Planters Products, Inc.

July 31, 2009 BIR RULING [DA-(C-163) 428-09] 27 (D) (2); 28 (B) (5) (b); RR 06-08 Planters Products, Inc. Planters Products Building 109 Esteban Street Legaspi Village, Makati City Attention: Atty. John Paolo Robert A. Calleja Manager-Legal Department Gentlemen : This refers to your letter dated July 3, 2009 requesting for a ruling on the tax implications of the sale of shares in Grand Planters International, Inc. ("GPI") by Planters Products, Inc. ("PPI") to Golden Oak Properties, Inc. ("GOPI") It is represented that GPI is a domestic corporation organized and existing under the laws of the Philippines; that its shareholders include: PPI, a domestic corporation organized and existing under the laws of the Philippines and GOPI, a corporation organized and existing under the laws of the Philippines; that as of July 1, 2009, the details of GPI's stock ownership are as follows: Shareholders Par Value No. of Amount Paid/ Percentage of Common Acquisition Cost Ownership Shares PPI P1.00 220,000,000 P220,000,000.00 40% Co.X. P1.00 330,000,000 P330,000,000.00 60% and that PPI intends to sell all of its GPI shares composed of 220,000,000 common shares to GOPI. Upon the foregoing representations, you now request for confirmation that: 1. The sale by PPI of its GPI Common Shares to GOPI at a price of P1 per share which is equal to its acquisition cost and which is also equivalent to its book value or fair market value will not result in a gain to PPI. There being no gain, PPI shall not be liable to pay capital gains tax imposed under Section 27 (D) (2) of the 1997 Tax Code on the transaction. 2. The sale of GPI shares is likewise not subject to value-added tax under Section 108 of the Tax Code, as amended. 3. However, the sale of the GPI shares shall be subject to documentary stamp tax under Section 175 of the same Tax Code. In reply, please be informed that under Sections 27 (D) (2);28 (A) (7) (c);and 28 (B) (5) (c) of the Tax Code, there is a capital gains tax (CGT) imposed on net capital gains derived by a seller of shares of stock of a domestic corporation not sold and traded in the local stock exchange, at the rate of 5% on the first P100,000 of gain and 10% on the excess gain. The net capital gain is the difference between the gross selling price or fair market value (FMV) of the shares, whichever is higher, and the acquisition cost of the shares. Gross selling price, for this purpose, is defined as "the total amount of money or its equivalent which the purchaser pays the vendor to receive or get the goods".On the other hand, the FMV of shares is the book value nearest the valuation date (BIR Ruling No. 146-98 dated October 14, 1998). The BIR has held that "Section 5 of Revenue Regulations No. 2-2003 1 provides that in the case of shares of stocks, the fair market value shall depend on whether the shares are listed or unlisted in the stock exchanges. Unlisted common shares are valued based on their book value while unlisted preferred shares are valued at par value. In determining the book value of common shares, appraisal surplus shall not be considered as well as the value assigned to preferred shares, if there are any" (BIR Ruling No. DA-091-05 dated March 14, 2005). In the instant case, considering that the shares to be transferred by PPI are unlisted common shares of GPI, the FMV of the said shares shall be valued based on their book value. Based on the unaudited financial statement of GPI as of April 30, 2009, the book value of the shares is at P0.97/share. Inasmuch as the book value is lower than actual consideration, gross selling price shall then be based on the higher value of P1/share or the value of the actual consideration. Moreover, in determining the net capital gain, the cost basis of the GPI shares to be transferred to GOPI shall be their original acquisition/historical cost of P1/share or a total of P220,000,000.00. Pursuant to the foregoing, therefore, there will be no gain or loss on the transfer by PPI of its GPI common shares to GOPI. Thus, PPI will not be liable for any CGT on the transaction. Moreover, the sale of GPI shares is not subject to value-added tax (VAT) considering that PPI is not a dealer in securities. Section 108 of the Tax Code provides that a dealer in securities, or one who is regularly engaged in the purchase and resale of securities, shall be subject to VAT on the basis of his gross receipts. Since PPI is not a merchant of securities and the sale of the GPI shares is not done in the regular course of trade or business of PPI, there is no basis to impose the 12% VAT. However, the sale of the GPI shares shall be subject to Documentary Stamp Tax (DST) pursuant to Section 175 of the Code which provides as follows: "SEC. 175. Stamp tax on Sales, Agreements to Sell, Memoranda of Sales, Deliveries or Transfer of Shares or Certificates of Stock. On all sales, or agreements to sell, or memoranda of sales, or deliveries, or transfer of shares or certificates of stock in any association, company, or corporation, or transfer of such securities by assignment in blank, or by delivery, or by any paper or agreement, or memorandum or other evidences of transfer or sale whether entitling the holder in any manner to the benefit of such stock, or to secure the future payment of money, or for the future transfer of any stock, there shall be collected a documentary stamp tax of Seventy-five centavos (P0.75) on each Two hundred pesos (P200),or fractional part thereof, of the par value of such stock: Provided, That only one tax shall be collected on each sale or transfer of stock from one person to another, regardless of whether or not a certificate of stock is issued, indorsed, or delivered in pursuance of such sale or transfer: and Provided, further, That in case of stock without par value the amount of the documentary stamp tax herein prescribed shall be equivalent to twenty-five percent (25%) of the documentary stamp tax paid upon the original issue of said stock." 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 as null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Footnotes 1. Now Section 7 (C),Revenue Regulations 06-08.