Shell Philippines Exploration B.V.

March 10, 2009 BIR RULING [DA-(C-037) 145-09] 40 (C) (2); 100 & 105; DA (C003) 017-2008; DA 150-00 Shell Philippines Exploration B.V. 19/F Asian Star Building Asean Dr., Filinvest Corporate City Alabang, Muntinlupa City Attention: Mr. Paul van der Harten Finance Manager Gentlemen : This refers to your letters dated May 22, 2008 and October 10, 2008 requesting confirmation of your opinion that the merger of SPLL Head Office with SPHLLC in the USA and the subsequent transfer of assets and liabilities of Shell Philippines LLC-Philippine Branch (SPLL) to Shell Philippines Exploration B.V.-Philippine Branch (SPEX) as a result of the purchase of Shell (Philippines) Holdings LLC (SPHLLC) shares by SPEX Head Office in the Netherlands do not result to a taxable gain or loss in the Philippines for either SPLL or SPEX. ASHaTc It is represented that SPLL is a company organized under the laws of the State of Delaware, USA and duly licensed to do business in the Philippines through its Philippine branch; that SPLL is primarily engaged in the exploration and development of gaseous hydrocarbons in the Philippines through its twenty five percent (25%) equity interest in the Malampaya consortium under Service Contract 38 and is owned by SPHLLC, also a company organized under the laws of the State of Delaware, USA; that SPHLLC is owned by Shell Philippines Holding GmBH (SPG), a company organized under the laws of Austria; that SPEX, on the other hand, is a company organized under the laws of the Netherlands and duly licensed to do business in the Philippines through its Philippine branch; that SPEX holds a twenty percent (20%) equity interest in the Malampaya consortium and is the operator of the consortium and as such, it manages the accounting and administrative functions of the other consortium members including that of SPLL. It is also represented that consistent with the objectives of the Royal Dutch Shell Group Plc (Shell Group) the ultimate parent company of SPLL and SPEX of simplifying the structures and eliminating the duplication of administrative functions of all its companies globally, it is planned to have a single owner of all its Philippine assets; that SPEX being the operator of the consortium is designated to be the surviving entity; and that the following transactions are deemed efficient in terms of cost and administration by Shell Group to effect the simplification of the structure of its US, Austrian and Philippine companies: 1. Liquidation of SPG; 2. Merger of SPHLLC and SPLL-Head Office with SPHLLC as the surviving company; 3. Sale of SPHLLC shares to SPEX by Shell Petroleum N.V. (SPNV) parent company of SPG and organized under the laws of the Netherlands; 4. Liquidation of SPHLLC; and 5. Cancellation of SPLL' branch registration in the Philippines and transfer of all its assets and liabilities of to SPEX branch. HCSDca In reply, please be informed that based on the foregoing representations the merger of SPLL Head Office with SPHLLC in the USA and the subsequent transfer of assets and liabilities of SPLL-Philippine Branch to SPEX-Philippine Branch as a result of the purchase SPHLLC shares by SPEX Head Office in the Netherlands do not result to a taxable transaction in the Philippines for either SPLL or SPEX. The sale by SPNV of SPHLLC shares to SPEX Head Office takes place in the Netherlands and the merger of SPHLLC and SPLL takes place in the USA. Further, the transfer of all the assets and liabilities of SPLL to SPEX Head office takes place in Netherlands. Inasmuch as the legal personality of SPHLLC and SPLL ceased to exist upon its dissolution, the Philippine branch of SPLL automatically dissolved as well. The transfer therefore of the assets and liabilities of the SPLL Philippine branch to SPEX Head Office through its Philippine branch is a necessary consequence of the changes of ownership in its head office akin to the principle that the accessory follows the principal. HAaDcS In the case of Marubeni Corporation vs. Commissioner of Internal Revenue and Court of Tax Appeals, G.R. No. 76573 dated September 14, 1989, the Supreme Court ruled that the head office and its Philippine branch constitute but one juridical entity. The cessation of the corporate existence of the head office as a result of a merger necessarily results in the cessation of the corporate existence of the branch. For income tax purposes in the Philippines, the transfer transaction of the assets and liabilities of SPLL Philippine branch to SPEX Head Office through its Philippine branch is not a sale, barter, exchange or other forms of disposition that will result to a taxable transaction since there was no effective transfer of beneficial ownership over the said properties. Consequently, no gain or loss can be recognized from this transaction by either branch as it is merely an absorption of assets and liabilities from a dissolved company to the surviving company as a result of the corporate re-structuring effected by SPEX Head Office after its purchase of the SPHLLC shares from SPG. Thus, in BIR Rulings No. 112-96 dated October 25, 1996 and DA 257-07 dated April 25, 2007, the BIR opined that "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. Consequently, no gain was realized by the surviving bank or its Philippine branches." The foregoing squarely falls with the facts presented. EIASDT In a recent ruling, the BIR ruled that the tax consequences of a de facto merger taking place outside the Philippines of two foreign corporations with Philippine branches are akin to a merger under Section 40 (C) (2) of the Tax Code, inasmuch as the transfer of assets and liabilities of the absorbed foreign corporation, including that of its branch, to the surviving corporation is in exchange of shares of stock in the latter. ( BIR Ruling DA (C003) 017-2008 dated July 9, 2008. ) On the other hand, for Value-Added Tax (VAT) purposes, the transfer of properties from SPLL branch to SPEX Head Office through its Philippine branch is not a disposition or exchange of properties that is subject to the 12% VAT. VAT is imposed on any person who, in the course of trade or business, sells, exchanges or leases goods or properties. The phrase "in the course of trade or business" means the regular conduct or pursuit of a commercial or an economic activity including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a non-stock, non-profit private organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members or their guests, or government entity. (Section 105 of the Tax Code of 1998, as amended) . The transfer of the assets as a result of the corporate re-structure is not a disposition or exchange of properties "in the course of trade or business" and therefore is not subject to VAT. (Commissioner of Internal Revenue vs. Magsaysay Lines, et al., G.R. No. 146984 dated July 28, 2006 and BIR Ruling DA 150-00 dated March 13, 2000). IESDCH Finally, the transfer of the assets and liabilities from SPLL Philippine branch to SPEX Head Office through its Philippine branch pursuant to the corporate restructuring of their parent companies shall not be considered as a transfer of property for insufficient consideration subject to donor's tax under Section 100 of the Tax Code of 1998 as amended, since there is no intention to donate on the part of SPLL to SPEX as the transaction is effected purely for business reasons. (BIR Ruling DA 388-98 dated August 25, 1998). 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. STIcEA Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service