BIR Ruling [DA-264-96]

July 19, 1996 BIR RULING [DA-264-96] Ayala Corporation Makati Stock Exchange Building Ayala Avenue, Makati City Attention: Atty . Renato O . Marzan Managing Director Gentlemen : This refers to your letter dated March 11, 1996 requesting in effect for a confirmation of your opinion that the corporate merger by AYC (Overseas) Ltd. of its shares in the capital stock of Ayala Land, Inc. in favor of Ayala International Pte. Ltd. qualifies as a tax-free merger under Section 34(c)(2) of the Tax Code, as amended. cd It is represented that AYC (Overseas) Ltd., is a foreign corporation organized and existing under Liberian Laws; that Ayala International Pte., Ltd. is likewise a foreign corporation, duly organized and existing under the laws of Singapore; that for Philippine tax purposes, both companies are considered non-resident foreign companies; that the issued and outstanding capital of Ayala International Pte. Ltd. is presently owned by Ayala Corporation; that likewise, the issued and outstanding capital of AYC (Overseas) Ltd. is owned by Ayala Corporation; that for Philippine tax purposes, the subject of the stock transfer are Class "B" shares of Ayala Land, Inc., a corporation duly organized and existing under the laws of the Philippines; that ALI-B shares are registered under the Revised Securities Act and listed with the Philippine Stock Exchange; and that pursuant to the merger, AYC (Overseas) Ltd. will transfer all its assets including the ALI-B shares, to Ayala International Pte. Ltd.; that in consideration thereof, Ayala International Pte. Ltd. will issue its shares to Ayala Corporation as sole stockholder of AYC (Overseas) Ltd.; that there is a necessity for the operations of AYC (Overseas) Ltd., and Ayala International Pte. Ltd. to be harmonized along unified operational policies in order to achieve efficiency and effectiveness and to optimize the use of resources of both corporations; that the merger of AYC (Overseas) Ltd. into Ayala International Pte. Ltd. will enable both corporations to achieve efficiency and operating economy by eliminating duplication of efforts and facilities, and increase profitability through the pooling of resources; and that the merger of AYC (Overseas) Ltd. into Ayala International Pte. Ltd. will provide Ayala International Pte. Ltd. with the necessary resources which it can utilize to achieve and maintain a stronger business and financial position. In reply thereto, please be informed that the above reorganization is a merger within the contemplation of Section 34(c)(2) and 6(b) of the Tax Code, as amended because a corporation (Ayala International Pte. Ltd) will acquire all the assets and assume all the liabilities of AYC (Overseas) Ltd. solely for stocks, the transaction undertaken being for a bona fide business purpose and not solely for the purpose of escaping the burden of taxation. Accordingly, the transfer by AYC (Overseas) Ltd. of all its assets and liabilities to Ayala International Pte. Ltd. solely in exchange for the latter's shares of stock shall not give rise to the recognition of gain or loss pursuant to Section 34(c)(2) of the Tax Code, as amended. No gain or loss shall be recognized to AYC (Overseas) Ltd. upon the distribution of Ayala International Pte. Ltd. shares to AYC (Overseas) Ltd. stockholders in complete redemption of their stocks under Section 34(c)(2) of the Tax Code, as amended. No gain or loss shall be recognized to AYC (Overseas) Ltd. stockholders upon the exchange of their stocks solely for Ayala International Pte. Ltd. stocks under Section 3(c)(2) of the Tax Code, as amended. The basis of the assets received by Ayala International Pte. Ltd. shall be the same as it would be in the hands of AYC (Overseas) Ltd. The basis of Ayala International Pte. Ltd. stocks received by the stockholders of AYC (Overseas) Ltd. shall be the same as the basis of the AYC (Overseas) Ltd. stocks surrendered in exchange therefor. If the total liabilities to be assumed by Ayala International Pte. Ltd. upon effective merger date exceeds the historical or original acquisition cost (cost basis) of the assets transferred by AYC (Overseas) Ltd., the excess shall be recognized as gain to AYC (Overseas) Ltd. (Section 34(c)(4)(b), Tax Code, as amended by P.D. No. 1773). The abovementioned transactions shall not be subject to the donor's tax as there is no intention to donate on the part of any of the parties. It is understood, however, that upon the subsequent sale or exchange of the assets or shares of stock acquired by the parties, the gain derived such sale or exchange shall be subject to income tax. Moreover, in order that the above-described re-organization can be considered as merger under Section 34(c)(2) of the Tax Code, as amended, 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 the cost or other basis of all properties, 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 or 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, a 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. Permanent records in substantial form shall be kept be 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 a subsequent disposition of such stock or securities and other property received from the exchange. (par. 9803-8, P-H 1963 ed., p. 9611) In addition to the foregoing requirements, pertinent 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. 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, and/or any of the requirements imposed in this letter are not complied with, then this ruling shall be considered null and void. (BIR Ruling No. 472-93 dated December 3, 1993) casia Very truly yours, ALICIA P. CLEMENO Assistant Commissioner (Legal Service) By: ALICIA L. TOMACRUZ Head, Revenue Executive Assistant (Legal Service)