BIR Ruling [DA-292-06]

May 3, 2006 BIR RULING [DA-292-06] Punongbayan & Araullo 20th Floor, Tower I The Enterprise Center Ayala Avenue Makati City Attention: Atty. Romeo H. Duran Tax Principal Gentlemen : This refers to your letter dated August 4, 2005 stating that your client, Pacific Plans, Inc. (PPI), is a domestic corporation organized and existing under the laws of the Philippines with principal place of business at 9304 Kamagong corner Dungon Street, Makati City; that it is registered with the Securities and Exchange Commission (SEC) to carry on the business of selling memorial, educational and pension pre-need plans; that its outstanding capital stock is 100% owned by GPL Holdings, Inc. (GPHL); that on June 9, 2004, the Board of Directors of PPI approved the spin-off of the memorial, pension, and the fixed-value educational pre-need plan businesses into a separate new company, called Lifetime Plans, Inc. (Lifetime), which was incorporated with 100% of its shares of stock subscribed by PPI; that the spin-off was approved by the SEC in its letters dated March 31 and July 22, 2004; that on June 20, 2004, PPI and Lifetime entered into a Deed of Assignment whereby PPI transferred to Lifetime all of its assets and liabilities relating to its fixed value education, pension and memorial plans business; that the Certificate of Incorporation of Lifetime was issued by the SEC on August 12, 2004; that upon incorporation, the shares of stock of Lifetime were subscribed by PPI and its nominees as follows: Name of Stockholder No. of Shares Amount Subscribed PPI 999,995 P99,999,500.00 Ernesto C. Garcia 1 100.00 Liwayway F. Gener 1 100.00 Maribel A. Obidos 1 100.00 Flor Bella Monina A. 1 100.00 Maraon Ricardo K. Cua 1 100.00 Total 1,000,000 P1,000,000.00 that as part of the organizational restructuring of PPI, the following transactions were also undertaken: 1. On September 28, 2004, PPI and GPLH executed a Deed of Sale of Shares whereby PPI and its nominees sold 100% of the shares of stock in Lifetime to GPLH for a total consideration of P205,137,860.00. 2. On December 15, 2004, GPLH and Exemplar Holdings, Inc. (Exemplar) with the conformity of PPI, executed a Deed of Sale of Shares whereby GPLH transferred its 21,010,000 shares of stock in PPI to Exemplar for P181,000.00. that after the incorporation of Lifetime, it engaged in memorial, pension, and fixed-value educational pre-need plan businesses; that it also entered into various other transactions for which it acquired assets and asset rights and incurred liabilities; that these transactions include the granting of cash advances to its affiliates, such as GPLH and PPI; that it also entered into Deeds of Assignment of receivables with PPI whereby PPI assigned to Lifetime its receivables from GPLH and Exemplar; that further, as a BIR-registered corporation, Lifetime filed its own tax returns, such as income tax returns, value-added tax returns and withholding tax returns; that on May 24, 2005, however, the SEC revoked the Certificate of Registration of Lifetime for failure of Lifetime to submit documentary requirements imposed by SEC as a condition for Lifetime's registration; that the SEC ruled that: "In view of its failure to submit the above-mentioned requirements despite sufficient time given and pursuant to the resolution of Commission en banc in its Executive Session of May 24, 2005, the Certificate of Incorporation of Lifetime Plans, Inc. is hereby REVOKED." that moreover, the SEC in a Supplemental Comment dated May 25, 2005 filed by the Office of the Solicitor General on its behalf, and in connection with the special proceeding entitled "In re: Petition for Corporate Rehabilitation with Prayer for Suspension of Payments, Pacific Plans, Inc., Petitioner," docketed as Sp. Proc. No. M-6059, pending before Branch 61 of the Regional Trial Court of Makati City (the Court), stated as follows: "Effectively, therefore, Lifetime is nonexistent; only Pacific Plans, Inc. remains and all assets of Lifetime now pertain to Pacific Plans, Inc. . . . ." that accordingly, the Court, in its Order dated June 9, 2005, upheld the position of the SEC in its Supplemental Comment dated May 25, 2005 by stating in its dispositive portion as follows: "xxx xxx xxx "In view of the foregoing, for this Court to determine whether the Petition has been rendered moot and academic, petitioner PPI is hereby ordered to submit an audited financial statement reflecting the consolidation of the assets and liabilities of Lifetime with PPI within seven (7) days from receipt hereof." EaHATD that a motion for reconsideration of the revocation was filed, but the same was denied with finality by the SEC on June 24, 2005; that in its Resolution denying the Motion for Reconsideration, the SEC reiterated that the approval of the incorporation of Lifetime on August 12, 2004 was subject to the condition that "the shares to be issued by the corporation shall be held in escrow and shall be released only upon presentation of proof of transfer in the name of the transferee-corporation of the properties in spin-off within 30 days from the date of approval of the registration and the non-submission of which within the prescribed period shall be sufficient ground for the revocation of the related applications."; that the SEC further cited the comments of Fletcher (Cyclopedia on Corporations, page 212) to the effect that failure to comply substantially with conditions precedent to the creation of a corporation will prevent legal incorporation; that accordingly, the SEC ruled that "Considering Lifetime's failure, in spite of repeated request, to comply with the conditions set by CRMD, this Commission sees no valid reason to reverse CRMD's Order revoking Lifetime's certificate of registration; that as a consequence of the revocation of the registration of Lifetime, and the order of the Regional Trial Court dated June 9, 2005 ordering the submission of consolidated financial statements of Lifetime and PPI, the following transactions will be effected: 1. The shares of stock issued by Lifetime upon its incorporation to PPI and its nominees will be cancelled/retired. 2. All existing assets and asset rights as well as the liabilities of Lifetime will be transferred back and consolidated in PPI. This is because Lifetime never existed as a corporate entity separate from PPI. Consequently, the assets and liabilities of PPI referred to in the Deed of Assignment dated June 20, 2004 were never transferred to Lifetime. All said assets and liabilities remained with PPI. Furthermore, all assets acquired and liabilities incurred by Lifetime under its own name were acquired or incurred on behalf of PPI. The foregoing will be effected by the execution of a deed whereby the Deed of Assignment between PPI and Lifetime dated June 20, 2004 and other contracts entered into by PPI and Lifetime pursuant to the reorganization of PPI will be set aside and whereby PPI will accept and assume the other contracts, rights, assets and liabilities entered into in the name of Lifetime. 3. As a result of the consolidation of the assets and liabilities of Lifetime in PPI, which includes advances granted by Lifetime, a deed of assignment of credit will be executed whereby the creditor will be changed from Lifetime to PPI. 4. Further, as a result of the consolidation of the assets and liabilities of Lifetime in PPI, the promissory note covering the cash advances made by Lifetime in favor of PPI will be rescinded. 5. The Deeds of Assignment of Receivables, previously executed between PPI and Lifetime whereby PPI transferred its receivables from Exemplar and GPLH in favor of Lifetime, will be rescinded. 6. The Deed of Sales of Shares, previously executed between PPI and GPLH whereby PPI transferred its shares in Lifetime to GPLH, will be cancelled or rescinded. 7. The Deed of Sale of Shares, previously executed between GPLH and Exemplar whereby GPLH transferred its 21,010,000 shares in PPI to Exemplar, will be rescinded. that the above transactions would not involve any monetary consideration and would merely involve a reversion to the original status of PPI prior to the spin-off considering that Lifetime never legally existed; and that accordingly, all the transactions carried out to implement the spin-off of the memorial, pension, educational and fixed-value educational pre-need plan businesses of PPI into Lifetime, or all transactions carried out pursuant or in connection thereto never occurred or transpired. DAEIHT Based on the foregoing representations, you now request confirmation of your opinion that "1. The cancellation/retirement of the shares of stock previously issued by Lifetime to PPI and its nominees will not be subject to any tax. "2. The transfer of all assets and liabilities of Lifetime, including the existing assets and liabilities transferred from PPI during the spin-off pursuant to the Deed of Assignment dated June 20, 2004, and those subsequently acquired and incurred and the execution of a deed setting a side or annulling the Deed of Assignment dated June 20, 2004 and other transactions executed in connection with or related to the spin-off, will not be subjected to any tax; "3. The execution of deed of assignment of credit, covering the advances previously granted by Lifetime, whereby the creditor will be changed from Lifetime to PPI, will not be subject to any tax; "4. The rescission of the promissory note covering the cash advances made by Lifetime in favor of PPI, as a result of the consolidation of the assets and liabilities of Lifetime in PPI, will not be subject to any tax; "5. The rescission of the Deeds of Assignment of Receivables, previously executed between PPI and Lifetime whereby PPI transferred its receivables from Exemplar and GPLH in favor of Lifetime, will not be subject to any tax; "6. The cancellation or rescission of the Deed of Sales of Shares, previously executed between PPI and GPLH whereby PPI transferred its shares in Lifetime to GPLH, will not be subject to any tax; "7. The rescission of the Deed of Sale of Shares, previously executed between GPLH and Exemplar whereby GPLH transferred its 21,010,000 shares in PPI to Exemplar, will not be subject to any tax; and "8. The tax returns filed by Lifetime, which includes income tax returns, VAT returns and withholding tax returns, shall be considered filed by Lifetime for and on behalf of PPI. Thus, in determining the total amounts reported by PPI, the amounts reported by PPI in its own tax returns and the amounts separately reported by Lifetime shall be consolidated." In reply thereto, please be informed that the revocation by the SEC of the registration of Lifetime means that Lifetime was not validly incorporated, as such it did not exist from the very beginning. Accordingly, it had no powers and capacity to carry out the purposes expressly provided and implied from its incorporation. Corollarily, Article 1358 of the Civil Code provides that the rescission creates the obligation to return the things which were the object of the contract, together with their fruits, and the price with its interest; consequently, it can be carried out only when he who demands rescission can return whatever he may be obliged to restore. Thus, in BIR Ruling No. 588-04 dated November 22, 2004 , this Office ruled that ". . . rescission of a contract does not give rise to a taxable event for two reasons: (a) the result of rescission is that it is as if there was no sale, transfer or exchange, and hence, no income is realized; and (b) the return of the object of the rescinded contract is not for monetary consideration and is merely an acknowledgment or confirmation of the title and ownership of the original owner of the property. SCETHa "xxx xxx xxx" Accordingly, your opinion is hereby confirmed that the transactions to be effected following the revocation of the registration of Lifetime would have the following tax consequences: 1. The cancellation of the shares of stock previously issued by Lifetime to PPI and its nominees will not be subject to any tax. 2. The transfer of all assets and liabilities of Lifetime, including the existing assets and liabilities transferred from PPI during the spin-off pursuant to the Deed of Assignment dated June 20, 2004, and those subsequently acquired and incurred and the execution of a deed setting aside or annulling the Deed of Assignment dated June 20, 2004 and other transactions executed in connection with or related to the spin-off, will not be subject to any tax. 3. The execution of deed of assignment of credit, covering the advances previously granted by Lifetime, whereby the creditor will be changed from Lifetime to PPI, will not be subject to any tax. 4. The rescission of the promissory note covering the cash advances made by Lifetime in favor of PPI, as a result of the consolidation of the assets and liabilities of Lifetime in PPI, will not be subject to any tax. 5. The rescission of the deeds of assignment of receivables, previously executed between PPI and Lifetime whereby PPI transferred its receivables from Exemplar and GPLH, will not be subject to any tax. 6. The cancellation or rescission of the Deed of Sales of Shares, previously executed between PPI and GPLH whereby PPI transferred its shares in Lifetime to GPLH, will not be subject to any tax. 7. The rescission of the deed of sales of shares, previously executed between GPLH and Exemplar whereby GPLH transferred its 21,010,000 shares in PPI to Exemplar, will not be subject to any tax. 8. Finally, the tax returns filed by Lifetime, which include income tax returns, VAT returns and withholding tax returns, shall be considered filed by Lifetime for and on behalf of PPI. Thus, in determining the total amounts reported by PPI, the amounts reported by PPI in its own tax returns and the amounts separately reported by Lifetime shall be consolidated. 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. IDaEHS Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service