Martinez Vergara Gonzalez & Serrano

July 15, 2009 BIR RULING [DA-(C-127) 372-09] 174; #096-96; DA-216-2004; DA-326-2005 Martinez Vergara Gonzalez & Serrano Suite 2401, The Orient Square F. Ortigas, Jr. Road, Ortigas Center 1600 Pasig City Attention: Atty. Elmer B. Serrano and Atty. Gilbert M. Viloria Gentlemen : This refers to your letter dated September 16, 2008 requesting on behalf of your client, Healthcare Systems of Asia Philippines, Inc. ("HSAPI"), for a ruling that the issuance of new shares of stocks to replace previously issued and outstanding shares of stocks pursuant to a decrease in capital stock and reduction in par value is exempt from the payment of documentary stamp tax ("DST") under Section 175 of the National Internal Revenue Code ("NIRC"), as amended by Republic Act No. 9243 ("R.A. 9243"). AHCETa HSAPI is a corporation duly registered with the Securities and Exchange Commission ("SEC") under SEC Registration No. A199603920 and registered with the BIR under Corporate Tax Identification Number 005-023-956. HSAPI currently has an authorized capital stock of ONE BILLION PESOS (P1,000,000,000.00) divided into ONE BILLION (1,000,000,000) common shares with par value of ONE PESO (P1.00) per share. On March 18, 2008, the Board of Directors of HSAPI unanimously approved the capital restructuring of HSAPI, as follows: 1. A decrease in the authorized capital stock from ONE BILLION PESOS (P1,000,000,000.00) divided into ONE BILLION (1,000,000,000) common shares with a par value of ONE PESO (P1.00) per share to ONE HUNDRED MILLION PESOS (P100,000,000.00) divided into ONE HUNDRED MILLION (100,000,000) common shares with a par value of ONE PESO (P1.00) per share, as follows: Decrease in From To Amount of Authorized Decrease Capital Stock Amount P1,000,000,000.00 P100,000,000.00 P900,000,000.00 Number of Shares 1,000,000,000 100,000,000 900,000,000 Par value per share P1.00 P1.00 N/A 2. A corresponding decrease of HSAPI's issued and outstanding capital stock (inclusive of Treasury Shares) from THREE HUNDRED SEVENTY-FIVE MILLION THREE HUNDRED THIRTY-FOUR THOUSAND ONE HUNDRED SEVENTY-TWO PESOS (P375,334,172.00) divided into THREE HUNDRED SEVENTY-FIVE MILLION THREE HUNDRED THIRTY-FOUR THOUSAND ONE HUNDRED SEVENTY-TWO (375,334,172) common shares with a par value of ONE PESO (P1.00) per share to THIRTY-SEVEN MILLION FIVE HUNDRED THIRTY-THREE THOUSAND FOUR HUNDRED SEVENTEEN AND 20/100 PESOS (P37,533,417.20) divided into THIRTY-SEVEN MILLION FIVE HUNDRED THIRTY-THREE THOUSAND FOUR HUNDRED SEVENTEEN AND 20/100 (37,533,417.20) common shares with par value of ONE PESO (P1.00) per share, as follows: Decrease in From To Amount of Authorized Decrease Capital Stock Amount of Shares P375,334,172.00 P37,533,417.20 P337,800,754.80 Issued and Outstanding (Inclusive of Treasury Shares) Total Number of 375,334,172 37,533,417.20 337,800,754.80 Shares Issued and Outstanding (Inclusive of Treasury Shares) at par value of P1.00 per share Amount of Issued P299,813,750.00 P29,981,375.00 P269,832,375.00 and Outstanding Shares Number of Issued 299,813,750 29,981,375 269,832,375 and Outstanding Shares at par value of P1.00 per share Amount Treasury P75,520,422.00 P7,552,042.20 P67,968,379.80 Shares Number of Treasury 75,520,422 7,552,042.20 67,968,379.80 Shares at par value of P1.00 per share Par Value per share P1.00 P1.00 N/A 3. The application of the existing additional paid-in capital of TWO HUNDRED FORTY-NINE THOUSAND FIVE HUNDRED SEVENTY-FIVE PESOS (P249,575.00) as per the audited financial statements as of December 31, 2007 and the additional paid-in capital of TWO HUNDRED SIXTY-NINE MILLION EIGHT HUNDRED THIRTY-TWO THOUSAND THREE HUNDRED SEVENTY-FIVE PESOS (P269,832,375.00) arising from the decrease in the issued and outstanding capital stock (but excluding the decrease in the Treasury Shares) against the capital deficit of THREE HUNDRED FORTY-SIX MILLION FIVE HUNDRED THIRTY-FIVE THOUSAND EIGHT HUNDRED FIVE PESOS (P346,535,805.00), as follows: Amount Capital Deficit (P346,535,805.00) Less: Existing APIC P249,575.00 Less: APIC from Decrease in Capital Stock P269,832,375.00 Remaining Capital Deficit (P76,453,855.00) 4. Finally, a reduction in the par value of the common shares from ONE PESO (P1.00) per share to TEN CENTAVOS (P0.10) per share thereby (a) increasing the number of its authorized common shares from ONE HUNDRED MILLION (100,000,000) common shares with a par value of ONE PESO (P1.00) per share to ONE BILLION (1,000,000,000) common shares with a par value of TEN CENTAVOS (P0.10) per share; and (b) increasing the number of its issued and outstanding common shares (including Treasury Shares) from THIRTY SEVEN MILLION FIVE HUNDRED THIRTY-THREE THOUSAND FOUR HUNDRED SEVENTEEN AND 20/100 (37,533,417.20) common shares with a par value of ONE PESO (P1.00) per share to THREE HUNDRED SEVENTY FIVE MILLION THREE HUNDRED THIRTY FOUR THOUSAND ONE HUNDRED SEVENTY TWO (375,334,172) common shares with a par value of TEN CENTAVOS (P0.10) per share. Pursuant to the decrease in the issued and outstanding capital stock and the reduction in par value of HSAPI's common shares, each stockholder will be entitled to ONE (1) common share at the reduced par value of TEN CENTAVOS (P0.10) per share in replacement of ONE (1) common share currently held at the par value of ONE PESO (P1.00) per share. ACcISa Reduction in Par Value From To Par Value P1.00 P0.10 Authorized Common Shares 100,000,000 1,000,000,000 Total Issued and Outstanding Capital Stock 37,533,417.20 375,334,172 (Inclusive of Treasury Stock) Issued and Outstanding Capital Stock 29,981,375 299,813,750 (Inclusive of Treasury Stock) Treasury Stock 7,552,042.20 75,520,422 The shareholders representing at least two-thirds (2/3) of the outstanding capital stock of HSAPI ratified the proposed capital restructuring at the special shareholders' meeting held on April 3, 2008. On July 15, 2008, HSAPI filed an application for the decrease in capital stock and equity restructuring with the SEC. The application for approval is currently pending with the SEC. HSAPI will issue new shares of stocks reflecting the new par value of TEN CENTAVOS (P0.10) per share, in replacement of the previously issued shares whose par value is at ONE PESO (P1.00) per share. Thus, HSAPI will issue TWO HUNDRED NINETY NINE MILLION EIGHT HUNDRED THIRTEEN THOUSAND SEVEN HUNDRED FIFTY (299,813,750) common shares with a par value of TEN CENTAVOS (P0.10) per share to replace the previously issued and outstanding TWO HUNDRED NINETY NINE MILLION EIGHT HUNDRED THIRTEEN THOUSAND SEVEN HUNDRED FIFTY (299,813,750) common shares with a par value of ONE PESO (P1.00) per share. CITDES Based on the foregoing, you now request for a ruling that the aforesaid issuance of shares is not subject to DST since the issuance of the new shares is merely in replacement of the previously issued and outstanding shares. Effectively, HSAPI is not "issuing new shares" as contemplated under Section 174 of the Tax Code of 1997, as amended, (on which DST is imposed) but merely re-denominating its already existing and outstanding capital stock at a par value of Ten Centavos (P0.10) per share. In reply thereto, please be informed that in BIR Ruling No. 096-96 dated September 3, 1996, this Office had already occasioned to rule on the matter, when it said that "xxx xxx xxx Likewise, the replacement of Stock Certificate is not subject to the documentary stamp tax imposed under Section 176 of the Tax Code, as amended, but only to the documentary stamp tax of P15.00 pursuant to Section 188 of the said Code, as amended by Republic Act No. 7660." The same rule was reiterated in BIR Ruling No. DA-326-2005 dated July 22, 2005 which provides, to wit: "In the instant case, the surrender of the certificates of stock by the stockholders of ML&H is a necessary consequence of the decrease in the capital stock of the said corporation. Thus, in order to reflect the corrected number of shares therein, it is required that the stockholders of record should transfer and surrender their old certificates of stock to the corporation, without any monetary consideration, but only for the purpose of replacing the old stock certificates into new ones. In other words, there is no effective transfer of beneficial ownership over the said shares. Such being the case, the replacement of stock certificates is not subject to the documentary stamp tax prescribed in Section 176 of the Tax Code, as amended." 1 Furthermore, BIR Ruling No. DA-678-2007 dated December 20, 2007, the BIR likewise ruled: "In reply thereto, please be informed that in BIR Ruling No. DA-326-05, dated July 22, 2005, this Office had the occasion to rule that the issuance of new shares of stock to replace previously issued and outstanding shares of stock pursuant to a decrease in capital stock is exempt from the payment of documentary stamp tax under Section 175 of the Tax Code of 1997, as amended. The justification of the said exemption is that the surrender of the certificates of stock by the stockholders is a necessary consequence of the decrease in the capital stock of the corporation, and that in order to reflect the corrected number of shares therein, the stockholders of record should transfer and surrender their old certificates of stock to the corporation, without any monetary consideration, but only for the purpose of replacing the old stock certificates into new ones. In other words, there is no effective transfer of beneficial ownership over the said shares." cSEDTC "In view thereof, and since the new shares of CEI with par value of Ten Centavos (P0.10) per share will be issued to replace its old shares with par value of One Peso (P1.00), the issuance of Thirteen Billion Five Hundred Ninety Nine Million Nine Hundred Ninety Nine Thousand Nine Hundred Sixty (13,599,999,960) new common shares to its stockholders of record with par value of Ten Centavos (P0.10) per share pursuant to the reduction of CEI's capital stock, therefore, will not be subject to the DST imposed under Section 175 of the Tax Code of 1997, as amended. Moreover, neither said replacement of shares of stock subject to the DST imposed under Section 174 of the same Tax Code since the issuance of the new shares is merely in replacement of the previously issued and outstanding ones therefore not to be considered as original issuance of shares of stock as contemplated therein." 2 Accordingly, since the new shares with par value of TEN CENTAVOS (P0.10) per share will be issued to replace the old shares with par value of ONE PESO (P1.00) per share, the issuance of TWO HUNDRED NINETY NINE MILLION EIGHT HUNDRED THIRTEEN THOUSAND SEVEN HUNDRED FIFTY (299,813,750) new common shares with par value of TEN CENTAVOS (P0.10) per share is exempt from the payment of documentary stamp tax under Section 174 of the Tax Code, as amended by R.A. 9243. AEcTCD 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) GREGORIO V. CABANTAC Deputy Commissioner Legal and Inspection Group Footnotes 1. BIR Ruling No. DA-326-05 dated July 22, 2005 citing BIR Ruling No. DA-216-2004 dated April 21, 2004. 2. pp. 3-4, BIR Ruling No. DA-678-2007 dated December 20, 2007.