Sycip Gorres Velayo & Co.

February 16, 2009 BIR RULING [DA-(S40M-002) 084-09] 40 (C) (2) & (6) (b); S-40-004-2003 Sycip Gorres Velayo & Co . 6760 Ayala Avenue 1226 Makati City Attention: Atty. Emmanuel C. Alcantara Co-Head, Tax Services Gentlemen : This refers to your letter dated December 22, 2008, requesting for confirmation of your opinion of the following: AEaSTC 1. That the merger of SGL Philippines E-Zone Services, Inc. (SGLE) and Sumisho Global Logistics Phils., Inc. (SGLP), with SGLE as the surviving entity, qualifies as a tax free merger under Section 40(C)(2) of the 1997 Tax Code, as amended; 2. That the conversion of SGLE outstanding common shares and reclassification of SGLE unissued common shares to preferred shares resulting from the merger is not subject to capital gains tax (CGT) and to documentary stamp tax (DST); 3. That SGLP, the absorbed entity, is not required to file a short-period return as prescribed under Section 52 of the 1997 Tax Code, as amended. The facts, as represented, are as follows: 1. SGLP and SGLE are domestic corporations organized and existing under the laws of the Republic of the Philippines, both holding their principal office at Lot 4-E, Bldg., H1 & H2 Special Economic Zone, First Philippine Industrial Park, Barangay Sta. Anastacia, Sto. Tomas, Batangas. 2. SGLE is engaged in the business of rendering trading, transportation, handling, forwarding, warehousing and logistics services for enterprises registered and doing business within the Sto. Tomas, Batangas Special Economic Zone; while SGLP is engaged in the business of rendering container handling services, warehousing, freight forwarding, clearance, inland transportation, non vessel ownership common carriage services and related logistics services. 3. Prior to the merger, SGLE's authorized capital stock was Eighty Six Million Seven Hundred Twenty Thousand Pesos (P86,720,000.00) in lawful money of the Philippines divided into Eight Hundred Sixty Seven Thousand Two Hundred Shares (867,200) with a par value of P100.00 per share. The total capital stock subscribed and paid-up amounted to Twenty One Million Six Hundred Eighty Thousand Pesos (P21,680,000.00) in the name of its stockholders, as follows: Stockholders Number of Amount Amount Shares Subscribed Paid-Up Sumisho Global Logistics Co. Ltd., Japan 108,397 P10,839,700.00 P10,839,700.00 Sumisho Global Logistics Phils., Inc. 86,718 8,671,800.00 8,671,800.00 Sumitomo Corporation Japan 21,679 2,167,900.00 2,167,900.00 Angelito A. Alvarez 1 100.00 100.00 Erlindo M. Salvador 1 100.00 100.00 Shigetomo Kawamoto 1 100.00 100.00 Hideaki Watanabe 1 100.00 100.00 Hiroyoshi Yamada 1 100.00 100.00 Hisashi Chujo 1 100.00 100.00 Total 216,800 P21,680,000.00 P21,680,000.00 ====== =========== =========== 4. Based on the audited financial statements of SGLP as of June 30, 2008 and after SGLP's buyback of its 82,744 common shares as duly approved by the Board of Directors of SGLP on October 2, 2008, SGLP has total assets of P29,620,912.00, total liabilities of P6,820,794.00 and total stockholders' equity of P22,800,118.00. As per submitted Certification, the total assets of SGLP is broken down as follows: aIDHET Assets Cash P3,468,465.00 Receivables 4,316,908.00 Prepaid expenses and other current assets 6,724,235.00 Due from related parties 1,638,991.00 Total current assets 16,148,599.00 Investment in associate 8,534,991.00 Property and equipment 2,256,083.00 Computer software 655,298.00 Deferred tax assets 1,657,779.00 Other assets 368,162.00 Total non current assets 13,472,313.00 Total assets P29,620,912.00 =========== 5. The merger between SGLE and SGLP was unanimously approved by the Board of Directors of both corporations in meetings separately held on October 3, 2008, as well as by the stockholders representing at least 2/3 of the outstanding capital stock of each of SGLE and SGLP pursuant to Section 77 of the Corporation Code of the Philippines. 6. Considering that both corporations are engaged in the same business activity, the merger is deemed desirable in order to simplify operations and to achieve efficiency and economy of operations by reducing administrative and operating costs involved in maintaining two (2) separate entities to undertake the same activities. 7. Pursuant to their Plan of Merger duly filed with the Securities and Exchange Commission (SEC) on October 23, 2008 and approved by the SEC on December 17, 2008, the following are the salient terms and conditions of the merger between SGLE and SGLP: SGLP shall be merged into SGLE, and SGLP's corporate existence shall cease by operation of law as provided for under Section 80 (2) of the Corporation Code of the Philippines and upon approval of the merger by the SEC. SGLE shall be the surviving corporation in the merger. SGLE shall continue to possess all its rights, privileges, immunities and powers, and shall continue to be subject to all its duties and liabilities, as those existing immediately prior to the Effective Date of Merger which is agreed to be on January 1, 2009 subject to SEC approval of the merger. Upon and on the Effective Date of Merger, all the respective rights, businesses, assets and other properties of SGLP, including, but not limited to, all real and personal properties, contractual rights, licenses, privileges, property rights, claims, bank deposits, stocks, accounts receivables, credit lines, supplies, equipment, and such other assets as shown in the audited balance sheet of SGLP as of June 30, 2008 shall be conveyed, assigned, and transferred to SGLE. It is understood that whatever assets that may not have been reflected in the said balance sheet of SGLE as of June 30, 2008 or may have been omitted therefrom for any reason whatsoever as well as all other assets which may come into their possession or to which they may be entitled after the aforesaid date and until the approval of the merger by the SEC shall be deemed included in the conveyance, assignment and transfer. Furthermore, all transactions entered into by SGLP during the said period shall be for the account of SGLE. Upon approval of the merger, SGLE shall be the surviving corporation and its corporate existence shall continue. SGLE shall become the owner of all the rights, assets, privileges and other properties of SGLP and shall assume all the debts and liabilities of SGLP as of June 30, 2008 in the same manner as if SGLE had itself incurred such liabilities and obligations. The rights of creditors of SGLP, if any, or any lien upon any of its properties shall not be impaired by the merger, and any such claim or action or proceeding against SGLP as of the Effective Date of the Merger may be prosecuted by or against SGLE provided, however, that SGLE may avail of all the defenses, rights, privileges, set-offs and counterclaims which SGLP may have had under the premises. AaIDHS 8. Moreover, considering that SGLP owns 40% of the outstanding capital stock of SGLE, SGLP shall surrender its 86,720 SGLE common shares as treasury shares, which shall be simultaneously reissued by SGLE pursuant to the merger. SGLE, in consideration of the transfer of SGLP's assets and liabilities (net asset value) as of June 30, 2008 shall issue new shares and reissue treasury shares to SGLP which it will distribute proportionally to its shareholders, namely: (1) Airfreight 2100, Inc.; (2) Philippine Transworld Shipping Corporation; (3) Sumisho Global Logistics Co. Ltd., Japan; and (4) Sumitomo Corporation Japan, in redemption of the outstanding SGLP shares. Also, pursuant to the merger and corresponding amendment to its articles of incorporation, SGLE provides for convertibility feature of its common shares to preferred shares. Thus, as a result of the merger, the new shares to be issued by SGLE to SGLP stockholders except Airfreight 2100, Inc. will comprise of preferred shares arising from the reclassification of SGLE unissued common shares to preferred shares. Therefore, in consideration of the transfer of SGLP's net asset value as of June 30, 2008 in the amount of P22,800,118.00, SGLE shall issue new shares and reissue treasury shares to SGLP stockholders as follows: Name of Type of From Number of Amount Amount Shareholder Share Shares Subscribed Paid-Up Subscribed (Total plus APIC Par Value) Sumisho Global Preferred Unissued 52,440 P5,244,000.00 P5,244,000.00 Logistics Co. Ltd. Japan Airfreight 2100, Common Unissued/ 107,161 10,716,100.00 10,716,100.00 Inc. Treasury Philippine Common Treasury 22,963 2,296,300.00 2,296,300.00 Transworld Shares Shipping Preferred Unissued 29,477 2,947,700.00 2,947,700.00 Corporation Sumitomo Corporation Preferred Unissued 15,960 1,596,000.00 1,596,000.00 Japan Additional Paid- in Capital 18.00 (APIC) Common 130,124 13,012,400.00 13,102,400.00 Preferred 97,877 9,787,700.00 9,787,700.00 Total 228,001 P22,800,100.00 P22,800,118.00 ====== =========== =========== The resulting capital structure of SGLE, the surviving entity, after the issuance of shares and reissuance of treasury shares to the stockholders of SGLP arising from the merger shall be as follows: Name of Type of Number of Amount Amount Paid-Up Shareholder Share Shares Subscribed plus APIC Subscribed (Total Par Value) Sumisho Global Common 22,960 P2,296,000.00 P2,296,000.00 Logistics Co. Ltd. Preferred 137,877 13,787,700.00 13,787,700.00 Japan Airfreight 2100, Common 107,160 10,716,000.00 10,716,000.00 Inc. Philippine Common 22,962 2,296,200.00 2,296,200.00 Transworld Shipping Preferred 29,477 2,947,700.00 2,947,700.00 Corporation Sumitomo Corporation Japan Preferred 37,639 3,763,900.00 3,763,900.00 Angelito A. Common 1 100.00 100.00 Alvarez Erlindo M. Common 1 100.00 100.00 Salvador Shigetomo Common 1 100.00 100.00 Kawamoto Hideaki Watanabe Common 1 100.00 100.00 Hiroyoshi Yamada Common 1 100.00 100.00 Hisashi Chujo Common 1 100.00 100.00 Additional Paid-in Capital (APIC) 18.00 Common 153,088 15,308,800.00 15,308,800.00 Preferred 204,993 20,499,300.00 20,499,300.00 Total 358,081 P35,808,100.00 P35,808,118.00 ====== =========== ============ In connection therewith, you are requesting confirmation of your opinion on the tax consequences thereof, to wit: 1. The statutory merger of SGLE and SGLP is a tax-free merger and qualifies for non-recognition of gain or loss for income tax purposes in accordance with Sections 40 (C) (2) (a) and (b) and 40 (C) (6) (b) of the 1997 Tax Code, as amended. Hence, no gain or loss shall be recognized by: caSEAH a) SGLP, as the transferor, on the assignment of all its assets and liabilities to SGLE, pursuant to the Plan of Merger; and b) SGLE, as the transferee, on its receipt of the assets and liabilities of SGLP in exchange for SGLE shares; c) The basis of the transferred assets and liabilities in the hands of SGLE shall be the same as it would be in the hands of SGLP. 2. The transfer of the assets of SGLP to SGLE is not a transfer of property for an insufficient consideration subject to donor's tax considering that the transfer is being undertaken purely for a business purpose and there is no intention on the part of SGLP to donate its assets to SGLE. 3. The transfer of assets of SGLP to SGLE pursuant to the merger is not subject to value-added tax (VAT) and any unused input tax of SGLP as of the effectivity of the merger shall be absorbed by SGLE as the surviving corporation pursuant to Section 4.106-8 (b) (3) of Revenue Regulations No. 16-05 dated November 1, 2005, otherwise known as the Consolidated Value-Added Tax Regulations of 2005, implementing Republic Act No. 9337. 4. Any excess MCIT of SGLP shall be transferred and vested in SGLE on the effective date of merger and SGLE may carry forward and credit the excess MCIT of SGLP against its normal income tax liability for the three immediately succeeding taxable years reckoned from the date of payment of the MCIT by SGLP pursuant to Section 27 (E) (2) of the 1997 Tax Code, as amended. 5. The transfer of assets of SGLP to SGLE pursuant to the merger is not subject to documentary stamp tax (DST), pursuant to Section 199 (m) of Republic Act No. 9243, otherwise known as An Act Rationalizing the Provisions on the Documentary Stamp Tax of the 1997 Tax Code, as amended, as implemented by RR No. 13-2004. 6. The DST at the rate of P1.00 on each P200 par value, or a fractional part thereof, will be imposed on the (a) original issuance of common and preferred shares and (b) reissuance of treasury shares as preferred shares by SGLE to the stockholders of SGLP, as a consequence of the merger, pursuant to Section 175 of the 1997 Tax Code, as amended by Republic Act No. 9243. 7. The surrender of the shares of stock held by the stockholders of SGLP in exchange for the shares of stock of SGLE in complete redemption and cancellation of the capital stock of SGLP, pursuant to the merger, is likewise not subject to DST. 8. The conversion by SGLE of its outstanding common shares and the reclassification of its unissued common shares to preferred shares pursuant to the merger without change in the proportionate shareholdings of the stockholders and the par value of the shares and without any cash flow and which conversion and reclassification do not partake of original issuance or transfer of shares are not subject to CGT and DST. 9. SGLP, the absorbed entity in the merger, is not required to file a short period return for the period January-June 30, 2008 as prescribed under Section 52 (C) of the 1997 Tax Code, as amended, since the effectivity date of the merger pursuant to the Plan of Merger is on January 1, 2009 as duly approved by the SEC at which date SGLP's corporate existence ceases to exist by operation of law. We reply as follows: 1. The merger of the SGLE and SGLP qualifies as a tax-free merger because it is being undertaken in accordance with Section 40 (C) (2) in relation to Section 40 (C) (6) (b) of the 1997 Tax Code, as amended, to wit: "Section 40. Determination of Amount and Recognition of Gain or Loss. xxx xxx xxx (C) Exchange of Property. xxx xxx xxx (2) Exception. No gain or loss shall be recognized if in pursuance of a plan of merger or consolidation A corporation, which is a party to a merger or consolidation, exchanges property solely for stock in a corporation, which is a party to the merger or consolidation; or SCHTac A shareholder exchanges stock in a corporation, which is a party to the merger or consolidation, solely for the stock of another corporation also a party to the merger or consolidation; or A security holder of a corporation, which is a party to the merger or consolidation, exchanges his securities in such corporation, solely for stock or securities in another corporation, a party to the merger or consolidation." Moreover, Section 40 (C) (6) (b) of the 1997 Tax Code, as amended, defines the term "merger" and provides for the condition in order for the merger to qualify as tax-free, to wit: "Section 40. Determination of Amount and Recognition of Gain or Loss. xxx xxx xxx Definitions. xxx xxx xxx (b) The term "merger" or "consolidation", when used in this Section, shall be understood to mean: (i) the ordinary merger or consolidation, or (ii) the acquisition by one corporation of all or substantially all the properties of another corporation solely for stock: Provided, That for a transaction to be regarded as a merger or consolidation within the purview of this Section, it must be undertaken for a bona fide business purpose and not solely for the purpose of escaping the burden of taxation: Provided, further, That in determining whether a bona fide business purpose exists, each and every step of the transaction or series of transactions shall be treated as a single unit; Provided, finally, That in determining whether the property transferred constitutes a substantial portion of the property of the transferor, the term 'property' shall be taken to include the cash assets of the transferor." [Underscoring * supplied]. Based on the foregoing, the elements of a tax-free merger under Section 40 (C) (2) in relation to Section 40 (C) (6) (b) of the 1997 Tax Code, as amended are as follows: 1. There must be a merger and a plan of merger; 2. The parties to the merger must, as a general rule, exchange property solely for stock, pursuant to the plan of merger; and 3. The merger must be undertaken for a bona fide business purpose and not solely for purpose of escaping the burden of taxation. It is clear that the above-enumerated elements are present in the case of the merger of SGLE and SGLP. In addition, the application of Section 40 (C) (2) to the transfer of property in exchange for shares of stock pursuant to a merger has been recognized in several BIR Rulings. In BIR Ruling No. DA-701-06 dated December 13, 2006, involving the merger of two universal banks, namely Banco de Oro Universal Bank (BDO) and Equitable PCI Bank (EPCIB), with BDO as the surviving corporation, through a share-swap arrangement, the BIR ruled: "[T]he proposed reorganization involving BDO and EPCIB is a merger within the contemplation of Section 40(C)(2) and (6)(b) of the 1997 Tax Code, as amended, because BDO shall acquire all the assets and assume all the liabilities of EPCIB, and the same being for a bona fide business purpose and not for the purpose of escaping the burden of taxation. Likewise, no gain or loss shall be recognized by BDO, as the transferee, on its receipt of the assets and liabilities of EPCIB pursuant to and as a consequence of the merger. xxx xxx xxx [P]ursuant to Section 40(C)(5)(a) and (b) of the Tax Code of 1997, as amended, the basis of the assets to be received in the hands of the transferee shall be the same as it would be in the hands of the transferor increased by the amount of the gain recognized to the transferor on the transfer. Accordingly, since BDO neither received money or any other property from EPCIB nor BDO recognized any gain on the exchange, the basis of the properties to be received by BDO upon the exchange shall be as the basis of the properties in the hands of EPCIB. EHIcaT Further, if the total liabilities to be assumed by BDO upon the effective merger date exceed the historical or original acquisition cost or cost basis of the assets transferred by EPCIB, the excess shall be recognized as gain to EPCIB subject to income tax. (Section 40(C)(4)(b), Tax Code of 1997, as amended)." Also, in BIR Ruling No. DA-371-06 dated June 15, 2006, the BIR similarly ruled that the merger between SMPI and HRI qualifies as a tax-free merger, to wit: "[U]nder Section 40(C)(2) of the 1997 Tax Code, HRI transferred all assets and liabilities to SMPI in exchange for shares of stock pursuant to the provisions of the Plan of Merger. In addition, the merger is being undertaken for a bona fide business purpose . . . and not merely for the purpose of escaping the burden of taxation. Consequently, the merger between SMPI and HRI qualifies as a tax-free merger." In view of the foregoing, we conclude that the transfer of assets and liabilities of SGLP to SGLE in exchange for the latter's shares pursuant to the Plan of Merger, falls within the contemplation of the provisions of Section 40 (C) (2) of the 1997 Tax Code, as amended, and the interpretative rulings of the BIR. Consequently, no gain or loss shall be recognized by SGLP upon the transfer of its assets and liabilities to SGLE pursuant to the Plan of Merger. At the same time, no gain or loss shall be recognized by SGLE upon its receipt of the assets, and its assumption of the liabilities transferred to it by SGLP. It is understood, however, that upon subsequent sale or exchange of the assets acquired by SGLE in the merger transaction, the gain it derived, if any, from such sale or exchange shall be subject to income tax. The gain, if any, shall be computed by taking into consideration the basis of SGLP of the properties it transferred as against the fair market value of the same at the time of sale or disposition. On the other hand, pursuant to Section 40 (C) (5) (a) and (b) of the Tax Code of 1997, as amended, the basis of the assets to be received in the hands of the transferee shall be the same as it would be in the hands of the transferor increased by the amount of the gain recognized to the transferor on the transfer. Accordingly, since SGLE neither received money or any other property from SGLP nor SGLE recognized any gain on the exchange, the basis of the properties to be received by SGLE upon the exchange shall be the same as the basis of the properties in the hands of SGLP. In addition to the above, the stockholders of SGLP shall recognize no gain or loss when they surrender their SGLP shares in exchange for SGLE shares in complete redemption and cancellation the SGLP capital stock pursuant to the Plan of Merger. The basis of the SGLE shares that will be issued to the stockholders of SGLP shall be the same as the basis of SGLP shares surrendered in exchange therefore, and the basis of the assets and liabilities to be received by SGLE from SGLP shall be the same as it would be in the hands of SGLP. 2. The transfer of property is not subject to Donor's Tax. Clearly, there is no intention to donate on the part of either or both SGLE and SGLP since the said transfer is effected purely for business reasons. Hence, the transfer by SGLP of its assets to SGLE pursuant to the Plan of Merger is not subject to donor's tax. Moreover, it was laid down in the case of Republic of the Philippines vs. Guzman (G.R. No. 132964 dated February 18, 2000) that the essential elements of a valid donation are as follows: (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. The third element is not present in the case of the merger between SGLE and SGLP. Further, it was mentioned in BIR Ruling No. DA-401-98 dated September 3, 1998 that the transfer of the assets and liabilities of ABIBI to CIBC pursuant to a merger is not subject to donor's tax since there is no intention to donate on the part of either or both of the parties, and the transaction was effected purely for business reasons. Same as in the above-ruling, SGLP and its stockholders have no intention to donate their assets to SGLE, as the transfer of said assets is pursuant to the merger and motivated purely by business reasons, which are, in order to improve the competitive position and financial strength of SGLE and to achieve economies of scale and efficiency of operations. 3. The transfer of property not subject to VAT. The transfer of the assets of SGLP to SGLE, pursuant to the Plan of Merger, is not subject to VAT. Moreover, any unused input tax belonging to SGLP as of the effective date of the merger, if any, will be absorbed by SGLE as the surviving entity in accordance with Section 4.106-8 (b) (3) of Revenue Regulations No. 16-05 dated November 1, 2005, otherwise known as the Consolidated Value-Added Tax Regulations of 2005, as amended, implementing Republic Act (R.A.) No. 9337, which provides the following: CDEaAI "Section 4.106-8. Change or Cessation of Status as VAT-registered Person. xxx xxx xxx (b) Not subject to output tax The VAT shall not apply to goods or properties existing as of the occurrence of the following: xxx xxx xxx 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." Accordingly, in BIR Ruling DA-150-00 dated March 13, 2000, the BIR ruled that: "Finally, value-added tax (VAT) is imposed on the sale, barter, and exchange of properties in the course of trade or business. Section 109 of the Tax Code of 1997, as amended, defines the phrase "in the course of trade or business" as the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a non-stock, non-profit private organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members or their guests), or government entity. An exchange of property pursuant to a merger is not a disposition or exchange of properties "in the course of trade or business" and is, therefore, not subject to VAT." [Underscoring * supplied]. Based on the foregoing, the transfer of SGLP's assets to SGLE pursuant to their merger is not subject to VAT and the unused input tax of SGLP will be absorbed by SGLE as the surviving corporation. 4. Any excess MCIT of SGLP will be transferred and vested in SGLE, which may be carried forward and credited against SGLE's normal income tax liability. The excess MCIT of SGLP, if any, as of the Effective Merger Date shall inure to the benefit of SGLE. This finds support in BIR Ruling No. DA-017-02 dated February 7, 2002 where the BIR ruled that the excess MCIT of the absorbed corporations may be transferred to and vested in the surviving corporation on the effective date of the merger, to wit: "[T]he excess MCIT of the absorbed corporation are among the rights, privileges, property and/or interest of the absorbed corporation, the excess MCIT of the absorbed corporations shall be transferred to and vested in ABCI, as the surviving corporation on the effective date of the merger. Accordingly, the excess MCIT of the absorbed corporations shall be carried forward and credited against the normal income tax due of ABCI, as the surviving corporation, for the three (3) immediately succeeding taxable years pursuant to said Section 27(E)(3) of the said Code." Based on the foregoing, any excess MCIT of SGLP shall be transferred and vested in SGLE, which may be carried forward and credited against SGLE's normal income tax liability. 5. The transfer of property pursuant to the merger is not subject to DST. Section 199 of RA No. 9243, otherwise known as An Act Rationalizing the Provisions on the DST of the 1997 Tax Code, as amended, provides as follows: "Section 199. Documents and Papers Not Subject to Stamp Tax. The provisions of Section 173 to the contrary notwithstanding, the following instruments, documents and papers shall be exempt from the documentary stamp tax: xxx xxx xxx (m) Transfer of property pursuant to Section 40(C)(2) of the National Internal Revenue Code of 1997, as amended." Moreover, Section 9 of RR No. 13-2004, implementing R.A. No. 9243, provides: "The exemption on transfer of property pursuant to Section 40(C)(2) of the National Internal Revenue Code of 1997, as amended, provided for under Section 199 (m) refers to the DST due on the deed transferring the property. However, the shares of stocks issued in exchange for the said property is subject to the DST due under Sections 174 if they are original issues." In view of the foregoing, no DST shall be due on the transfer by SGLP of its assets to SGLE pursuant to the merger transaction since Section 199 (m) of R.A. No. 9243, expressly provides that transfer of property pursuant to Section 40 (C) (2) of the NIRC, as amended, is exempt from the DST. IaTSED 6. The original issuance of SGLE shares and reissuance of SGLE treasury shares to the stockholders of SGLP is subject to DST. DST shall be imposed on the original issuance by SGLE of common and preferred shares to the stockholders of SGLP, as well as the reissuance by SGLE of its treasury shares as a consequence of the merger. Section 174 of the Tax Code, reads: "Section 174. Stamp Tax on Original Issue of Shares of Stock. On every original issue, whether on organization, reorganization or for any lawful purpose, of shares of stock by any association, company or corporation, there shall be collected a documentary stamp tax of One peso (P1.00) on each Two hundred pesos (P200), or fractional part thereof, of the par value, of such shares of stock: Provided, That in the case of the original issue of shares of stock without par value, the amount of the documentary stamp tax herein prescribed shall be based upon the actual consideration for the issuance of such shares of stock: Provided, further, That in the case of stock dividends, on the actual value represented by each share." In BIR Ruling No. DA-701-06 dated December 13, 2006, the BIR ruled: "No DST shall be due on the transfer of properties by EPCIB made pursuant to the Plan of Merger in accordance with Section 199(m) of the Tax Code, as amended by Republic Act No. 9243, in relation to Section 40(C)(2) of the Tax Code, as amended. However, the original issuance of BDO shares in exchange for the EPCIB shares shall be subject to DST at the rate of P1.00 per P200.00, or fractional part thereof, of the par value of such shares of stock as impose[d] under Section 174 of the Tax Code of 1997, as amended." Based on the foregoing, it is clear that the original issuance by SGLE of common and preferred shares to the stockholders of SGLP, as well as the reissuance by SGLE of its treasury shares as a consequence of the merger shall be subject to DST at the rate of P1.00 on each P200 par value, or fractional part thereof. 7. The cancellation of SGLP's shares of stock in SGLE is not subject to DST. In the case of Pilipinas Shell Petroleum Corporation vs. Commissioner of Internal Revenue (C.T.A. Case No. 6477 dated April 20, 2003), the Court stated that all the integral parts of the merger including the surrender of shares in exchange for shares, should be treated as a single and continuing transaction subject only to one DST. The Court held as follows: "As earlier stated, DST is in the nature of an excise tax because it is really imposed on the privilege to enter into a transaction. Its imposition, therefore, should be only once. And in a statutory merger, there is only one transaction, i.e. , the issuance by the surviving corporation of its own shares of stock to the stockholders of the absorbed corporation in exchange for the shares surrendered by the shareholders of the absorbed corporation. All other transactions which are an integral and inherent part of the merger, such as the absorption of real property, should no longer be subject to another round of DST. In other words, all the integral parts of the merger ( e.g. , surrender of shares in exchange for shares, transfer of assets, assumption of liabilities, etc.) should be treated as a single and continuing transaction subject only to one DST. The transfer of real property is not a transaction separate and distinct from the merger but an integral part or a mere continuation of the initial transaction which was previously consummated." Applying the above, the surrender of shares of stock held by the stockholders of SGLP in exchange for the shares of stock of SGLE as a result of the merger is not a transaction separate and distinct from the merger, but a mere continuation of the initial transaction which was previously consummated, and for which the required DST will be paid. Hence, considering that the DST on the original issuance of common and preferred SGLE shares and the reissuance of SGLE treasury shares to the stockholders of SGLP in complete redemption and cancellation of the capital stock of SGLP pursuant to the merger will be paid, then the cancellation of shares held by the stockholders of SGLP should no longer be subject to DST. Indeed, in various BIR rulings, the BIR has ruled that no DST shall be due upon the surrender by the stockholders of shares of stock for retirement/cancellation made pursuant to a merger (BIR Ruling Nos. DA-371-06 dated June 15, 2006, S-40-013-2006 dated May 26, 2006 and S-40-058-02 dated April 18, 2002) Moreover, in order that the above-described reorganization can be considered as merger under Section 40 (C) (2) of the Tax Code of 1997, as amended, 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: DIHETS (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/received incident to the plan; (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. 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. The parties shall, pursuant to Section 58 (E) of the Tax Code of 1997, as amended, also cause the Register of Deeds to annotate on the Transfer Certificate of Title, the date the deed of transfer or the document of merger, as in this case, was executed, the original or historical cost of acquisition of the properties involved, and the fact that no gain or loss was recognized as a result of such merger. It is further required that the parties to the transaction must submit to the Law Division, Bureau of Internal Revenue, a certified true copy by the Register of Deeds, of duly annotated Transfer Certificates of Title for the real properties involved in the merger transaction and proof of annotation of the substituted basis of the shares of stock involved therein, as well as, the shares of stock to be issued to the stockholders of the transferor corporation within ninety (90) days from the effective date of merger. Violation of the above requirements is subject to the penalties provided under Section 269 and/or Section 275 of the Tax Code of 1997, as amended, whichever is applicable. aITECA 8. The conversion and reclassification of common shares to preferred shares is not subject to CGT and DST. In BIR Ruling No. DA-318-05 dated July 15, 2005 citing BIR Ruling No. DA-030-05 dated January 24, 2005, the BIR ruled as follows: "The conversion of the common shares into preferred shares shall not be subject to capital gains tax since the holders thereof merely change the form of their shareholdings from common shares to preferred shares and they do not realize any gain or economic benefit therefrom. (BIR Ruling No. DA-141-99 dated March 9, 1999) The exchange of common shares into preferred shares qualifies as a mere recapitalization and no gain or loss is recognized therefrom. Recapitalization has been defined as a readjustment of existing interests in the rearrangement of the capital structure of the company, which generally are non-taxable to both the holders and the issuing corporation. (Mertens, Law of Federal Income Taxation, Section 43.105, pp. 164-166)" The above-cited ruling is in line with the Supreme Court Decision entitled Commissioner of Internal Revenue vs. Court of Appeals, Court of Tax Appeals and A. Soriano Corporation , G.R. No. 108576 (20 January 1999), where it was recognized that no income was realized by the stockholders upon the reclassification of common shares into preferred shares since there was no change in the proportionate interest of the stockholders after the reclassification. Both classes of stocks had the same par value. There was no cash flow and the reclassification was a mere corporate paper transaction. Any difference in the market value of the shares would be immaterial at the time of the reclassification because no income was realized. There was only a modification of the subscribers' rights and privileges and this was not a flow of wealth for tax purposes. Such being the case, when the common shares held by MR's stockholders are granted convertibility features but without changing the stockholders' proportionate interest and the par value of the shares and without any cash flow, MR's stockholders will not be liable to capital gains tax. Moreover, it was ruled that the conversion of the preferred shares into equivalent common shares does not partake of the issuance of original shares of stock and, hence, the same is not subject to the DST imposed under Section 175 of the Tax Code of 1997. Likewise, the said reclassification is not subject to the DST provided the new certificates are issued to the same stockholders and the par value is not higher than the replaced certificates (BIR Ruling DA-406-03 dated November 10, 2003; BIR Ruling DA-030-05 dated January 24, 2005). Accordingly, no DST will be due when the common shares are reclassified into common shares convertible into redeemable, preferred shares since there is neither original issuance of shares nor transfer of shares. Based on the foregoing, since the conversion and reclassification of SGLE common shares to preferred shares is a mere recapitalization, without change in the proportionate shareholdings of the stockholders and the par value of shares and which do not entail issuance or transfer of shares are not subject to CGT and DST. 9. The absorbed corporation in the merger is not required to file a short-period return. Considering that the effectivity date of the merger pursuant to the Plan of Merger and as approved by the SEC is on January 1, 2009, SGLP is not required to file a short-period return for the period January-June 30, 2008 as prescribed under Section 52 of the 1997 Tax Code, as amended. While the cut-off date used in the merger is June 30, 2008, SGLP still exists as an entity after June 30, 2008 and will only cease to exist by operation of law on January 1, 2009 which is the effectivity date of the merger. Hence, it need not file a short period return but instead is still required to file an annual income tax return for the period January-December 31, 2008. 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, and/or any of the requirements imposed in this letter is not complied with, 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