Banco de Oro Unibank, Inc.

July 4, 2008 BIR RULING [DA-(S40M-003) 006-08] 40 (C) (2) & (6) (b); S-40-004-2003 Banco de Oro Unibank, Inc. 12 ADB Avenue, Ortigas Center Mandaluyong City Attention: Mr. Ricardo V. Martin Executive Vice President Gentlemen : This refers to your letter dated June 27, 2008, requesting for confirmation of your opinion that pursuant to Section 40 (C) (2) of the 1997 Tax Code, no gain or loss shall be recognized on the transfer of assets and liabilities by Equitable Exchange Inc. (EEI), Jardine Equitable Finance Corporation (JEFC), Express Padala International Inc., (EPII), EBC Capital Corporation (ECAP) to EBC Investment Inc. (EBCII) as a consequence of the merger wherein EBCII shall be the surviving corporation. aSEDHC The facts, as represented are as follows: On May 31, 2007, the Securities and Exchange Commission (SEC) has approved the merger of Banco de Oro Universal Bank, now Banco de Oro Unibank, Inc. (BDO) and Equitable PCI Bank (EPCI) with BDO as the surviving corporation. As a consequence of this event, various subsidiaries of EPCI became subsidiaries of BDO. As a part of its post-merger rationalization plan, BDO has decided to merge subsidiaries and affiliates in order to eliminate duplication and streamline its business structure so that its customers would deal only with one corporate entity for certain types of business transactions. Hence, the following subsidiaries and/or affiliates herein below described decided to undergo a merger. EBCII is a domestic corporation registered with the Securities and Exchange Commission (SEC); that the total authorized capital stock of the corporation is Two Billion P2,000,000,000.00 divided into two (2) classes of shares namely Ten Million (10,000,000) preferred and Ten Million (10,000,000) common shares, both with a par value of One Hundred Pesos (P100.00) per share. CAIHaE Equitable Exchange Inc. (EEI), is a domestic corporation registered with SEC; that the primary purpose for which the corporation is formed (among others) is to engage in the business of dealing and broking in all currencies, to enter into, spot and forward foreign exchange contracts with local and foreign residents; that the authorized capital stock of the corporation is Fifty Million Pesos (P50,000,000.00) divided into two classes of shares, namely, Three Hundred Thousand (300,000) preferred and Two Hundred Thousand (200,000) common shares, both with a par value of One Hundred Pesos (P100.00) per share. Jardine Equitable Finance Corporation (JEFC) is a domestic corporation registered with SEC; that the primary purpose for which the corporation is created is to extend credit facilities to consumers and to industrial, commercial or agricultural enterprises, either by discounting or factoring commercial papers, accounts receivable or buying and selling contracts or other evidences of indebtedness; that the authorized capital stock of said corporation is Two Hundred Million Pesos (P200,000,000.00) divided into Two Million (2,000,000) shares with a par value of One Hundred Pesos (P100.00) per share. Express Padala International (EPII) is a domestic corporation registered with SEC; that the primary purpose for which the corporation is formed is to engage in, conduct, and carry on the business of buying, selling, distributing, marketing at wholesale and retail insofar as may be permitted by law; the authorized capital stock of the corporation is Four Million Pesos (P4,000,000.00), divided into Forty Thousand (40,000) shares with a par value of One Hundred Pesos (P100.00) per share. ISDCaT EBC Capital Corporation (ECAP) is a domestic corporation registered with SEC; the primary purpose for which the corporation is formed is to invest in, purchase, or otherwise acquire, own, hold, use, sell, assign, transfer real and personal property but not limited to shares of stock, bonds, notes, evidences of indebtedness; that the authorized capital stock of the corporation is Two Hundred Million Pesos (P200,000,000.00) divided into two classes of shares namely, One Million (1,000,000) common shares and One Million (1,000,000) preferred shares, both with a par value of One Hundred Pesos (P100.00) per share. EBCII, EEI, JEFC, EPII and ECAP have determined that the merger of the five (5) corporations will result in benefits and various advantages from their combined operations such as, but not limited to, effective and optimum utilization of their resources, properties and facilities and rationalization of their respective structures. The ownership structure of these five (5) corporations is such that they are either directly or indirectly related through common ownership of shares. That prior to the merger, EBCII, EEI, JEFC, EPII and ECAP are substantially owned directly or indirectly by BDO and EBC Strategic Holdings Corporation (ESHC) which is a wholly owned subsidiary of BDO by virtue of the earlier merger of BDO and EPCI. The ownership structure is as follows: Merged Corp. Percentage Ownership Percentage Ownership BDO ESHC (100% EBCII EEI owned by BDO) EBCII 38.46% 61.54% (surviving) EEI 100% JEFC 50% 40% 10% EPII 100% ECAP 100% The shareholders of EBCII, EEI, JEFC, EPII and ECAP have determined that the merger of the corporations will result in benefits and various advantages from their combined operations such as, but not limited to, effective and optimum utilization of their resources, properties and facilities and rationalization of their respective structures. cSEaTH Under the plan of merger, EBCII, EEI, JEFC, EPII and ECAP shall cease to exist as a corporation by operation of law, on the other hand, EBCII's corporate existence shall continue and its Articles of Incorporation shall provide among others that EBCII shall be the surviving corporation, and will, upon the effective date of merger, acquire and assume all the assets, franchises, licenses, powers, rights, interests, titles, equities, privileges, immunities and liabilities of EEI, JEFC, EPII, ECAP. The merger of EEI, JEFC, EPII, ECAP as the surviving corporation will not result in substantial change in the ownership structure of EBCII (surviving corporation) Considering the complementary business of EEI, JEFC, EPII, ECAP the merger becomes necessary and advantageous for the following reasons: a. The integration of the administrative facilities of the parties to the merger, to streamline and simplify operation will result in economies of scale and efficiency of operations; b. The consolidation of the assets of the parties to the merger will allow procurement of financing and credit facilities under more favorable terms. c. The merger will make possible the more productive use of the properties and facilities of the constituent corporation. Based on the foregoing, you are now requesting for confirmation of your opinion that 1. The plan of merger between EEI, JEFC, EPII, ECAP with EBCII as the surviving corporation is a merger within the contemplation of Section 40 (C) (2) and 40 (C) (6) (b) of the Tax Code, considering that it is being undertaken for a bonafide business purpose and not for the purpose of escaping the burden of taxation. Therefore, no gain or loss shall be recognized by BDO, ESHC, EBCII, EEI, JEFC, EPII and ECAP on the transfer of all assets and assumption of liabilities pursuant to the Plan of Merger. 2. No DST shall be due on the surrender of shares for cancellation. No DST shall be due on the Additional Paid in Capital which shall be recognized in the books of the surviving corporation as a result of the transfer of assets and assumption of liabilities by EBCII. TCEaDI 3. The transfer of real properties registered in the name of EEI, JEFC, EPII, and ECAP as absorbed corporations to EBCII, as the surviving corporation pursuant to a merger or consolidation that occurs by operation of law, in as much as the real properties are deemed transferred without further act or deed, is not subject to DST. 4. The transfer of properties by EEI, JEFC, EPII and ECAP to EBCII will not be considered as transfer of property for an insufficient consideration subject to Donor's Tax pursuant to Section 100 of the Tax Code, since it is not attended with an act of liberality by any one of the parties to the merger, but the transaction is viewed as having been undertaken purely for business purposes; 5. The transfer of properties of EEI, JEFC, EPII, ECAP to EBCII pursuant to the plan of merger shall not be subject to any output VAT imposed under Section 106 of the Tax Code; 6. In the event that there should be any excess minimum corporate income tax (MCIT), such excess MCIT of EEI, JEFC, EPII and ECAP shall be transferred to EBCII and carried forward and credited against the normal income tax due of EBCII for three (3) immediately succeeding taxable years; 7. Any excess creditable withholding tax of EEI, JEFC, EPII and ECAP shall be transferred to EBCII and carried forward and credited against MCIT, normal income tax due of EBCII for succeeding year(s); and aIHCSA 8. The aggregate Net Operating Loss Carry Over (NOLCO) balances of the absorbed corporation may be claimed by the surviving corporation as a deduction from gross income pursuant to Sec. 34 (D) (3) of the Tax Code subject to the three (3) years period limitation. In reply thereto, please be informed as follows; 1. The merger between EBCII, EEI, JEFC, EPII, ECAP, whereby all the assets and liabilities of EEI, JEFC, EPII and ECAP shall be transferred to EBCII as the surviving corporation, qualifies for non-recognition of gain or loss for income tax purposes in accordance with Section 40 (C) (2) of the Tax Code of 1997, as amended, which provides, as follows: "Sec. 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) A corporation, which is a party to a merger or consolidation, exchanges property solely for the stock of another corporation which is a party to the merger or consolidation; or (b) A shareholder exchanges stock in a corporation, which is a party to the merger or consolidation, solely for the stock of another corporation, which is a party to the merger or consolidation; or (c) A security holder of a corporation, which is a party to the merger or consolidation, exchanges his securities in another corporation, a party to the merger or consolidation. Relative to the above, Sec. 40 (C) (6) (b) of the Tax Code provides: "The term merger or consolidation, when applied in this Section shall be interpreted to mean: (1) the ordinary merger or consolidation or (2) the acquisition by one corporation of all or substantially all the properties of another corporation solely for stock; provided that for a transaction 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 purposes 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 shall be considered and the whole transaction or series of transaction shall be treated as a single unit, provided, finally, that in determining whether the property transferred constitutes a substantial portion of the business of the transferor, the term "property" shall be taken to include the cash assets of the transferor". Based on the foregoing, the following are the elements of a tax-free exchange pursuant to a merger under Sec. 40 (C) (2) in relation to Sec. 40 (C) (6) (b) of the Tax Code: a) There must be a merger and a plan of merger; b) The parties to the merger, in general, must exchange property solely for stock, pursuant to the plan of merger; c) The merger must be undertaken for a bona fide business purpose and not solely for purpose of escaping the burden of taxation. The above provision of the law was applied in several BIR rulings e.g. BIR Ruling No. 210-93; DA-371-06; in order to highlight the tax free character of an exchange resulting from a merger. In BIR Ruling 210-93, the BIR ruled that the re-organization is a merger within the purview of Sec. 34 (c) (2) (2) and 5 (b) of the Tax Code, as amended considering that GMCR Corporation will acquire all the assets and assume all the liabilities of CRS, although no GMCR shares of stock shall be issued. The fact attendant to this case is essentially similar to the present merger wherein upon effectivity of the merger, CRS (the absorbed corporation) is wholly-owned by GMCR (the surviving corporation), and the transaction was undertaken for a bona fide business purpose and not solely for the purpose of escaping the burden of taxation. TEcHCA Following the provisions under Sec. 40 (C) (2) of the 1997 Tax Code, EEI, JEFC, EPII and ECAP shall transfer all assets and liabilities to EBCII 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 as stated and not merely for the purpose of escaping the burden of taxation. Consequently, the merger between EBCII, EEI, JEFC, EPII and ECAP qualifies as a tax-free merger. Ordinarily in cases of merger, the surviving corporation would issue shares of stock to the stockholders of the absorbed corporation in exchange for the net assets. However, in the case of EBCII shares holdings in EEI (100% wholly owned except for nominal shares), EPII (100% wholly owned except for nominal shares), ECAP (100% wholly owned except for nominal shares), JEFC (50% owned by BDO, 40% owned by ESHC and 10% owned by EBCII), sound corporate practice dictates that the surviving corporation, EBCII being directly or indirectly related through common ownership of shares in EEI, JEFC, EPII, ECAP, shall no longer issue new shares corresponding to the net value of the assets transferred in order not to create treasury shares. The fact that no shares were issued, will not prevent the merger of EBCII, EEI, JEFC, EPII, ECAP from qualifying for the non recognition of gain or loss under Section 40 (C) (2) of the Tax Code (BIR Ruling No. 210-93). In BIR Ruling Nos. 30-99, S-40-221-2001, this Office has the occasion to rule that: "The tax-deferred character of the merger under Section 40 (C) (2) and (6) (b) of the Tax Code of 1997, is not affected by the non-issuance (by the surviving corporation) of its share in exchange for the assets and liabilities of the absorbed corporation in cases merger of a parent and subsidiary (par. 4305, Vol. II Mertens Law of Federal Income Taxation 1986)". 2. Considering that all the outstanding shares of EEI, JEFC, EPII, and ECAP will be retired/cancelled as a consequence of the merger, no DST shall be due upon the surrender by the stockholders of the shares of the absorbed corporation for retirement/cancellation (BIR Ruling S-40-121-2001 dated October 5, 2001). Likewise, no DST shall be due on the cancellation of shares of stock of the absorbed corporations held by BDO, ESHC, EBCII, EEI. With respect to the additional paid in capital which will be recognized in the books of the surviving corporation, no DST shall be due thereon if the same comes from the subscribed capital stock by the respective parties to the merger and the DST thereon was already paid upon subscription, otherwise or if the same are coming from the unissued capital stock, the same shall be subject to DST on original issuance. (RR No. 13-2004). 3. No DST shall be due on the transfer of properties by EEI, JEFC, EPII and ECAP EBCII to be made pursuant to the plan of merger in accordance with Section 199 (m) of the Tax Code, as amended by Republic Act (R.A.) No. 9243, in relation Section 40 (C) (2) of the Tax Code, as amended. 4. The transfer of properties of EEI, JEFC, EPII and ECAP to EBCII as a consequence of merger is not subject to donor's tax as there is no intention to donate on the part of any of the parties to the merger. The transaction is undertaken for a bona-fide business purpose and could not be viewed as an act of liberality by anyone of the parties. Accordingly, the transaction will not be considered as a transfer of properties for insufficient consideration so that there is no deemed gift under Section 100 of the Tax Code. 5. The transfer of properties of EEI, JEFC, EPII and ECAP to EBCII as a consequence of merger is not subject to value added tax (VAT) pursuant to Section 105 of the Tax Code as amended by Republic Act No. 9337. The transfer of properties to effectuate a merger is not a sale, barter or exchange in the course of trade or business by any of the parties involved, but to make the pooling of resources among the parties to the merger possible. The phrase in the course of trade or business means the regular conduct or pursuit of a commercial or economic activity including transactions incidental thereto (Section 105 NIRC). Since the transfer of properties by the absorbed entities to the surviving entity is an isolated transaction to implement the merger, it is not subject to the VAT. The properties, real or personal, of the absorbed corporation existing as of the time of merger are also not subject to VAT although there will be a change in the ownership thereof. Section 4.100-5 (b) (3) of Revenue Regulations No. 7-95, as amended by RR No. 4-2007, provides; "(b) Not subject to output tax The Vat shall not apply to goods or properties existing as of the occurrences of the following: i. Change of control of a corporation by the acquisition of the controlling interest of such corporation by another stockholder or group of stockholder; EAcCHI ii. Change in trade or corporate name of the business; and iii. Merger or consolidation of corporation." 6. With respect to the treatment of any excess minimum corporate income tax (MCIT) of any of the absorbed corporation, it is to be emphasized that in several BIR Ruling, it was held that the excess MCIT of an absorbed corporation shall be carried forward and credited against the normal income tax due of the surviving corporation for the three immediately succeeding taxable years pursuant to Sec. 27 (E) (3) of the Tax Code of 1997. Thus, considering the excess MCIT of the absorbed corporation are among the rights, privileges, property and/or interest of the absorbed corporation, the excess MCIT of EEI, JEFC, EPII, and ECAP shall be transferred and vested in EBCII as the surviving corporation on the effective date of the merger. The creditability of any excess MCIT, however, shall not be reckoned from the effective date of merger but from the date of its payment by the absorbed corporation. (BIR Ruling No. DA-01702007 dated February 7, 2002) 7. The excess creditable withholding taxes of the absorbed corporations are part of the assets to be transferred to the surviving entity. The ownership of these prepaid taxes, both legal and beneficial, having been effectively transferred to the surviving entity as a consequence of the merger, therefore, the surviving entity is now entitled to exercise all the attributes of ownership over them. Hence, EBCII, is entitled to carry forward and apply these excess creditable withholding taxes as credit against its MCIT or normal corporate income tax liabilities. 8. Finally, as to the entitlement of the surviving corporation to NOLCO deduction the BIR has, in several occasions, ruled that the aggregate Net Operating Loss Carry Over (NOLCO) balances of the absorbed corporations and the surviving corporation may be claimed by the latter as a deduction from gross income under Section 34 (D) (3) of the Tax Code of 1997 subject to the three (3) years period limitation and the interest retention rule. NOLCO balance is among the rights, privileges property and/or interest of the absorbed corporations and considering further that the merger will be undertaken for a bona fide business purpose and not for the purpose of escaping the burden of taxation and there is no effective change of ownership (the surviving corporation being directly and indirectly related through common ownership of shares of the absorbed corporations), thus the surviving corporation can claim as NOLCO deduction the NOLCO balance of the absorbed corporation, which shall be transferred and vested in the surviving corporation, EBCII, by operation of law (S-40-207-2001 dated October 24, 2001 citing BIR Ruling No. 137-99 dated August 31, 1999) However, in order that the above described reorganization can be considered as a merger under Section 40 (C) (2) and (6) (b) of the Tax Code of 1997, the parties should comply with the following requirements: A. The plan of reorganization should be adopted by each of the corporation, 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 all cost or other basis of all property, stocks or securities, transferred incident to the plan; 3. A statement of the amount of stock or securities and other money received from the exchange, including a statement of all distribution of other disposition made thereof. The amount of each kind of stock or securities and other property received shall be stated on the fair market value there at the date of the exchange. 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 property acquired in the exchange is subject. TIADCc B. Every taxpayer, other than a corporation, 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 in the exchange; and 2. A statement in full of the amount of stock or securities and other property or money received from the exchange, including any liabilities assumed upon the exchange, and any liabilities to which property received is subject. The amount of each kind of stock or securities and of 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 the exchange. C. 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 liabilities assumed on the exchange, or any liabilities to which any of the properties received were subject), in order to facilitate the determination of gain or loss from subsequent disposition of such stock or securities and other property received from the exchange. (par. 9803-8, F-H. 963,3d., p. 9611) In addition to the foregoing requirements, records in substantial form must be kept by the corporation participating in the merger showing the information listed above in order to facilitate the determination of gain or loss from a subsequent disposition of the stock received as a consequence of the merger. (BIR Ruling No. 473-93 dated December 3, 1993). EHITaS 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