BIR Ruling [DA-300-06]

May 8, 2006 BIR RULING [DA-300-06] NOLCO RR No. 14-2001 Balmeo & Go Law Offices 3/F, Rm. 309 Margarita Building J.P. Rizal corner Cardona Streets Makati City Attention: Atty . Leonides F. Balmeo Gentlemen : This refers to your letter dated November 2, 2005 requesting confirmation of your opinion that the net operating loss carry over (NOLCO) of your client, BENGUET HYDRO CORPORATION (BHC for brevity), sustained in 2002 can be utilized until 2005 and the NOLCO it sustained in 2004 can be utilized until 2007 despite its de facto merger with Hydro Electric Development Corporation (HEDCOR) and Northern Mini Hydro Corporation (NMHC) where there was no substantial, change in ownership of BHC. It is represented that BHC is a corporation organized and existing under the laws of the Philippines with business address at Aboitiz Corporate Center, Archbishop Reyes Avenue, Banilad, Cebu City. It is engaged in the business of acting as manager or managing agent of persons, firms, associations, corporations, partnerships and other entities engaged in hydropower related business; hydropower, construction, ownership and operation of mini-hydropower plants; acting as consultant, contractor or principal in the business of developing, constructing, operating, repairing and maintaining electric plants and systems and other power generating and converting stations, and the manufacture, operation and repair of associated mechanical and electrical equipment. aTEHCc On May 27, 2005, it entered into a Memorandum of Agreement for De Facto Merger with Northern Mini Hydro Corporation (NMHC) and Hydro Electric Development Corporation (HEDCOR) which are corporations organized and existing under the laws of the Philippines both with business address at 214 Ambuklao Road, Obulan Beckel, La Trinidad Benguet. This merger was approved by the BIR in BIR Ruling No. S-40-014-2005 dated August 4, 2005. Since BHC, NMHC and HEDCOR are engaged in similar lines of business, the de facto merger will have the result of simplifying their business operations and consolidating their assets and activities into a single corporation and streamlining their operations and minimize administrative costs of the three corporations. The de facto merger involved the acquisition of all the assets of NMHC and HEDCOR and the assumption of the obligations and liabilities of NMHC and HEDCOR in respects of the assets in exchange of shares of stocks of BHC. NMHC and HEDCOR continue to exist as holding corporations. The stock holdings of BHC before and after the de facto merger is as follows: Name of Shareholder Before de facto After de facto Percentage after merger merger the merger Philippine P62,142,318.00 P62,142,318.00 77% Hydropower Corporation (including nominee shareholders) NMHC 0.00 P4,818,282.00 6% HEDCOR 0.00 P13,743,709.00 17% Total P62,142,318.00 P80,704,309.00 100% BHC has accumulated net operating loss carry over (NOLCO) available for tax reporting as of its 2004 Financial Statement as follows: Year NOLCO Availment Current NOLCO Valid Until sustained in Previous Write-Off Unused Year 2001 P21,123,394 P3,216,992 P17,906,402 - 2004 2002 18,774,240 18,774,240 2005 2004 12,784 12,784 2007 P39,910,418 P3,216,992 P17,906,402 P18,787,024 There is no transfer of NOLCO by HEDCOR and NMHC as a result of the merger. Based on the foregoing, you are requesting confirmation of your opinion that BHC may legally claim as deduction to its gross income the above amount of NOLCO since there is no substantial change in its ownership as a result of the de facto merger with HEDCOR and NMHC. In reply, please be informed that Revenue Regulations No. 14-2001 govern the allowance of NOLCO as a deduction from gross income. It provides as follows: ""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 aTEHCc (ii) Not less than seventy-five percent (75%) of the paid up capital of the corporation if the business is in the name of a corporation, is held by or on behalf of the same persons. 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: Provided, That for mines other than oil and gas wells, a net operating loss without the benefit of incentives provided for under Executive Order No. 226, as amended otherwise known as the Omnibus Investments Code of 1987, incurred in any of the first ten (10) years of operation may be carried over as a deduction from taxable income for the next five (5) years immediately following the year of such loss. The entire amount of the loss shall be carried over to the first of the five (5) taxable years following the loss and any portion of such loss which exceeds the taxable income of such first year shall be deducted in like manner from the taxable income of the next remaining four (4) years." The same RR also provides as follows: "2.2 In general, NOLCO shall be allowed as a deduction from the gross income of the same taxpayer who sustained and accumulated the net operating losses regardless of the charge in its ownership. This rule shall also apply in the case of a merger where the taxpayer is the surviving entity. 2.3 Unless otherwise provided in these Regulations, NOLCO of the taxpayer shall not be transferred or assigned to another person, whether directly or indirectly, such as, but not limited to, the transfer or assignment thereof through a merger, consolidation or any form of business combination of such taxpayer with another person. 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 a 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 business combination with another person. In case the transfer or assignment of the taxpayer's net operating losses arises from the said taxpayer's merger, consolidation 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 a corporation ) or 75% or more interest in the business of the transferee/assignee ( in case the transferee/assignee is other than a corporation )." Considering that BHC is the absorbing corporation which sustained the NOLCO and considering further that the nominal value of its outstanding issued shares is more than seventy-five percent (75%) owned by the same shareholder, before and after the merger, BHC, therefore, may utilize the NOLCO sustained in 2002 until 2005 and the NOLCO it sustained in 2004 until 2007. The above NOLCO, however, is subject to the verification and investigation by the BIR District and/or Regional Office concerned as to its existence and the correctness of the amount involved. 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.) JOSE MARIO C. BUAG Commissioner of Internal Revenue