Punongbayan & Araullo

August 8, 2007 BIR RULING [DA-433-07] 107-95 Punongbayan & Araullo 20th Floor, Tower 1 The Enterprise Center 6766 Ayala Avenue Makati City Attention: Atty. Romeo H. Duran Tax Partner Gentlemen : This refers to your letter dated February 7, 2007 stating that your client, P.J. Lhuillier, Inc. (PJLI), is a corporation existing under and by virtue of the law of the Philippines; that presently, PJLI has a total capital stock of P400,000,000.00 divided into 4,000,000 shares with a par value of P100 per share; that in 1997, on pro rata basis, all stockholders deposited a total amount of P622,610,364 for future stock subscriptions; that subsequently, in the light of PJLI's expansion plans, PJLI's Board of Directors called for special meeting on November 16, 1998 whereby they agreed, through a Board Resolution, to convert a portion of the said deposit for future stock subscription in the amount of P575,735,364 into Additional Paid-in Capital (APIC); that on December 28, 1998, the balance of the deposit in future stock subscription in the amount of P46,875,000 was used to subscribe additional common stocks; that out of the P575,735,364 APIC of the Company, P247,865,400 (representing 2,478,654 shares) was declared as stock dividend on December 12, 2001; that hence, the APIC was reduced to P372,869,964 after the declaration; and that a stockholder of PJLI is contemplating to sell his shareholdings in PJLI. Based on the foregoing representations, you now request confirmation of your opinion that the APIC in the amount of P372,869,964, which arose from conversion of the deposit for future stock subscriptions contributed by the stockholders on a pro rata basis, should be allocated among the outstanding shares likewise on a pro rata basis. Accordingly, in computing the capital gains tax, the APIC as allocated pro rata should be considered part of the acquisition cost of shares of stock. In reply thereto, please be informed that in BIR Ruling No. 107-95 dated July 19, 1995, this Office ruled that ". . . where a corporation requires additional funds for conducting its business and obtains such needed money through voluntary pro-rata 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 a part of the operating capital of the company. (Section 56, Revenue Regulations No. 2) . . . in the determination of the net capital gain subject to the 10% and 20% final capital gains tax prescribed in Section 24(e)(2)(a) of the Tax Code, as amended, the said additional contribution should be added to the original acquisition cost and the total amount deducted from the selling price of the shares is hereby confirmed." SUCH BEING THE CASE, this Office hereby confirms your opinion that for purposes of computing capital gains tax, the cost of PJLI's shares shall include that purchase price, including all costs of acquisition (e.g., commission, documentary stamp tax, transfer fees, etc.) as well as the APIC infused by the stockholders. Moreover, the APIC shall be allocated on each PJLI's shares of stock on pro-rata basis because the deposits for future stock subscription, which were converted into APIC, had been infused by the stockholders on a pro rata basis, i.e., on the basis of their equity shareholdings. Accordingly, the cost per share of PJLI's shares shall be computed by dividing the capital of PJLI (i.e., capital stock plus APIC) by the total number of shares issued and outstanding. 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. TSHEIc Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service