Quiason Makalintal Barot Torres & Ibarra

November 10, 2009 BIR RULING [DA-(C-259) 660-09] 27 (D) (2); #046-96; #163-90; #186-91; #004-2007; UN-250-95; DA-059-98 Quiason Makalintal Barot Torres & Ibarra 21st Floor, Robinsons-Equitable Tower 4 ADB Avenue Corner Pedro Poveda Avenue 1605 Ortigas Center, Pasig City Attention: Attys. Enrique I. Quiason and Benedict R. Tugonon Gentlemen : This refers to your letter dated October 21, 2009 requesting on behalf of your client, Metro Pacific Tollways Development Corporation (formerly: First Philippine Infrastructure Development Corporation, hereinafter referred to as MPTDC) for a ruling confirming the tax consequences of the additional payment that MPTDC will receive from Leighton Asia Limited (LAL) as additional selling price in connection with the purchase by LAL, as buyer, from MPTDC, as seller, of 10% of the outstanding capital stock of Manila North Tollways Corporation (MNTC) last January 30, 2003. HaTDAE It is represented that MPTDC is a corporation duly organized and existing under and by virtue of the laws of the Republic of the Philippines, with office address at 10th Floor MGO Building, dela Rosa corner Legaspi Streets, Legaspi Village, Makati City; that LAL is a corporation duly organized and existing under the laws of the Cayman Islands, with address at 39th Floor Sun Hung Kai Centre, 30 Harbour Road, Hong Kong; that on January 30, 2003, MPTDC sold a portion of its shares in MNTC representing 10% of the outstanding capital stock of MNTC; that even prior to the Sale, a letter agreement dated January 14, 2003 was executed by and between MPTDC and LAL together with EGIS Projects, S.A. and Philippine National Construction Corporation, amending the Original Shareholder's Agreement of MNTC to admit the entry of LAL as a shareholder in the Company and to provide additional terms and conditions governing the rights and duties of the shareholders as well as the management, financing and operation of MNTC, including the conditional covenant of LAL that it will pay MPTDC 50% of the difference between the Aggregate Selling Price and US$19.4 million (the agreed value of the investment of LAL), not exceeding US$4.3725 million (Premium), to wit: 2. f. If and when Leighton (i) sells at least 10% of MNTC's total issued capital stock (of which Leighton is projected to own a maximum of 16.5% of MNTC's total issued capital stock) in one or a series of transaction, and (ii) the said sales are for an aggregate selling price ("Aggregate Selling Price") of more than US$19.4 million, then Leighthon agrees to pay to FPIDC, within five (5) business days from the receipt of the Aggregate Selling Price, 50% of the difference between the Aggregate Selling Price and US$19.4 million. The obligation of Leighton under this Clause 3(e) shall continue until the earlier of (i) Leighton having sold all its shares in MNTC, or (ii) Leighton has paid FPIDC a total of US$4.3725 million under this Clause 3(e). Leighton's liability under this Clause 3(e) will not exceed US$4.3725 million in any event. that LAL already sold 10% of MNTC at a price exceeding US$19.4 and consequently LAL is now required to pay FPIDC the additional selling price. Based on the foregoing, you now request for confirmation that the additional selling price is in the nature of capital gains subject to the capital gains tax pursuant to the provisions of Section 27 (D) (2) of the National Internal Revenue Code of 1997. In reply please be informed that Section 27 (D) (2) of the National Internal Revenue Code of 1997, as amended, provides to wit: (2) Capital Gains from the Sale of Shares of Stock Not Traded in the Stock Exchange. A final tax at the rates prescribed below shall be imposed on net capital gains realized during the taxable year from the sale, exchange or other disposition of shares of stock in a domestic corporation except shares sold or disposed of through the stock exchange: "Not over P100,000 5% "Amount in excess of P100,000 10% In BIR Ruling 004-2007 dated February 19, 2007, this Office had the occasion to rule as follows: 4. This Office confirms that the sale by SMC of its CCBPI shares comprising of 766,121 common shares and 172,942 preferred shares to KO shall be subject to capital gains tax and documentary stamp tax. Section 27 (D) (2) of the Tax Code of 1997 reads Sec. 27. (D) Rates of Tax on Certain Passive Incomes. (2) Capital Gains from the Sale of Shares of Stock Not Traded in the Stock Exchange. A final tax at the rates prescribed below shall be imposed on net capital gains realized during the taxable year from the sale, exchange or other disposition of shares of stock in a domestic corporation except shares sold or disposed of through the stock exchange: "Not over P100,000 5% "Amount in excess of P100,000 10% The term "net capital gain" means the excess of the gains from the sales or exchanges of capital assets over the losses from such sales or exchanges. On the other hand, "net capital loss" means the excess of the losses from sales or exchanges of capital assets over the gains from such sales or exchanges. (Sec. 39 (A) (2) & (3) of the Tax Code of 1997) DEcITS Thus, the sale by SMC of its CCBPI shares comprising of 766,121 common shares and 172,942 preferred shares to KO may give rise to gains which shall be subject to the capital gains tax, or to losses during the taxable year. xxx xxx xxx Accordingly, the net capital gains, if any, shall be subject to 5% for the first P100,000 and 10% for the amount in excess of P100,000. The CGT is required to be paid and a return filed by the seller not later than 30 days from the date of sale. In relation thereto, Section 7 (c) of Revenue Regulations (RR) No. 6-2008 provides, to wit: "SEC. 7. Sale, Barter or Exchange of Shares of Stock Not Traded Through a Local Stock Exchange Pursuant to Secs. 24(C), 25(A)(3), 25(B), 27(D)(2), 28(A)(7)(c), 28(B)(5)(c) of the Tax Code, as Amended. xxx xxx xxx (c) Determination of Amount and Recognition of Gain or Loss. (c.1) Determination of Selling Price. In determining the selling price, the following rules shall apply: (c.1.1) In the case of cash sale, the selling price shall be the total consideration per deed of sale. (c.1.2) If the total consideration of the sale or disposition consists partly in money and partly in kind, the selling price shall be sum of money and the fair market value of the property received. (c.1.3) In the case of exchange, the selling price shall be the fair market value of the property received. (c.1.4) In case the fair market value of the shares of stock sold, bartered, or exchanged is greater than the amount of money and/or fair market value of the property received, the excess of the fair market value of the shares of stock sold, bartered or exchanged over the amount of money and the fair market value of the property, if any, received as consideration shall be deemed a gift subject to the donor's tax under Sec. 100 of the Tax Code, as amended. TAECSD (c.2) Definition of "fair market value" of the Shares of Stock. For purposes of this Section, "fair market value" of the share of stock sold shall be: (c.2.1) In the case of listed shares which were sold, transferred, or exchanged outside of the trading system and/or facilities of the Local Stock Exchange, the closing price on the day when the shares are sold, transferred, or exchanged. When no sale is made in the Local Stock Exchange on the day when the listed shares are sold, transferred, or exchanged, the closing price on the day nearest to the date of sale, transfer or exchange of the shares shall be the fair market value. (c.2.2) In the case of shares of stock not listed and traded in the local stock exchanges, the book value of the shares of stock as shown in the financial statements duly certified by an independent certified public accountant nearest to the date of sale shall be the fair market value." TcaAID Thus, the additional selling price or consideration which MPTDC will receive from LAL in connection with the purchase by LAL of its shares in MNTC from MPTDC last January 30, 2003 is subject to the payment of the final capital gains tax pursuant to Section 27 (D) (2) of the National Internal Revenue Code. 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service