Sycip Gorres Velayo & Co.

December 5, 2007 BIR RULING [DA-611-07] Secs. 40 (C) (2); 175; RR 16-2005; RR 13-2004; DA-459-2006 Sycip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Attention: Atty. E. C. Alcantara Tax Division Gentlemen : This refers to your letter dated November 23, 2007 requesting for confirmation of your opinion on the following: 1. No gain or loss shall be recognized on the transfer of the shares of stock of San Roque Power Corporation registered in the name of Marubeni Corporation (MC) to Axia Power Holdings B.V. (AXIA) in exchange for shares of stock in AXIA whereby as a result of the exchange, MC shall gain further control of AXIA, pursuant to Section 40 (C) (2) and (6) (c) of the Tax Code, as amended; 2. The transfer by MC of the shares of stock in San Roque Power Corporation in exchange for shares of stock in AXIA shall not be subject to Value-Added Tax (VAT) pursuant to Section 4.106-8 of Revenue Regulations No. 16-2005; 3. The cost basis of the shares of stock in San Roque Power Corporation in the hands of MC shall be the same as the basis of the property transferred; 4. The cost basis of the shares of stock in San Roque Power Corporation in the hands of AXIA shall be the same basis as it would be in the hands of the transferor, MC; 5. The transfer by MC of its shares of stock in San Roque Power Corporation in exchange for shares of stock in AXIA will not be considered as a transfer of property for insufficient consideration subject to donor's tax, since there is no intention to donate on the part of any of the parties and the transaction is effected purely for business reasons; 6. The transfer of the shares of stock in San Roque Power Corporation is not subject to documentary stamp tax (DST) imposed under Section 175 of the Tax Code, as amended, pursuant to Section 199 (m) of the Tax Code as amended by Republic Act No. 9243; 7. Upon presentation of the BIR Ruling, the Corporate Secretary of San Roque Power Corporation can record the transfer of the San Roque Power Corporation shares from MC to AXIA in the Stock and Transfer Books of San Roque Power Corporation, and after cancellation of the stock certificates issued in the name of MC, issue new stock certificates in the name of AXIA as transferee. DTCSHA The facts, as represented, are as follows: MC is a corporation duly organized and existing under the laws of Japan with its principal office address at 4-2 Ohtemachi I-Chome, Chiyoda-ku, Tokyo, Japan. It is the registered owner of 827 common shares of stock (including beneficial ownership of two common shares issued to its nominee directors) and 841,496 preferred shares in San Roque Power Corporation, a corporation organized and existing under and by virtue of the laws of the Republic of the Philippines. MC's total acquisition cost of these shares is P2,969,190,036.00. On the other hand, AXIA is a corporation duly organized and existing under the laws of the Netherlands with office address at Strawinskylaan 1025, 1077 XX Amsterdam. It is wholly owned by MC. MC is restructuring its business operations worldwide. As part of this restructuring plan, MC will transfer its shares of stock in San Roque Power Corporation to AXIA in exchange for the latter's shares of stock at a transfer value equal to the acquisition cost of these shares. As a result of the exchange, MC will continue to own the entire and outstanding subscribed and voting capital stock of AXIA, pursuant to Section 40 (C) (2) and (6) (c) of the Tax Code, as amended. aDSAEI We reply, as follows: 1. Pertinent portions of Section 40 (C) (2) of the Tax Code, as amended, state: "No gain or loss shall also be recognized if property is transferred to a corporation by a person in exchange for stock or unit of participation in such corporation of which as a result of such exchange said person, alone or together with others, not exceeding four (4) persons, gains control of said corporation: Provided, that stocks issued for services shall not be considered as issued in return for property." xxx xxx xxx (c) The term 'control' when used in this Section, shall mean ownership of stocks in a corporation possessing at least fifty-one percent (51%) of the total voting power of all classes of stocks entitled to vote." In BIR Ruling No. 149-94 dated September 29, 1994 , this Office affirmed that the tax-free exchange provision of Section 40 (C) (2) is applicable to transfers of Philippine domestic company shares by transferors who are organized and registered under foreign laws to a transferee likewise registered and incorporated under foreign laws. Applying the foregoing, the transferor, MC, therefore, will not recognize gain or loss on the transfer of 827 common shares of stock (including beneficial ownership of two common shares issued to its nominee directors) and 841,496 preferred shares in San Roque Power Corporation to AXIA in exchange for the latter's shares of stock resulting in MC continuing to own the entire and outstanding subscribed and voting capital stock of AXIA since this qualifies as a tax-free exchange pursuant to Section 40 (C) (2) and (6) (c) of the Tax Code, as amended. ( BIR Ruling [DA-459-06] dated July 27, 2006 ) cIACaT It should be emphasized, however, that Section 40 (C) (2) and (6) (c) of the Tax Code merely defers recognition of the gain or loss from such transaction, for in determining the gain or loss from a subsequent transaction of the properties or of the stocks involved in the exchange, the original or historical cost of the properties or stocks is considered. Thus, if the transferor later sells or exchanges the shares of stock it acquired in the exchange, it shall be subject to income tax on gains derived from such sale or exchange, taking into consideration that the cost basis of the shares shall be the same as the original acquisition cost or adjusted cost basis to the transferor of the property exchanged therefor; and that the cost basis to the transferee of the property exchanged for stocks shall be the same as it would be in the hands of the transferor. (Section 40 (C) (5), Tax Code, as amended) 2. Section 106 of the Tax Code, as amended, states: "Sec. 106. Value-added Tax on Sale of Goods or Properties . (A) Rate and Base of Tax. There shall be levied, assessed and collected on every sale, barter or exchange of goods or properties, a value-added tax equivalent to ten percent of the gross selling price or gross value in money of the goods or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor: Provided, That the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%) . . ." ICcaST Moreover, pertinent portion of Section 4.106-8 of Revenue Regulations (RR) No. 16-2005, provides: "(a) Subject to output tax The VAT provided for in Sec. 106 of the Tax Code shall apply to goods or properties originally intended for sale or use in business, and capital goods which are existing as of the occurrence of the following . . . xxx xxx xxx (b) Not subject to output tax The VAT shall not apply to goods or properties existing as of the occurrence of the following: (1) Change of control of a corporation by the acquisition of the controlling interest of such corporation by another stockholder or group of stockholders. The goods or properties used in business or those comprising the stock-in-trade of the corporation, having a change in corporate control, will not be considered sold, bartered or exchanged despite the change in the ownership interest in the said corporation." HCISED Based on the foregoing, the transfer by MC of the San Roque Power Corporation shares of stock in exchange for AXIA shares is not subject to 12% VAT under Section 106 of the Tax Code, as amended by Republic Act No. 9337 and as implemented by RR No. 16-2005 since the San Roque Power Corporation shares are not held by MC primarily for sale, barter or exchange in the ordinary course of its trade or business. 3. The cost basis of the shares of stock in San Roque Power Corporation to be received by AXIA shall be the same as would be in the hands of MC; and that the cost basis of the shares of stock to AXIA shall be the same as it would be in the hands of MC. [ Sec. 40 (C) (5) (a) and (b) of the Tax Code of 1997 ] 4. The transfer by MC of its San Roque Power Corporation shares of stock to AXIA in exchange for the latter's shares of stock is exempt from DST pursuant to Section 199 (m) of the Tax Code, as amended by R.A. No. 9243 and as implemented by RR No. 13-2004, which states as follows: "Sec. 199. Documents and Papers Not Subject to Stamp Tax . The provisions of Section 173 to the contrary notwithstanding, the following instruments, documents and papers shall be exempt from the documentary stamp tax: xxx xxx xxx (m) Transfer of property pursuant to Section 40(c)(2) of the National Internal Revenue Code of 1997, as amended. " [Emphasis supplied] Thus, for DST purposes, a transfer of shares pursuant to a tax-free exchange under Section 40 (C) (2) of the Tax Code, as amended, is an exempt transaction under Section 199 (m) of the Tax Code, as amended. TSEAaD 5. Well-settled in our jurisprudence is the fact that the essential elements of a valid donation are: (1) the reduction of the patrimony of the donor; (2) the increase in the patrimony of the donee; and, (3) the intent to do an act of liberality ( animus donandi ). (BIR Ruling No. S-40-023-05) Clearly there is no intention on the part of MC to donate its shares of stock in San Roque Power Corporation to AXIA since the transaction is being undertaken for purely business purposes. Hence, the transfer of by MC of its shares of stock in San Roque Power Corporation in exchange for shares of stock in AXIA shall not be subject to donor's tax. 6. On the basis of the foregoing representations, the Corporate Secretary of San Roque Power Corporation can register the transfer of San Roque Power Corporation shares from MC to AXIA in its stock and transfer book and cancel and issue new stock certificates in the name of the transferee. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it shall be ascertained that the facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. acHCSD Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service