BIR Ruling [DA-594-99]

October 7, 1999 BIR RULING [DA-594-99] Platon Martinez Flores San Pedro & Leao Law Offices 6/F Tucsan Bldg., 114 Herrera St. Legaspi Village, Makati City Attention: Attys . Hector A . Martinez and Grace P . Quevedo-Panagsagan Gentlemen : This refers to your letter dated June 11, 1999 stating that your client, Motorola Philippines, Inc. ("MPI"), is a domestic corporation duly registered with the Securities and Exchange Commission "to engage in, conduct, carry on and operate the business of manufacturing, producing, assembling, processing, servicing, importing, exporting, buying, selling, distributing and marketing of electronic products and the parts, components and accessories therefor, including specifically semiconductor devices of every type and description . . ."; that it has an authorized capital stock of Thirty Million Pesos (P30,000,000.00) divided into Three Million (3,000,000) shares with a par value of Ten Pesos (P10.00) per share; that Two Million Two Hundred Fifty Thousand shares (2,250,000) are issued and outstanding and the registered owners of said shares are Motorola International Development Corporation (MIDC) and the five individual directors of MPI holding one (1) qualifying share each, are as follows: Name of Stockholders of Record of MPI No. of Shares MIDC 2,249,995 Hector A. Martinez 1 Augusto San Pedro 1 Romerico S. Serrano 1 Patrick Choy 1 Chandramohan A/L Subramaniam 1 2,250,000 shares that you further state that: 1. MIDC is a close corporation organized and existing under the laws of the State of Delaware, U.S.A., with an authorized capital stock of Two Thousand US Dollars (US$2,000.00) divided into Two Thousand (2,000) shares with a par value of US$1.00 per share. 2. Motorola, Inc. (MINC) is a corporation duly organized and existing under the laws of the State of Delaware, U.S.A.. It has an authorized capital stock consisting of One Billion Four Hundred Million (1,400,000,000) shares of common stock, Six Hundred Two Million Four Hundred Sixty Nine Thousand Seven Hundred Fifty Four (602,469,754) shares of which are outstanding, with a par value of US$3.00 per share; 3. SCG Holding is a corporation organized and existing under the laws of the State of Delaware, U.S.A. It has an authorized capital stock consisting of One Thousand (1,000) shares of common stock with a par value of US$0.01. One Hundred (100) shares are presently issued and outstanding in the name of MINC; 4. SCI, LLC is a limited liability company organized and existing under the laws of the State of Delaware, U.S.A. It is controlled by its sole member, SCG Holding, which has a 100% membership interest in SCI, LLC. that you also explain that as an integral part of a worldwide corporate reorganization among the subsidiaries and affiliates of MINC which includes the separation of the business of MINC's semi-conductor components group (SCG) from MINC's other businesses, MIDC shall declare as property dividend all the 2,249,995 MPI shares owned by it and registered in its name (the "MPI SHARES") in favor of MINC; that MINC shall in turn make a capital contribution of the MPI SHARES in favor of SCG Holding, without the issuance of additional shares to MINC (the "capital contribution"); that the capital contribution by MINC to SCG Holding's capital account shall be in the form of paid-in surplus, that immediately after MINC's contribution of the MPI shares to SCG Holding, MINC will still own 100% of the issued and outstanding shares of SCG Holding; that SCG Holding shall contribute the MPI SHARES to SCI LLC without a change in the membership interest of SCG Holding (the "capital contribution"); that the capital contribution by SCG Holding to SCI, LLC's capital account shall be in the form of paid-in surplus; and that it is contemplated that MINC will transfer 90% of its shareholdings in SCG Holding to an affiliate of the Texas Pacific Group ("TPG") and retain 10% thereof. In connection therewith, you now request for a confirmation of your opinion: a) On the property dividend declaration by MIDC to MINC of the MPI shares: That the transfer by MIDC of the MPI SHARES as property dividend in favor of MINC is not taxable in this jurisdiction under the provisions of the National Internal Revenue Code either on the part of MINC or MIDC. b) On the transfer of the MPI SHARES by MINC to SCG Holding and the subsequent transfer of the MPI SHARES by SCG Holding to SCI, LLC. cdll (1) That no taxable gain or loss shall be recognized (i) by transferor MINC in the transfer of the MPI SHARES in favor of transferee SCG Holding, and (ii) by transferor SCG Holding in the subsequent transfer of the MPI SHARES in favor of transferee SCI, LLC, pursuant to Article 14, paragraph 2 of the RP-US Tax Treaty in connection with paragraph 1 of the Protocol of the Treaty. (2) That the transferees in the transfer of the MPI SHARES (i) from MINC to SCG Holding and subsequently (ii) from SCG Holding to SCI, LLC, do not realize taxable income and therefore are not subject to Philippine income tax. (3) That the transfers of the MPI SHARES (i) from MINC to SCG Holding and subsequently (ii) from SCG Holding to SCI, LLC, are not subject to the donor's tax. (4) The Corporate Secretary of MPI be authorized to record in MPI's stock and the transfer book, the transfer of the MPI shares from MIDC to MINC; from MINC to SCG Holding and from SCG Holding to SCI, LLC. In reply thereto, I have the honor to inform you as follows: a) On the property dividend declaration by MIDC to MINC of the MPI SHARES Pursuant to Section 42(A)(2)(b) of the Tax Code of 1997, dividends received from a foreign corporation shall be treated as income unless less than fifty per cent (50%) of the gross income of such foreign corporation for the three year period ending with the close of its taxable year preceding the declaration of such dividends was derived from sources within the Philippines. Based on MIDC Officer's Certificate, MIDC has not realized any income from MPI or from any other Philippine source in each of the years 1996, 1997 and 1998. Under Section 23(F) of the Tax Code of 1997, a foreign corporation, whether engaged in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines. Thus, the receipt by MINC, a foreign corporation, of the MPI SHARES as property dividend is not subject to Philippine income tax. (BIR Ruling No. 252-91 dated November 20, 1991 and BIR Ruling No. 102-94 dated May 4, 1994) We also conform that on the part of MIDC, the transfer of the MPI SHARES by way of property dividend is not considered a sale or disposition within the meaning of Section 40 of the Tax Code of 1997, considering that in the transfer of the MPI SHARES, MIDC does not receive any consideration nor does MIDC realize any income. (BIR Ruling No. 277-93 dated June 28, 1993; BIR Ruling UN-024-1-11-95, BIR Ruling UN-047-1-27-95) prcd b) On the transfer of the MPI SHARES by MINC to SCG Holding and the subsequent transfer of the MPI SHARES by SCG Holding to SCI , LLC (1) Tax Consequence on the Transferors This office hereby confirms your opinion that no taxable gain or loss shall be recognized (i) by transferor MINC in the transfer of MPI SHARES to SCG Holding, and (ii) by transferor SCG Holding in the subsequent transfer of the MPI SHARES in favor of transferee SCI, LLC since the transfer are being made as capital contributions. (BIR Ruling No. 351-92 dated December 8, 1992) (2) Tax Consequence on the Transferees We likewise confirm your opinion that the transferees in the transfer of the MPI SHARES (i) from MINC to SCG Holding and subsequently (ii) from SCG Holding to SCI, LLC, do not realize taxable income and therefore are not subject to Philippine income tax. The transfers of the MPI SHARES by MINC and then by SCG Holding as capital contribution to the transferee companies without issuance of additional shares/change in membership interest are not taxable income but capital investment and thus, are not subject to income tax. (BIR Ruling Nos. 270-87 dated September 8, 1987, BIR Ruling No. 586-88 dated December 19, 1988 and BIR Ruling No. 351-92 dated December 8, 1992) (3) Donor's Tax The transfers of the MPI SHARES (i) from MINC to SCG Holding and subsequently (ii) from SCG Holding to SCI, LLC, are likewise not subject to the donor's tax. (BIR Ruling No. 270-87 dated September 8, 1987 and BIR Ruling No. 351-92 dated December 8, 1992) c) Corporate Reorganization is not subject to Philippine tax Since the transfer of MPI SHARES by MIDC to MINC by way of property dividend declaration and the transfer by MINC to SCG Holding and the subsequent transfer of the same shares from SCG Holding to SCI, LLC by way of capital contribution to the transferee entities are integral parts of the corporate reorganization among the subsidiaries and affiliates of MINC pursuant to the "Distribution and Contribution Agreement" dated April 30, 1999, by and among MINC, MIDC, SCG Holding and SCI, LLC, no sale or other disposition of the MPI SHARES take place hence, the transfer of the MPI SHARES are not subject to Philippine tax. (BIR Ruling No. 385-93 dated September 30, 1993) It is understood, however, that the transfer by MIDC to MINC of the MPI SHARES by way of a property dividend and all the subsequent transfer of the same shares will be subject to the documentary stamp tax (DST) under Section 176 of the Tax Code of 1997. Upon proof of payment of the DST, the Corporate Secretary of Motorola Philippines, Inc. may effect and record the series of transfers of the MPI SHARES. 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. LexLib Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal & Enforcement Group)