BIR Ruling [DA-401-98]

September 3, 1998 BIR RULING [DA-401-98] Roxas, De Los Reyes, Laurel & Rosario Law Offices 19th Floor, PDCP Bank Building 8737 Paseo de Roxas Makati City 1200 Attention: Attys . Anna Melissa L . Rosario and Joycel G . Robles-Panlilio Gentlemen : This refers to your letter dated June 19, 1998 requesting for a ruling on your following opinions that: cdta 1. No gain or loss shall be recognized by ABIBI upon the assumption by CIBC (now AARSI ) of the assets and liabilities of ABIBI pursuant to the merger, in accordance with 40 (C) (2) of the Tax Code of 1997; 2. No gain or loss shall be recognized by ABIBI and their respective stockholders upon the issuance and distribution of CIBC (now AARSI) shares to them in exchange for their shares in ABIBI, pursuant to the plan of merger; 3. The basis of properties of ABIBI in the hands of CIBC (now AARSI) shall be the same as it would be in the hands of ABIBI; 4. The basis of the CIBC (now AARSI) shares of stock to be received by the stockholders of ABIBI shall be the same as the basis in ABIBI's shares of stocks surrendered and exchanged pursuant to the plan of merger; 5. The transfer of the assets of ABIBI to CIBC (now AARSI) pursuant to the merger will not be subject to Value Added Tax; and 6. The transfer of assets of ABIBI will not be considered as a transfer of property for insufficient consideration subject to gift tax, since there is no intention to donate on the part of any of the parties and the transaction is effected purely for business purposes. It is represented that CIBC and ABIBI are corporations duly organized and existing under and by virtue of the laws of the Republic of the Philippines; that at present, CIBC has an authorized capital stock of Two Hundred Thousand Pesos (P200,000.00) divided into Two Thousand (2,000) shares with a par value of One Hundred Pesos (P100.00) per share of which One Hundred Thousand Pesos (P100,000.00) have been subscribed and fully paid; that on the other hand, ABIBI's authorized capital stock at present is Forty Million Pesos (P40,000,000.00) divided into Four Million (4,000,000) shares with a par value of Ten Pesos (P10.00) per share of which Ten Million Pesos (P10,000,000.00) have been subscribed and fully paid; that both corporations are engaged in the business of insurance broking, risk consultancy and other insurance related activities in the Philippines; that at separate meetings held on January 16, 1998, the Board of Directors of both corporations, by majority vote, and the stockholders of each representing at least 2/3 of the outstanding capital stock, approved the pooling of resources and expertise of both corporations by way of merger with CIBC as the surviving corporation; that the merger is being undertaken for a bonafide business purpose and not solely for the purpose of evading the burden of taxation; that under the Plan of Merger dated April 3, 1998, CIBC and ABIBI shall merge into a single corporation with CIBC as the surviving corporation to be hereafter known as "Ayala Aon Risk Services, Inc. (AARSI); that it further provides that upon the Effective Merger Date [date of approval by the Securities and Exchange Commission (SEC)] the corporate existence of ABIBI shall cease and thereupon, all rights, privileges, powers and franchises of ABIBI and all property, real, personal or mixed, and all debts due to ABIBI on whatever account and all other things in action belonging to ABIBI as of the Effective Merger Date, shall be vested in CIBC without further act or deed, and all such property, rights, privileges, powers and franchises, and all and every interest of ABIBI shall thereafter be as effectually the property of CIBC as they were of ABIBI and Title to any real estate, whether by deed or otherwise, vested in ABIBI shall not revert or be in any way impaired by reason hereof; that in order to effect said merger, the registered shareholders of ABIBI thereby agreed to exchange their respective shareholdings in ABIBI for shares of stocks of CIBC at the ratio of one (1) share of CIBC with par value of One Hundred Pesos (P100.00) for every One Thousand Two Hundred Fifty (1,250) of ABIBI with a par value of Ten Pesos (P10.00); that a total of Eight Hundred (800) common shares of CIBC shall be issued out of its unissued capital stock in favor of ABIBI shareholders; that said shares, upon compliance with regulatory requirements, shall be at par with the outstanding shares of CIBC as of the date of the execution of the Plan of Merger; that on April 7, 1998, an application for merger was filed by the merging corporations with the SEC; and that the said application was approved by the SEC in its Certificate of Filing of the Articles of Merger dated January 15, 1998. In reply, please be informed that based on the foregoing representations and documents submitted, no taxable sale, exchange or disposition of property/stocks took place between CIBC and ABIBI since there is no effective transfer of beneficial ownership. In a merger, the surviving corporation (CIBC) succeeds to the rights and liabilities of the absorbed corporation (ABIBI), and merely carries on the identity of the latter. (Cashman V. Browhee, 27 N.E. 560). Consequently, no gain was realized by the surviving corporation, CIBC. (BIR Ruling No. 565-88 dated December 23, 1988) Such being the case, this Office hereby confirms your opinion that 1. The Merger of CIBC and ABIBI with CIBC as the surviving corporation is exempt from capital gains tax pursuant to Section 40(C)(2) of the Tax Code of 1997. (BIR Ruling No. 112-96 dated October 25, 1996) 2. That the exchange by the ABIBI shareholders of their ABIBI shares for shares of CIBC, said stock swap shall not likewise be subject to capital gains tax. (BIR Ruling No. 112-96 dated October 25, 1996) 3. The basis of properties of ABIBI in the hands of CIBC (now AARSI) shall be the same as it would be in the hands of ABIBI; 4. The basis of the CIBC (now AARSI) shares of stock to be received by the stockholders of ABIBI shall be the same as the basis in ABIBI's shares of stocks surrendered and exchanged pursuant to the plan of merger; Moreover, considering that the transfer of the assets and liabilities of ABIBI to CIBC is in pursuant to the merger, this Office likewise confirms your opinion that the said transfer shall not be considered as a transfer of property for insufficient consideration and therefore, not subject to donor's or to gift tax, since there is no intention to donate on the part of either or both parties and the transaction is effected purely for business reasons. (BIR Ruling No. 112-96 dated October 25, 1996) Furthermore, value-added tax (VAT) is imposed on the sale, barter, and exchange of properties in the course of trade or business. Section 106 of the Tax Code of 1997, defined the phrase "in the course of trade or business" as the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a nonstock, nonprofit private organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members or their guests), or government entity. An exchange of properties pursuant to a merger is not a disposition or exchange of properties "in the course of trade or business" and is, therefore, not subject to VAT. Accordingly, your opinion that the transfer of assets of ABIBI to CIBC pursuant to the merger will not be subject to VAT is hereby confirmed. (BIR Ruling No. 112-96 dated October 25, 1996) cdta 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.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal & Enforcement Group)