SGV & Co.

May 15, 2009 BIR RULING [DA-(C-066) 228-09] 27, 28, 98, 176; DA-088-06; DA-046-04; DA-406-07 SGV & Co. 6760 Ayala Ave. Makati City Attention: Atty. Veronica A. Santos Tax Division Gentlemen : This refers to your letter dated December 22, 2008 requesting on behalf of your client, Maginet Philippines, Inc. (MPI), for confirmation of your opinion that the transfer of shares in MPI (MPI Shares) from Maginet Pte Ltd. (MPL) to DOCOMO InterTouch Pte Ltd., (DIPL), and the subsequent transfer of the MPI shares from DIPL to Inter-Touch Philippines, Inc. (IPI) is not subject to tax since the transfer is part of a worldwide corporate reorganization and also because the beneficial ownership of the MPI shares will remain within the DOCOMO InterTouch Group (The DOCOMO InterTouch Group), MPL and IPI being wholly-owned subsidiaries of DOCOMO InterTouch Pte. Ltd (DIPL), their common parent. The facts as represented are as follows: 1. MPI is a corporation duly organized and existing under the laws of the Philippines. It was registered with the Securities and Exchange Commission on November 24, 1998 primarily to engage in the import, export, development, manufacture, assembly, sales, marketing, distribution, installation and maintenance of video-on-demand and information systems for the hospitality industry. MPI is a wholly-owned subsidiary of MPL. 2. MPL is a corporation organized and existing under the laws of Singapore and is primarily engaged in investment holding and the provision of management services for its subsidiaries. MPL is a wholly-owned subsidiary of DIPL. MPL is currently the registered and beneficial owner of effectively 100% of the outstanding capital stock of MPI consisting of 190,500 common shares. 3. IPI is a corporation duly organized and existing under the laws of the Philippines. It was registered with the Securities and Exchange Commission (SEC) on April 2, 2002 to provide high speed internet access to hotels, including the installation of the necessary hardware such as cables and tracking devices for internet access. IPI is a wholly-owned subsidiary of DIPL. IPI is securing the regulatory approvals to change its corporate name to DOCOMO InterTouch Philippines, Inc. in line with the global rebranding of the DOCOMO InterTouch Group. ASTcaE 4. DIPL is a corporation organized and existing under the laws of Singapore and is a premier provider of high-speed broadband connectivity services and video applications to the hospitality industry. It is the common parent of MPL and IPI. 5. In January 2008, DIPL wholly acquired MPL to solidify its position as a premier Asia Pacific provider of high-speed broadband connectivity services and video applications to the hospitality industries. Prior to its acquisition by DIPL, MPL had 31 operating subsidiaries operating worldwide providing high speed wired/wireless broadband connections and video on demand systems to about 550 hotel in approximately 40 countries across the Asia Pacific region. DIPL, on the other hand, prior to its acquisition of MPL, had 29 operating subsidiaries worldwide providing high speed wired/wireless broadband connections to about 400 hotels in approximately 45 countries worldwide. 6. As a result of its acquisition of MPL, DIPL now provides services to approximately 1,150 hotels in 63 countries of Asia Pacific Europe and the Middle East, with a growing presence in the Americas. 7. DIPL is now consolidating the operations of the former InterTouch and Maginet companies for increased efficiency via a worldwide corporate reorganization/restructuring. The reorganization/restructuring will streamline the organizational structure and enhance operational efficiency of the DOCOMO InterTouchGroup and is being undertaken in response to the company's global business growth. 8. Pursuant to said corporate restructuring, on 24th November 2008 at a meeting of the board of directors of DIPL, the board approved, amongst others, the transfer of 190,500 MPI shares from MPL to DIPL, and the subsequent transfer of the same MPI shares to IPI to be recognized as DIPL's additional investment in IPI. This additional investment will be booked as additional paid in capital (from DIPL) in IPI's books. 9. In accordance with the foregoing, MPL will transfer its rights, interests and title in 190,500 of its MPI common shares (the MPI shares) to DIPL. After said transaction, DIPL will transfer the same MPI shares to IPI as its additional paid in capital (APIC) to the latter. In view of the foregoing, you now request confirmation of your opinion that: 1. The transfer by MPL of its shares in MPI to DIPL, and the transfer of the MPI shares from DIPL to IPI pursuant to a legitimate worldwide corporate reorganization is not subject to capital gains tax. Therefore, no gain or loss shall be recognized by: TaISDA a. MPL, as the transferor, on its assignment of the MPI shares to DIPL and DIPL as the transferee, upon its receipt of the MPI shares; and b. DIPL as the transferor, on its assignment of the MPI shares to IPI as its additional investment (additional paid in capital) in the latter; and c. IPI, as the transferee, on its receipt of the MPI shares. 2. The transfers are not subject to donor's tax as there is no intention to donate on the part of MPL and DIPL as the transfers are made pursuant to a legitimate worldwide corporate reorganization and without donative intent. 3. The transfers are subject to documentary stamp tax (DST) imposed under Section 4 of Revenue Regulations No. 13, 2004, implementing Section 176 of the Tax Code of 1997, as amended. In reply, please be informed as follows: 1. The transfer of MPI shares from MPL to DIPL pursuant to a legitimate worldwide corporate reorganization is not subject to capital gains tax and donor's tax. The BIR has consistently ruled that the transfer of shares of stock in a Philippine company by a nonresident foreign corporation to another nonresident foreign corporation belonging to the same group of companies, pursuant to a legitimate worldwide corporate reorganization, is exempt from capital gains tax since there is no effective transfer of beneficial ownership of the shares in the Philippine company. There being no transfer of beneficial ownership, no gain will be realized by both the transferor and the transferee from the transfer of the shares. (BIR Ruling Nos. DA 114-2008 dated August 6, 2008, 406-07 dated July 23, 2007, DA-088-06 dated March 6, 2006) In BIR Ruling No. DA 088-06 dated March 6, 2006, the BIR had the occasion to rule as follows: ". . . the proposed transfer of the TPC shares from TTC to THBV, pursuant to a worldwide reorganization of The Thomson Group of Companies, is not subject to capital gains tax as (1) there is no effective transfer of beneficial ownership of the TPC shares since both Transferor and Transferee belong to The Thomson Group of Companies and (2) the proposed transfer is a mere realignment of stockholdings effectively consolidating beneficial and legal ownership of the TPC shares. Since there is no transfer of beneficial ownership, no gain will be realized by TTC and THBV for income tax purposes." cEaCAH The foregoing opinion was reiterated in BIR Ruling No. DA-406-07 Synovate, Inc. (Synovate), a corporation duly existing under Philippine laws is a wholly-owned subsidiary of Synovate (Asia-Pacific-BVI) Limited (BVI), a corporation existing under the laws of British Virgin Islands. BVI, on the other hand, is a wholly-owned company of Synovate Holdings BV ("Holdings"), a corporation existing under the laws of the Netherlands. Synovate, BVI and Holdings are all part of Synovate Far East Group and that in view of the corporate reorganization of the Synovate Far East Group, it is envisioned that the entire Synovate shares currently registered under the name of BVI will be transferred from BVI to Holdings. This Office ruled that the proposed transfer of Synovate shares from BVI to Holdings pursuant to a legitimate Asian corporate reorganization and without consideration is not subject to capital gains tax and donor's tax. In the more recent BIR Ruling No. DA-114-2008 dated August 6, 2008 BV-Philippines was a domestic corporation wholly owned by Bureau Veritas Consumer Product Services (HK) (BVCPS-HK) a private limited company duly incorporated and registered under the laws of Hong Kong. BVCPS-HK in turn, is a wholly-owned subsidiary of Bureau Veritas International SAS (BVI), a company duly incorporated and registered under the laws of France. BVI, on the other hand, is a subsidiary of Bureau Veritas SA (BVSA), the group's ultimate parent holding company, which is a company duly incorporated in France. A global restructuring was being undertaken by the Bureau Veritas Group which involved the transfer of the Group's international operational subsidiaries to be held by BVI. As part of this global restructuring, it was intended that the subsidiaries of BVCPS-HK, including BV-Philippines, be transferred to BVI for purposes of rationalizing and consolidating control. To implement this worldwide corporate restructuring of the Bureau Veritas Group, BVCPS-HK will transfer all of its BV-Philippines shares to BVI. The BIR confirmed that the transfer of BV-Philippines shares from BVCPS-HK to BVI pursuant to a legitimate worldwide reorganization of the BV Group is not subject to capital gains tax since there is no effective transfer of beneficial ownership of the said shares in the Philippine company. The transfer of MPI shares from MPL to DIPL will be made primarily for business considerations, i.e., in connection with a worldwide corporate reorganization and to consolidate beneficial and legal ownership. Thus, the transfer is not likewise subject to donor's tax since there is no donative intent that can be attributed to the transferors. ITSCED Furthermore, the transferors are part of the DOCOMO InterTouch Group of Companies and there is no transfer of beneficial ownership of the MPI shares. The BIR has previously ruled as follows: "This Office has consistently ruled that the transfer of property, without consideration, and primarily made for business considerations is not subject to donor's tax under Section 98 of the Tax Code because under such circumstances, no donative intent can be attributed to the transferor (BIR Ruling Nos. DA-174-98 dated April 30, 1998; DA-028-05 dated January 24, 2005; and DA-136-05 dated April 7, 2005). Where the proposed transfer of the TPC shares will be made without consideration, the same is not subject to donor's tax in the absence of donative intent. It has been consistently held that in a direct gift, the element of donative intent must be present in the transfer of property to be donated (BIR Ruling No. DA-567-04 dated November 9, 2004; DA-338-03 dated October 7, 2003; DA-588-99 dated October 07, 1999; DA-403-99 dated July 13, 1999; DA-550-98 dated December 04, 1998; Perez vs. Commissioner of Internal Revenue , CTA Case No. 1707, February 10, 1969). The proposed transfer of the TPC shares will be made primarily for business considerations, i.e. , in connection with a worldwide corporate reorganization and to consolidate beneficial and legal ownership into the Transferee. Thus, the proposed transfer to be made without consideration is not subject to donor's tax since there is no donative intent that can be attributed to the Transferor." (BIR Ruling No. DA-088-06 dated March 6, 2006) 2. The transfer of MPI shares from DIPL to IPI pursuant to a legitimate worldwide corporate reorganization, and by way of an additional capital contribution in the form of additional paid-in capital (APIC) without the issuance of additional IPI shares is not subject to capital gains tax and donor's tax. SATDHE The BIR opines that additional funds received by a corporation from shareholders in the form of APIC are not considered taxable income as defined under the 1997 Tax Code, as amended. This additional capital contribution without the issuance of additional shares of stock merely increases the basis of the stockholders' stock but not their proportionate equity in the corporation. As such, it is a transaction not subject to income or gift ( i.e. , donor's) taxes. (BIR Ruling Nos. DA-432-05 dated October 20, 2005; DA-046-04 dated February 5, 2004) Sec. 56 of Revenue Regulations No. 2 otherwise known as the Income Tax Regulations provides that voluntary payments by stockholders to the corporation, when credited to the corporation's surplus account or to its special capital account, is not considered income. Thus: "Contributions by shareholders. 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 part of the operating capital of the company." Since the capital infusion shall effect no change in the equity shareholdings of IPI's stockholders and the transfer will merely increase the basis of the stockholders' stock but not their proportionate equity in the Company, the transaction is likewise not subject to gift or donor's tax under Section 99 of the Tax Code (BIR Ruling Nos. DA-046-04 dated February 5, 2004; DA-560-04 dated November 8, 2004). Moreover, as DIPL has no intent to donate and that the transfer is intended as additional capital contribution undertaken for purely business reasons, the APIC is not subject to donor's tax (BIR Ruling Nos. DA-432-05 dated October 20, 2005; DA-001-03 dated January 7, 2003). Based on the foregoing the proposed transfer of MPI shares from MIPL to DIPL, its sole shareholder/parent, and from DIPL to its wholly-owned subsidiary IPI, pursuant to a worldwide corporate reorganization of the DOCOMO InterTouch Group of Companies, is not subject to capital gains tax as (1) there is no effective transfer of beneficial ownership of the MPI shares as in both transfers, the transferor and the transferee belong to the DOCOMO InterTouch Group of Companies; and (2) the transfers constitute a mere realignment of stockholdings effectively consolidating beneficial and legal ownership of the MPI shares. Since there is no transfer of beneficial ownership, no gain will be realized by the parties for income tax purposes. EICSDT 3. The transfer of shares in MPI from MPL to DIPL, and from DIPL to IPI pursuant to a legitimate worldwide corporate reorganization is subject to documentary stamp tax (DST) on each transfer. The transfer of MPI shares from MPL to DIPL is subject to DST imposed under Section 4 of Revenue Regulations No. 13-2004, implementing Section 176 of the Tax Code of 1997. In like manner, the subsequent transfer of MPI shares from DIPL to IPI is also subject to DST. Under Section 4 of Revenue Regulations 13-2004, all transfer of shares of stocks of a domestic corporation are subject to DST upon execution of the deed transferring ownership or rights thereto, or upon delivery, assignment or indorsement of such shares in favor of another. No transfer of shares of stock shall be recorded unless DST thereon has been duly paid for in accordance with Section 201 of the 1997 Tax Code. (BIR Ruling Nos. DA-406-07 dated July 23, 2007, DA-088-06 dated March 6, 2006) Again in BIR Ruling No. DA-406-07 dated July 23, 2007, the BIR said that the transfer of Synovate shares from BVI to Holdings, while not subject to capital gains tax shall be subject to DST imposed under Section 4 of Revenue Regulations No. 13-2004. 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 as null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service