-lida, Co., Ltd.) vs. Commissioner of Internal Revenue and Court of Tax Appeals [G.R. No. 76573 dated September 14, 1989] , the Supreme Court ruled that the head office and its Philippine branch constitute but one juridical entity. The cessation of the corporate existence of the head office as a result of a merger necessarily results in the cessation of the corporate existence of the branch. aATEDS Being a necessary consequence of the merger of their respective head offices, the transfer of assets and liabilities of Tomen Branch to Toyota Branch did not result in any taxable sale, exchange or disposition of properties, since there was no effective transfer of beneficial ownership over the said properties. Consequently, no gain was realized by Toyota Japan or its Philippine branch, Toyota Branch, upon transfer to the latter of the assets and liabilities of Tomen Branch. Neither shall Toyota Branch realize any gain or loss as a result of its receipt of the assets and its assumption of the liabilities of Tomen Branch pursuant to the Merger Agreement between their respective head offices in Japan. Thus, in BIR Ruling No. 112-96 dated October 25, 1996, the BIR ruled: "In reply, please be informed that based on the foregoing representations, no taxable sale, exchange or disposition of properties/stocks took place between Chembank Philippine branch and CMB OBU or Philippine branch, since there is no effective transfer of beneficial ownership. In a merger, the surviving corporation (Chembank) succeeds to the rights and liabilities of the absorbed corporation (CMB), and merely carries on the identity of the latter. (Cashman v. Browhee, 27 N.E. 560). Consequently, no gain was realized by the surviving bank Chembank or its Philippine branch. (BIR Ruling No. 595-88 dated December 23, 1988.) Such being the case, this office hereby confirms your opinion that 1. No gain or loss shall be recognized on the transfer by the CMB OBU of its resources and liabilities to the Chembank Philippine Branch as a consequence of the Merger; and 2. No gain or loss shall be recognized on the exchange by CMB shareholders of their CMB shares for Chembank Common Stock." (2) VAT is imposed on any person who, in the course of trade or business, sells, exchanges or leases goods or properties. The phrase "in the course of trade or business" is defined in Section 105 of the Tax Code, as amended, to mean the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person, regardless of whether or not the person engaged therein is a nonstock, nonprofit private organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members or their guests), or government entity. In the recent case of Commissioner of Internal Revenue vs. Magsaysay Lines, et al. [G.R. No. 146984 dated July 28, 2006] , the Supreme Court ruled that any sale, barter or exchange of goods or services not in the course of trade or business is not subject to VAT. The Supreme Court ruled: "A brief reiteration of the basic principles governing VAT is in order. VAT is ultimately a tax on consumption, even though it is assessed on many levels of transactions on the basis of a fixed percentage. It is the end user of consumer goods or services which ultimately shoulders the tax, as the liability therefrom is passed on to the end users by the providers of these goods or services who in turn may credit their own VAT liability (or input VAT) from the VAT payments they receive from the final consumer (or output VAT). The final purchase by the end consumer represents the final link in a production chain that itself involves several transactions and several acts of consumption. The VAT system assures fiscal adequacy through the collection of taxes on every level of consumption, yet assuages the manufacturers or providers of goods and services by enabling them to pass on their respective VAT liabilities to the next link of the chain until finally the end consumer shoulders the entire tax liability. Yet VAT is not a singular-minded tax on every transactional level. Its assessment bears direct relevance to the taxpayer's role or link in the production chain. Hence, as affirmed by Section 99 of the Tax Code and its subsequent incarnations, the tax is levied only on the sale, barter or exchange of goods or services by persons who engage in such activities, in the course of trade or business . These transactions outside the course of trade or business may invariably contribute to the production chain, but they do so only as a matter of accident or incident. As the sales of goods or services do not occur within the course of trade or business, the providers of such goods or services would hardly, if at all, have the opportunity to appropriately credit any VAT liability as against their own accumulated VAT collections since the accumulation of output VAT arises in the first place only through the ordinary course of trade or business. . . . The conclusion that the sale was not in the course of trade or business, which the CIR does not dispute before this Court, should have definitively settled the matter. Any sale, barter or exchange of goods or services not in the course of trade or business is not subject to VAT." The transfer of properties by Tomen Branch to Toyota Branch pursuant to the merger of their respective head offices is not a disposition or exchange of properties "in the course of trade or business" and is, therefore, not subject to VAT. Moreover, any unused input VAT of Tomen Branch will be absorbed by Toyota Branch, for the use or tax credit against the output VAT liabilities of Toyota Branch. Thus, in BIR Ruling No. 112-96, the BIR ruled: "Finally, value-added tax (VAT) is imposed on the sale, barter, and exchange of properties in the course of trade or business. Section 99 of the Tax Code, as amended, defines the phrase "in the course of trade or business" as the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a non-stock, non-profit private organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members or their guests), or government entity. The exchange of properties pursuant to a merger is not a disposition or exchange of properties "in the course of trade business" and is, therefore, not subject to VAT. In view thereof, this office also confirms your opinion that for VAT purposes, the transfer of assets, including tangible and movable properties pursuant to the merger by CMB-Phils. to Chembank-Phils., will not be subject to any output tax, and in the event that VAT will already be imposed on banks at the time the merger takes effect, any unused input tax of CMB-Phils. will be absorbed by the surviving corporation (Chembank-Phils.)." DAaHET (3) Moreover, the transfer of the assets and liabilities of Tomen Branch to Toyota Branch pursuant to the merger of their head offices shall not be considered a transfer for insufficient consideration and is, therefore, not subject to donor's or to gift tax since there is no intention to donate on the part of either or both parties and the transaction is effected purely for business reasons. Thus, in BIR Ruling DA-001-03 dated January 7, 2003, the BIR ruled: "In reply, please be informed that in BIR Ruling No. 112-96 dated October 25, 1996, citing BIR Ruling No. 595-88 dated December 23, 1988, this Office had the occasion to rule on the tax consequences of a merger between two foreign corporations taking place outside Philippine jurisdiction but having branches within the Philippines. This Office laid down the following precepts: 1. . . . 2. The said transfer shall not be considered as a transfer of property for insufficient consideration and is, therefore, not subject to donor's or to gift tax since there is no intention to donate on the part of either or both parties and the transaction is effected purely for business reasons. . . . Applying the foregoing precepts, this Office hereby confirms your opinion that: 1. . . . 2. The transfer of assets by TPI to CTMLLC as a consequence of the merger is not a transfer for insufficient consideration and is therefore not subject to donor's tax." (4) However, the transfer by Tomen Branch to Toyota Branch of its investments in shares of stock in Canlubang Golf and Manila Golf, which entitle the member to a "proprietary interest in the assets of the club," shall be subject to DST at the rate of P0.50 on each P200 or fractional part thereof, of the face value of such certificate, pursuant to Section 177 of the Tax Code, as amended [ BIR Ruling Nos. 152-90 dated August 16, 1990 and DA-280-96 dated July 30, 1996 ]. In BIR Ruling No. 400-93 dated October 11, 1993, the BIR ruled that in the absence of any face value on the certificates of the Tagaytay Highlands International Golf Club, Inc. (which represent certificates showing interest in the property of a corporation), the DST on the transfer of said shares should be based on issue value, instead of face value. Hence, the transfer of investments in shares of Canlubang and Manila Golf Clubs by Tomen Branch to Toyota Branch shall be subject to DST at the rate of P0.50 on each P200 or fractional part thereof, of the face value of such certificate. DAaEIc 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service