Bernaldo Mirador & Directo Law Offices

January 13, 2009 BIR RULING [DA-(S40M-001) 007-09] Section 40 (c) (2) (a); S40-018-2003 Bernaldo Mirador & Directo Law Offices Unit 1807 Cityland Condominium 10-Tower 6815 Ayala Avenue cor. H.V. dela Costa St., Makati City Attention: Atty. Pepito Po Partner Gentlemen : This refers to your letter dated March 29, 2008 requesting in behalf of your client, PUREGOLD PRICE CLUB, INC. for a ruling that the proposed merger of PUREGOLD PRICE CLUB-PARAAQUE, INC., PUREGOLD PRICE CLUB-VALENZUELA, INC., PUREGOLD PRICE CLUB- TAYUMAN, INC., and PUREGOLD PRICE CLUB-DAU, INC., with the former as the surviving entity, qualify as a tax-free exchange merger under Section 40 (C) (2) (a) of the Tax Code of 1997. EIAaDC In your letter it is represented that: PUREGOLD PRICE CLUB, INC. ("PPCI") is a corporation duly registered with the Securities and Exchange Corporation (SEC) under Registration No. A199913754 and is primarily engaged in the business of trading goods, particularly consumer goods on wholesale and retail basis. It has an authorized capital stock amounting to Three Billion Pesos (P3,000,000,000.00) divided into Three Billion Shares (3,000,000,000) shares with a par value of P1.00, of which 795,346,800 shares worth P795,346,800.00 are subscribed and paid. PUREGOLD PRICE CLUB-PARAAQUE, INC. is a corporation duly registered with the Securities and Exchange Corporation (SEC) under Registration No. A200110536. It has an authorized capital stock amounting to Fifty Million Pesos (P50,000,000.00) divided into Five Hundred Thousand Shares (500,000) shares with a par value of P100.00, of which shares worth P44,200,000.00 were subscribed and P25,450,000.00 are paid. PUREGOLD PRICE CLUB-VALENZUELA, INC. is a corporation duly registered with the Securities and Exchange Corporation (SEC) under Registration No. CS200252241. It has an authorized capital stock amounting to Fifty Million Pesos (P50,000,000.00) divided into Five Hundred Thousand Shares (500,000) shares with a par value of P100.00, of which P35,000,000.00 were subscribed and P16,250,000.00 are paid-up. PUREGOLD PRICE CLUB-TAYUMAN, INC. is a corporation duly registered with the Securities and Exchange Corporation (SEC) under Registration No. A200109819. It has an authorized capital stock amounting to Fifty Million Pesos (P50,000,000.00) divided into Five Hundred Thousand Shares (500,000) shares with a par value of P100.00, of which P35,000,000.00 were subscribed and P16,250,000.00 are paid-up. PUREGOLD PRICE CLUB-DAU, INC. is a corporation duly registered with the Securities and Exchange Corporation (SEC) under Registration No. CS200252242. It has an authorized capital stock amounting to Fifty Million Pesos (P50,000,000.00) divided into Five Hundred Thousand Shares (500,000) shares with a par value of P100.00, of which P35,000,000.00 were subscribed and P16,250,000.00 are paid-up. The condensed audited balance sheets of the five corporations as of October 31, 2007 are as follows: PPCI Paraaque Valenzuela Tayuman Dau Total Assets 4,404,462,985 245,155,527 322,031,623 322,709,801 262,862,688 Liabilities 4,220,579,687 216,864,524 257,318,216 261,183,256 211,122,812 Capital Stock 33,250,000 25,450,000 16,250,000 16,250,000 16,250,000 Retained Earnings 150,633,298 2,841,003 48,463,407 45,276,545 35,489,876 Total Liabilities & 4,404,462,985 245,155,527 322,031,623 322,709,801 262,862,688 Stockholders' Equity The Board of Directors and stockholders of the five (5) corporations approved the merger in accordance with the Corporation Code of the Philippines and the terms and conditions in the Plan of Merger by and between PPCI, PUREGOLD PRICE CLUB-PARAAQUE, INC., PUREGOLD PRICE CLUB-VALENZUELA, INC., PUREGOLD PRICE CLUB-TAYUMAN, INC., and PUREGOLD PRICE CLUB-DAU, INC. (Plan of Merger) which as filed with the SEC on October 31, 2007 and approved March 27, 2008. TADCSE In reply thereto, please be informed as follows: 1. The above reorganization is a merger within the contemplation of Section 40 (C) (2) and (6) (b) of the Tax Code of 1997, because PPCI acquired all the assets and assumed all the liabilities of PUREGOLD PRICE CLUB-PARAAQUE, INC., PUREGOLD PRICE CLUB-VALENZUELA, INC., PUREGOLD PRICE CLUB-TAYUMAN, INC., and PUREGOLD PRICE CLUB-DAU, INC. although no PPCI shares will be issued to PUREGOLD PRICE CLUB-PARAAQUE, INC., PUREGOLD PRICE CLUB-VALENZUELA, INC., PUREGOLD PRICE CLUB-TAYUMAN, INC., and PUREGOLD PRICE CLUB-DAU, INC., since on the effective merger date, PPCI wholly-owned the outstanding shares of PUREGOLD PRICE CLUB-PARAAQUE, INC., PUREGOLD PRICE CLUB-VALENZUELA, INC., PUREGOLD PRICE CLUB-TAYUMAN, INC., and PUREGOLD PRICE CLUB-DAU, INC. The transaction undertaken being for a bona fide business purpose and not solely for the purpose of escaping the burden of taxation. The tax-deferred character of the merger under Sec. 40 (C) and (6) (b) of the Tax Code of 1997 is not affected by the non-issuance of the surviving corporation of its shares of stock in exchange for the assets and liabilities of the absorbed corporation in cases of merger of a parent corporation and its subsidiary. [par. 4305, Vol. II, Mertens Law of Federal Income Taxation-1986] (BIR Ruling No. 030-99 dated March 12, 1999) (a) The merger of PPCI and PUREGOLD PRICE CLUB-PARAAQUE, INC., PUREGOLD PRICE CLUB-VALENZUELA, INC., PUREGOLD PRICE CLUB-TAYUMAN, INC., and PUREGOLD PRICE CLUB-DAU, INC. qualifies for non-recognition of gain or loss for income tax purposes in accordance with Section 40 (C) (2) of the Tax Code, that no gain or loss shall be recognized by PUREGOLD PRICE CLUB-PARAAQUE, INC., PUREGOLD PRICE CLUB-VALENZUELA, INC., PUREGOLD PRICE CLUB-TAYUMAN, INC., and PUREGOLD PRICE CLUB-DAU, INC., as the transferor of all assets and liabilities to PPCI pursuant to the Plan of Merger; and (b) No gain or loss shall be recognized by PPCI, as the transferee, on its receipt of the assets and liabilities of PUREGOLD PRICE CLUB-PARAAQUE, INC., PUREGOLD PRICE CLUB-VALENZUELA, INC., PUREGOLD PRICE CLUB-TAYUMAN, INC., and PUREGOLD PRICE CLUB-DAU, INC. pursuant to and as a consequence of the merger. EACTSH 2. The basis of the assets to be received by PPCI shall be the same as it would be in the hands of PUREGOLD PRICE CLUB-PARAAQUE, INC., PUREGOLD PRICE CLUB-VALENZUELA, INC., PUREGOLD PRICE CLUB-TAYUMAN, INC., and PUREGOLD PRICE CLUB-DAU, INC., and that the cost basis to the transferee of the properties transferred pursuant to the merger shall be the same as it would be in the hands of PUREGOLD PRICE CLUB-PARAAQUE, INC., PUREGOLD PRICE CLUB-VALENZUELA, INC., PUREGOLD PRICE CLUB-TAYUMAN, INC., and PUREGOLD PRICE CLUB-DAU, INC. Accordingly, the substituted bases of the assets transferred by PUREGOLD PRICE CLUB-PARAAQUE, INC. to PPCI, pursuant to the merger are as follows: Type of Property Substituted Basis ASSETS Cash and cash equivalents P5,311,211 Trade and other receivables net 5,282,222 Inventories 94,599,001 Due from related parties 1,110,099 Other current assets 20,691,476 Property and equipment net Building 53,654,736 Furniture and fixtures 9,185,405 Equipment 30,236,943 Leasehold Improvements 17,326,648 Deferred Tax Assets 2,590,257 Other non-current assets 5,167,529 TOTAL ASSETS P245,155,527 ========== LIABILITIES Accounts payable and accrued expenses P82,452,986 Loans Payable 65,344,500 Due to related parties 49,765,147 Income tax payable 1,217,364 Other current liabilities 18,084,527 TOTAL LIABILITIES P216,864,524 ========== Accordingly, the substituted bases of the assets transferred by PUREGOLD PRICE CLUB-VALENZUELA, INC. to PPCI, pursuant to the merger are as follows: CSTDIE Type of Property Substituted Basis ASSETS Cash and cash equivalents P54,996,508 Trade and other receivables net 25,210,157 Inventories 91,251,255 Due from related parties 117,087,612 Other current assets 2,303,892 Property and equipment net Furniture and fixtures 5,437,037 Equipment 19,406,841 Leasehold Improvements 2,246,290 Deferred Tax Assets 173,849 Other non-current assets 3,918,182 TOTAL ASSETS P322,031,623 ========== LIABILITIES Accounts payable and accrued expenses P125,267,561 Loans Payable 104,700,000 Due to related parties 9,245,634 Income tax payable 1,265,022 Other current liabilities 16,839,999 TOTAL LIABILITIES P257,318,216 ========== Accordingly, the substituted bases of the assets transferred by PUREGOLD PRICE CLUB-TAYUMAN, INC. to PPCI, pursuant to the merger are as follows: Type of Property Substituted Basis ASSETS Cash and cash equivalents P49,605,607 Trade and other receivables net 27,327,600 Inventories 101,132,956 Due from related parties 135,027,517 Other current assets 2,014,454 Property and equipment net Building Furniture and fixtures 630,310 Equipment 1,381,533 Leasehold Improvements 1,939,485 Deferred Tax Assets 270,495 Other non-current assets 3,379,844 TOTAL ASSETS P322,709,801 ========== LIABILITIES Accounts payable and accrued expenses P148,661,833 Loans Payable 56,000,000 Due to related parties 29,294,208 Income tax payable 3,234,073 Other current liabilities 23,993,142 TOTAL LIABILITIES P261,183,256 ========== Accordingly, the substituted bases of the assets transferred by PUREGOLD PRICE CLUB-DAU, INC. to PPCI, pursuant to the merger are as follows: aEIcHA Type of Property Substituted Basis ASSETS Cash and cash equivalents P64,447,519 Trade and other receivables net 12,822,261 Inventories 68,465,792 Due from related parties 100,500,139 Other current assets 1,694,109 Property and equipment net Furniture and fixtures 4,762,050 Equipment 2,720,174 Leasehold Improvements 3,425,024 Deferred Tax Assets 582,120 Other non-current assets 3,443,500 TOTAL ASSETS P262,862,688 ========== LIABILITIES Accounts payable and accrued expenses P117,010,880 Loans Payable 74,500,000 Due to related parties 3,393,616 Income tax payable 946,374 Other current liabilities 15,271,942 TOTAL LIABILITIES P211,122,812 ========== It is understood, however, that upon the subsequent sale or exchange of the assets acquired by PPCI, the gain derived from such sale or exchange shall be subject to income tax taking into consideration the above basis of the assets to be transferred. 3. Well-settled in our jurisprudence is the fact that the essential elements of a valid donation are: (1) the reduction of the patrimony of the donor, (2) the increase in the patrimony of the donee, and (3) the intent to do an act of liberality (animus donandi) . Clearly, there is no intention on the part of PUREGOLD PRICE CLUB-PARAAQUE, INC., PUREGOLD PRICE CLUB-VALENZUELA, INC., PUREGOLD PRICE CLUB-TAYUMAN, INC., and PUREGOLD PRICE CLUB-DAU, INC. to donate to PPCI its assets, since the transaction is purely for legitimate business purpose. Thus, the aforesaid merger will not be subject to donor's tax since there is no intention to donate and the transaction is a bona fide merger effected solely for business reasons. 4. No VAT should be imposed on the transfer of the assets by PUREGOLD PRICE CLUB-PARAAQUE, INC., PUREGOLD PRICE CLUB-VALENZUELA, INC., PUREGOLD PRICE CLUB-TAYUMAN, INC., and PUREGOLD PRICE CLUB-DAU, INC. to PPCI pursuant to the plan of merger. This is in accordance with Section 4.100-5 (b) of Revenue Regulations No. 7-95, as amended by Section 4.106-8 of Revenue Regulations No. 16-2005 dated November 1, 2005, viz. : acCETD "(b) Not subject to output tax. The VAT shall not apply to goods or properties existing as of the occurrences of the following: (1) Change of control of a corporation by the acquisition of the controlling interest of such corporation by another stockholder or group of stockholder, Example: transfer of property to a corporation in exchange for its shares of stock under Section 34(c)(2) and (6)(c) of the Code; (2) Change in trade or corporate name of the business; (3) Merger or consolidation of corporations. The unused input tax of the dissolved corporation as of the date of merger or consolidation shall be absorbed by the surviving or new corporation. 5. As a consequence of a parent and its subsidiaries being merged, no shares of stock were issued to the surviving corporation. Since no PPCI shares of stock were issued to PUREGOLD PRICE CLUB-PARAAQUE, INC., PUREGOLD PRICE CLUB-VALENZUELA, INC., PUREGOLD PRICE CLUB-TAYUMAN, INC., and PUREGOLD PRICE CLUB-DAU, INC., no documentary stamp tax imposed under Sec. 175 of the same Code are due from such transaction. (BIR Ruling No. 030-99 dated March 12, 1999) However, in order that the above-described reorganization can be considered as merger under Section 40 (C) (2) of the Tax Code of 1997, the parties to the merger should comply with the following requirements: A. The plan of reorganization should be adopted by each of the corporations, parties thereto, the adoption being shown by the acts of its duly constituted responsible officers and appearing upon the official records of the corporation. Each corporation, which is a party to the reorganization, shall file, as part of its return for the taxable year within which the reorganization occurred, a complete statement of all facts pertinent to the non-recognition of gain or loss in connection with the reorganization, including: (1) A copy of the plan of reorganization, together with a statement, executed under the penalties of perjury, showing in full the purposes thereof and in detail all transactions incident to, or pursuant to the plan; (2) A complete statement of the cost or other basis of all properties, including all stocks or securities, transferred incident to the plan; ITESAc (3) A statement of the amount of stock or securities and other property or money received from the exchange including a statement of all distribution or other disposition made thereof. The amount of each kind of stock or securities and other property received shall be stated on the basis of the fair market value thereof at the date of the exchange; and (4) A statement of the amount and nature of any liabilities assumed upon the exchange, and the amount and nature of any liabilities to which any of the property acquired in the exchange is subject. B. Every taxpayer, other than a corporation, who is a party to the reorganization, who received stock or securities and other property or money upon a tax-free exchange in connection with a corporate reorganization shall incorporate in his income tax return for the taxable year in which the exchange takes place a complete statement of all facts pertinent to the non-recognition of gain or loss upon such exchange including: (1) A statement of the cost or other basis of the stock or securities transferred in the exchange; and (2) A statement in full of the amount of the stock or securities and other property or money received from the exchange, including any liability assumed upon the exchange, and any liability to which property received is subject. The amount of each kind of stock or securities and other property (other liabilities assumed upon the exchange) received shall be set forth upon the basis of the fair market value thereof at the date of exchange. C. Permanent records in substantial form shall be kept by every taxpayer who participates in a tax-free exchange in connection with a corporate reorganization showing the cost or other basis of the transferred property or money received (including any liability assumed on the exchange, or any liability to which any of the properties received were subject), in order to facilitate the determination of gain or loss from a subsequent disposition of such stock or securities and other property received from the exchange. ADTEaI 6. Since the excess MCIT of PUREGOLD PRICE CLUB-PARAAQUE, INC., PUREGOLD PRICE CLUB-VALENZUELA, INC., PUREGOLD PRICE CLUB-TAYUMAN, INC., and PUREGOLD PRICE CLUB-DAU, INC. are among the rights, privileges, properties and/or interests to be transferred to and vested in PPCI by reason of the merger, PPCI may carry forward and credit the excess MCIT of PUREGOLD PRICE CLUB-PARAAQUE, INC., PUREGOLD PRICE CLUB-VALENZUELA, INC., PUREGOLD PRICE CLUB-TAYUMAN, INC., and PUREGOLD PRICE CLUB-DAU, INC. against its normal income tax liability for the three (3) immediately succeeding taxable years pursuant to Section 27 (E) (2) of the 1997 Tax Code (BIR Ruling S-40-121-2001) . 7. Under Revenue Bulletin No. 1-2003 dated July 14, 2003 one of the instance identified as "No-Ruling Area" is the determination of whether or not substantial change in the ownership or enterprise (whether as a result of a merger or otherwise) for purposes of applying the Net-Operating Loss Carry-Over (NOLCO) provision under Section 34 (D) (3) of the Tax Code of 1997, as defined under Revenue Regulations No. 14-2001. In addition to the foregoing requirements, the parties shall enclose with their respective income tax returns for the taxable year in which the merger occurred, a copy of the request for ruling filed with, and the corresponding ruling issued by the Bureau of Internal Revenue, both duly stamp-received by the appropriate office of the Bureau of Internal Revenue. Such parties shall include as a note to their respective audited financial statements for the taxable year in which the merger occurred a statement to the effect that they hold such assets/shares acquired in a merger and the year in which such merger occurred, and in the taxable years until the subject properties are subsequently transferred to another transferee. 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, and/or any of the requirements imposed in this letter is not complied with, then this ruling shall be considered null and void. cIaHDA Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service