BIR Ruling [DA-356-03]

October 10, 2003 BIR RULING [DA-356-03] 173; 171-92; 271-87; DA 214-96 Follosco Morallos & Herce Law Offices Suite 1506, 15th Floor, 88 Corporate Center 141 Valero Street Corner Sedeo Street Salcedo Village, Makati City Attention: Attys. Mary Lyn B. Tanawan and Virgilio D.C. Herce Gentlemen : This refers to your letter dated January 15, 2003 requesting for a confirmation of your opinion relative to the tax implications of the capital reduction undertaken by your client, OCBC Securities Philippines, Inc. (OSPI), such that: 1. OSPI is not subject to any tax for receiving from Provident Securities Pte. Ltd. (PSPL) the reduced shares and subsequently canceling the same; 2. The surrender by PSPL of the reduced shares to OSPI is not subject to payment of documentary stamp tax; 3. The amount of P85,000,000 representing the reduced capital to be repatriated to PSPL is not subject to income tax; and 4. PSPL is not required to apply for Certificate Authorizing Registration. It is represented that OSPI is a domestic corporation wholly-owned by PSPL, a non-resident foreign corporation established under the laws of Singapore; that as of July 10, 2001, OSPI has an authorized and outstanding capital stock of P120,000,000 divided into 1,200,000 common shares at P100 par value; that on July 10, 2001, the Board of Directors of OSPI passed a resolution, which was subsequently approved by the shareholders, reducing the authorized capital stock of the corporation from P120,000,000 to P35,000,000; that upon compliance by OSPI of the requirements for capital reduction, the Securities and Exchange Commission (SEC) approved the said reduction of capital stock of OSPI; that to implement the capital reduction after its approval by the SEC, the Board of Directors of OSPI passed a resolution authorizing the corporation to purchase at par from PSPL 850,000 shares of its capital stock; and that the purchase of the Reduced Shares is for the purpose of redeeming the same from PSPL and returning to the latter its capital, consistent with the nature of capital reduction as being akin to partial liquidation. AaITCS In reply, please be informed as follows: 1. Your opinion that OPSI is not subject to any tax for receiving from PSPL, the surrendered shares as a result of the partial liquidation and for the cancellation of the same is confirmed, since it is merely performing the ministerial function of implementing the reduction of the capital stock and is not taking title to nor is it receiving any value for the surrendered shares. The reduced shares do not represent value, since they are merely the documentary evidence of the reduced capital stock and will cease to exist after their cancellation. This Office has previously ruled that a company, under partial liquidation is not subject to any tax for receiving from its stockholders surrendered shares and for canceling the reduced shares. (BIR Ruling No. 171-92 and BIR Ruling No. DA-214-96 dated June 26, 1996.) 2. The corporation is not taking title to nor is it receiving any value for the shares surrendered by its stockholders pursuant to a capital reduction. It held that the reduced shares do not represent value since they are merely documentary evidence of the reduced capital stock and will cease to exist after they have been canceled (BIR Ruling No. 039-02 dated November 11, 2002) . Thus, the Deed of Assignment covering the transfer of the shares of stock for PSPL is not subject to DST since the conveyance is without any consideration. 3. The amount of P85,000,000 representing the reduced capital to be repatriated to PSPL is not subject to income tax since the same constitutes a return of capital or principal and not income as the term is defined under Section 32 of the Tax Code of 1997. (BIR Ruling No. 271-87) 4. Likewise, your opinion that PSPL is not required to apply for Certificate Authorizing Registration is likewise hereby confirmed inasmuch as the surrender of the reduced shares is not subject to the documentary stamp tax and capital gains tax, considering that it is not necessary to register the transfer of the reduced shares in the books of OSPI as the same must be canceled and retired. 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. IATHaS Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group