BIR Ruling [DA-425-98]

September 16, 1998 BIR RULING [DA-425-98] King Capuchino Tan & Associates 2nd Floor Belman II Building Quezon Avenue corner Cordillera Street Quezon City Attention: Atty . Lincoln L . Tan, Jr . Gentlemen : This refers to your letter dated April 16, 1998 requesting on behalf of your client, Hyatt Terminal and Industrial Corporation (HTIC) for exemption from the payment of the expanded withholding tax on the ground that HTIC has incurred operational losses in the years 1996 and 1997 pursuant to Revenue Regulations No. 12-94. It is represented that HTIC was formally incorporated on May 5, 1994 with the approval by the Securities and Exchange Commission (SEC) of its Articles of Incorporation under SEC Registration No. ASO94-4054; that it has an authorized capital stock of P100,000,000.00, of which P25,000,000.00 had been subscribed and P6,250,000.00 had been paid-up; that in 1996, HTIC commenced business operations and obtained long term loans, mainly dollar denominated, in the sum of US$10,000,000.00 from a foreign bank, or equivalent to P261,807,069.00 based on the prevailing exchange rate in 1996; that by the latter half of 1997, the Philippine Peso started to slide as against the US Dollar and which, before the end of 1997, further devaluated by more than 40% from its 1996 valuation level; that this event has substantially influenced the financial results of HTIC's operations to the point that it incurred a staggering loss of P81,894,052.00 for 1997; that as shown in its latest audited financial statements, the company had already sustained a deficit of P83,857,110.00 as the last two (2) years (i.e., 1996 and 1997) of operations resulted in net loss; that there seems to be no prospect of immediate recovery for HTIC within the next few years due to the fact that the outstanding balance of its long term loan shoot up to P594,072,430.00 from only P341,502,069.00 a year earlier, attributable mainly to the financial crisis that hit the Southeast Asian Region; that as a result, the corresponding interest that HTIC has to service on account of the above-mentioned long-term loans will amount to more than P50.0 Million on a yearly basis which is way above the company's projected income from leasing operations of only about P16.0 Million per annum; that it is therefore very clear that the company will most likely continue to show negative results in the coming years; transfer its operating assets to Total Petroleum Phils. Corporation (TPPC), a corporation organized and existing under Philippine laws; that HTIC will initially transfer its storage tank facilities, valued at about P150.0 Million to TPPC in exchange for the latter's shares of stock, representing approximately 40% of the outstanding shares of TPPC, while the remaining 60% of the outstanding shares will be subscribed to by Total Raffinnage Distribution, S.A. of France; and that the remaining assets of HTIC will likewise be transferred to TPPC for additional shares of stock as a final stage of the exchange transaction between HTIC and TPPC. In connection therewith, you now request for your opinion on the following "1. The proposed transfer by HTIC of its storage tank facilities to TPPC valued at about P150.0 Million, and the rest of its remaining assets, in exchange for shares of stock of the latter corporation, either at cost or its book values, is exempt from any and all creditable withholding taxes on income pursuant to Revenue Regulations No. 12-94 due to continuing losses for the last two (2) years of its operations; "2. HTIC's rental income, and all other income that may be derived by the company, if any, is likewise exempt from any and all withholding taxes due to losses for the last two (2) years, i.e., for 1996 and 1997, and on account further of the expected losses to be incurred by the company as explained above. In reply, please be informed as follows 1) Under Section 4(d) of Revenue Regulations No. 12-94, implementing then Section 50(b) of the Tax Code, as amended [now Section 57(B) of the Tax Code of 1997, as implemented by Revenue Regulations No. 2-98], the withholding tax prescribed in the said regulations shall not apply to income payments to payee who suffered net operating losses during the immediately preceding two (2) taxable years. Such being the case, since HTIC has suffered net operating losses during the immediately preceding two (2) consecutive years from 1996 to 1997, this Office is of the opinion as it hereby holds that the transfer by HTIC of its storage tank facilities to TPPC and its remaining assets, in exchange for shares of stock of the latter corporation is exempt from the 7.5% expanded creditable withholding tax imposed under Revenue Regulations No. 12-94, implementing then Section 50(b) of the Tax Code, as amended [now Section 57(B) of the Tax Code of 1997, as implemented by Revenue Regulations No. 2-98]. (BIR Ruling No. DA-430-97 dated December 11, 1997) 2) Moreover, rental income and other income that may be derived by HTIC is likewise exempt from the expanded creditable withholding tax prescribed under the said regulations, on the ground that it has suffered net operating losses for the immediately preceding two (2) taxable years. 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)