BIR Ruling [DA-398-06]

June 26, 2006 BIR RULING [DA-398-06] DA 432-05 Chevron Philippines, Inc . 6/F 6750 Ayala Avenue 1226 Makati City Attention: Mr. Augusto C. Cabugao Acting General Manager-Finance and Atty. Raissa R. Bautista Tax Manager Gentlemen : This refers to your letter dated May 23, 2006 stating that Chevron Philippines, Inc. (CPI) is a corporation duly organized and existing under the laws of the Philippines; that its parent companies are Chevron Global Energy, Inc. (CGEI) and Traders Insurance Limited (TIL); that CGEI is a company registered in the United States, with office address at 6001 Bollinger Canyon Road, San Ramon California, USA; that it holds the equivalent of 72.79% of the outstanding capital stock of CPI; that TIL, on the other hand, is a company registered in Bermuda, with office address at the Chevron House, 11 Church Street, Hamilton, HM11, Bermuda; that it holds the equivalent of 27.21% of the outstanding capital stock of CPI; that the current breakdown of the capital stock of CPI is as follows: Amount No. of Shares Type/% Authorized Capital P600,000,000 60,000,000 Common Stock Subscribed Capital P535,794,410 53,579,441 Common Stock Paid-in Capital P535,794,410 53,579,441 Common Stock Unsubscribed P64,205,590 6,420,559 Common Capital Stock Par Value P10 1 Common Stockholders CGEI P390,000,000 39,000,000 72.79% TIL P145,794,410 14,579,441 27.21% First Tranche That in a Special Meeting of the Board of Directors (Board) of CPI held on January 24, 2006, the Board called on the stockholders of CPI to proportionately constitute additional paid-in capital (APIC) in the amount of Sixty Million US Dollars (US$60,000,000) to be used as additional working capital of the Company and to reduce its borrowings; that the following Resolution was unanimously approved by the Board in the said meeting: DCcTHa "RESOLVED, to call on the stockholders for Additional Paid-In Capital contribution in the amount of SIXTY MILLION DOLLARS (US$60 Million) (in proportion to their stockholdings), to be used to reduce borrowings and save on interest expense as well as for working capital." that in a duly constituted Special Meeting of the Shareholders of CPI on January 24, 2006, more than 2/3 of its entire outstanding capital stock of CPI voted to approve the following resolution: "RESOLVED, that an additional capital contribution of USD60 Million immediately be made by the stockholders in proportion to their stockholdings, which shall become Additional Paid-In Capital of the Corporation and which shall not require issuance of new shares of stock, and to be used to clear dollar inter-company service charges, and pay off short term borrowings and part of the inter-company loan." that consequently, on January 26, 2006, the stockholders of CPI proportionately remitted a total of Sixty Million Dollars (US$60,000,000) as follows: US$43,680,000 from CGEI US$16,320,000 from TIL Second Tranche That in another Special Meeting of the Board on April 25, 2006, the Board called on the Stockholders of CPI to proportionately contribute APIC anew; that the following Resolution was unanimously approved: "RESOLVED, to call on the stockholders for Additional Paid-In Capital contribution in the amount of ONE HUNDRED THIRTY MILLION DOLLARS (US$130 Million) (in proportion to their stockholdings), to be used to reduce borrowings and save on interest expense as well as for working capital." that in a Special Meeting of the Stockholders of CPI held on April 25, 2006, more than 2/3 of the entire outstanding capital stock voted to approve the following resolution: "RESOLVED, that an additional capital contribution of US$130 Million immediately be made by the stockholders in proportion to their stockholdings, which shall become Additional Paid-In Capital of the, corporation and which shall not require issuance of new shares of stock, and to be used to clear dollar inter-company service charges, and pay off short term borrowings and part of the inter-company loan." that thereafter, the Stockholders of CPI proportionately remitted the total amount of One Hundred Thirty Million US Dollars (US$130,000,000) on April 26, 3006, as follows: US$94,630,000 from CGEI US$35,370,000 from TIL that the aforesaid APIC contributions, without CPI issuing additional shares of stock, did not change the proportionate ownership of CGEI and TIL in CPI; that they merely increased the basis of the Stockholders' stock, but not CGEI's and TIL's respective proportionate equity in CPI; and that to reiterate, the APIC contributions were for purposes of increasing the working capital of CPI, settle various US Dollar inter-company service charges and loans, and pay short-term local borrowings. In connection therewith, you now request confirmation of your opinion that the infusion by CGEI and TIL of additional paid-in capital into CPI, without the issuance of additional shares of stock, is not subject to income, donor's and documentary stamp taxes. In reply thereto, please be informed that Section 56 of Revenue Regulations No. 2, otherwise known as the Income Tax Regulations, provides that "Section 56. Contribution by shareholders. Where a corporation requires additional funds for conducting its business and obtains such needed money through voluntary process payments by its shareholders, the amounts so received being credited to its surplus account or to a special capital account, will not be considered income, although there is no increase in the outstanding shares of stock of the corporation. The payments in such circumstances are in the nature of voluntary assessments upon, and represent an additional price paid for, in shares of stock held by the individual shareholders, and will be treated as an addition to and as part of the operating capital of the company." IEAHca In applying the above-cited provisions, this Office in BIR Ruling No. DA432-05 dated October 20, 2005 ruled that "The infusion by Tupperware Asia Pacific Holdings Pte. Ltd. (TAPH) of additional paid-in capital (APIC) into DPI, in the amount of One Hundred Forty Million Five Hundred and Fifty Thousand Pesos (P140,550,000.00), without the issuance of additional shares of stock, is deemed a capital investment, which is not included within the purview of the term "taxable income" under the Tax Code of 1997, as amended, therefore, not subject to income tax. . . . ; "The remittance by TAPH to DPI of the amount of P140,550,000.00 intended as an additional capital contribution by the former, to augment the working capital and cash requirements of DPI, and without the issuance of shares of stock, is not subject to donor's tax, there being no intention to donate on the part of TAPH and that the transaction is effected purely for business reasons. . . . ; and lastly, "Considering that the cash contribution by TAPH to DPI will not involve the issuance of shares of stock by DPI, the same shall not be subject to DST under Section 174 of the Tax Code of 1997, as amended. . . . ." SUCH BEING THE CASE, this Office is of the opinion that the infusion by CGEI and TIL of APIC into CPI, without the issuance of additional shares of stock, is not subject to income and donor's taxes and is likewise not subject to the corresponding documentary stamp tax under Section 174 of the Tax Code of 1997, as amended. 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