Puyat Jacinto Santos Law Offices

July 9, 2008 BIR RULING [DA-(C-003) 017-08] 40 (C) (2); DA-001-03 Puyat Jacinto Santos Law Offices 12/F Manilabank Building 6772 Ayala Avenue Makati City 1226 Attention: Atty. Virginia B. Viray and Atty. Arnaldo M. Carino Gentlemen : This refers to your letter dated May 5, 2008 requesting for confirmation of your opinion that no Philippine income tax shall be due on the transfer of assets and liabilities of Hinduja TMT Limited (HTMT), an Indian corporation which has a Philippine Branch, to HTMT Global Solutions Limited (HTMT Global), also an Indian corporation which has a Philippine Branch, as a consequence of the demerger of the two foreign companies taking place outside the Philippines. DaAISH It is represented that HTMT is a corporation duly organized and existing under the laws of India with principal office address at InCentre, 49/50 MIDC, Andheri East Mumbai 400093; that on 23 September 2005, HTMT obtained a license from the Philippine Securities and Exchange Commission to operate a branch in the Philippines (HTMT Branch); that HTMT Branch is a PEZA registered enterprise entitled to the special tax regime of 5% on gross income; that HTMT Branch is engaged in customer contact service business and business process outsourcing predominantly for export for the purpose of satisfying the customer relationship requirements of clients thru various multimedia or electronic access services in the Philippines; that as part of the corporate restructuring undertaken by HTMT, its Information Technology and Information Technology Enabled Services (IT/ITES) Business, including HTMT Branch, has been demerged to and vested in HTMT Technologies Limited (HTMT Technologies); that the said demerger was effected by virtue of a judgment rendered by the High Court of Bombay on 23 February 2007; that the transfer took effect without any further act or deed as provided under the judgment; that the following are the legal effects of the demerger: 1. All the assets and properties of demerged company (HTMT) shall become the properties of the resulting company (HTMT Technologies) by virtue of the demerger; 2. All the liabilities relatable to the demerger shall be transferred from HTMT to HTMT Technologies by virtue of the demerger; 3. The properties and liabilities of HTMT relatable to the demerger are transferred to HTMT Technologies at the values appearing in the books of account of HTMT; 4. HTMT Technologies shall issue shares of stock to the shareholders of HTMT in consideration of the demerger on a proportionate basis; and 5. All shareholders of HTMT, shall become the shareholders of HTMT Technologies by virtue of the demerger. that subsequently HTMT Technologies amended its name to HTMT Global and established a branch in the Philippines, HTMT Global Branch. HTMT Global Branch is also duly licensed by the SEC to engage in customer contact service business and business process outsourcing predominantly for export for the purpose of satisfying the customer relationship requirements of clients thru various multimedia or electronic access services in the Philippines; and that pursuant to the judgment of demerger, HTMT Global absorbed the assets of HTMT, including the assets and liabilities of HTMT Branch, at book value, by operation of law without any further act or deed. EAcHCI Based on the foregoing, you now request for confirmation that: 1. No gain or loss shall be recognized on the transfer by HTMT of its assets, which includes the assets and liabilities of the Philippine branch (HTMT Branch), to HTMT Global as a consequence of the demerger between two foreign entities taking place outside the Philippines. 2. The transfer of assets by HTMT, including the assets and liabilities of the Philippine branch (HTMT Branch), to HTMT Global is not a transfer for insufficient consideration and is therefore not subject to donor's tax. 3. The transfer of assets by HTMT, including the assets and liabilities of the Philippine branch (HTMT Branch), to HTMT Global as a consequence of the demerger is not subject to VAT. 4. Finally, the transfer of assets by HTMT, including the assets and liabilities of the Philippine branch (HTMT Branch), to HTMT Global are not subject to DST considering that the same were not conveyed to or vested in the latter by means of any deed, instrument or writing (La Tondea Distillers, Inc., vs. Commissioner of Internal Revenue C.T.A. Case No. 6796, January 6, 2006) . By operation of law, the assets and liabilities were automatically vested in HTMT Global without further act or deed. In reply, please be informed as follows: As a rule, the gain derived from the transfer of properties for valuable consideration is subject to 35% income tax on the part of the seller. As provided under Section 40 (A) of the 1997 Tax Code, the gain from sale of property shall be the excess of the amount realized therefrom over the basis or adjusted basis for determining gain. However, the foregoing rule is not applicable on the transfer of assets by HTMT, including the assets and liabilities of HTMT Branch, to HTMT Global since the same was effected by operation of law, without any further act or deed, pursuant to the judgment of demerger of the High Court of Bombay. HTMT did not realize any gain since the transfer of assets, including the assets and liabilities of HTMT Branch, is only an effect of the demerger, which is also akin to a merger. Sec. 40 (C) (2) of the 1997 Tax Code provides that no gain or loss shall be recognized if in pursuance of a plan of merger or consolidation, a corporation, which is a party to a merger or consolidation, exchanges property solely for stock in a corporation, which is a party to the merger or consolidation. CDHAcI In BIR Ruling No. 165-99 dated October 21, 1999, the BIR held that the conversion of the subsidiary to a branch is akin to a merger. Thus, "Where there is transfer of all the assets and the assumption of debts and liabilities of the absorbed corporation by the absorbing corporation and the legal personality of the absorbed corporation is extinguished but its interest subsists inasmuch as the transfer is in consideration for the shares of stock to be issued by the absorbing corporation. In the instant case, the conversion of the subsidiary into a branch, the stockholders' interest in the subsidiary also subsists since the shares of stock of the subsidiary are owned by the head office of the branch. With the conversion, from indirect ownership of the assets of the subsidiary, APCBV will now have direct ownership of the said assets." Similarly, the demerger of HTMT and HTMT Global is also akin to a merger in as much as the transfer by HTMT of all its assets, including the assets and liabilities of HTMT Branch, to HTMT Global is in consideration for the shares of stock to be issued by the latter. Thus, the tax consequences of a merger between two foreign corporations taking place outside Philippine jurisdiction but having branches within the Philippines should similarly apply in the instant case. In BIR Ruling No. DA-001-03 dated January 7, 2003, citing BIR Ruling No. 595-88 dated December 23, 1988, this office had the occasion to rule on the tax consequences of a merger between two foreign corporations taking place outside Philippine jurisdiction but having branches within the Philippines. This office laid down the following precepts: 1. No taxable sale, exchange or disposition of properties/stocks took place between the two foreign branches, since there is no effective transfer of beneficial ownership. In a merger, the surviving corporation succeeds to the rights and liabilities of the absorbed corporation, and merely carries on the identity of the latter. ( Cashman v. Browhee, 27 N.E. 560 ). Consequently, no gain was realized by the surviving foreign corporation or its Philippine branch. 2. The said transfer shall not be considered as a transfer of property for insufficient consideration and is, 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. 3. The exchange of properties pursuant to a merger is not a disposition or exchange of properties "in the course of trade business" and is, therefore, not subject to VAT. 4. For VAT purposes, the transfer of assets, including tangible and movable properties pursuant to the merger of two foreign corporations will not be subject to any output tax, and any unused input tax of the absorbed foreign corporation will be absorbed by the surviving corporation. IHAcCS Applying the foregoing precepts by analogy, this office confirms your opinion that no gain or loss shall be recognized on the transfer by HTMT of its assets, which includes the assets and liabilities of the Philippine branch (HTMT Branch), to HTMT Global as a consequence of the demerger between two foreign entities taking place outside the Philippines. The transfer of assets by HTMT, including the assets and liabilities of the Philippine branch (HTMT Branch), to HTMT Global is not a transfer for insufficient consideration and is therefore not subject to donor's tax. The transfer of assets by HTMT, including the assets and liabilities of the Philippine branch (HTMT Branch), to HTMT Global as a consequence of the demerger is not subject to VAT. Finally, the transfer of assets by HTMT, including the assets and liabilities of the Philippine branch (HTMT Branch), to HTMT Global are not subject to DST considering that the same were not conveyed to or vested in the latter by means of any deed, instrument or writing (La Tondea Distillers, Inc., vs. Commissioner of Internal Revenue, C.T.A. Case No. 6796, January 6, 2006). This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service