Banco De Oro Unibank, Inc.

July 4, 2008 BIR RULING [DA-(S40M-004) 007-08] 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 PCI Automation Center, Inc. (PCIA) to Equitable Data Center, Inc. (EDCI), as a consequence of the merger wherein EDCI shall be the surviving corporation. cHCIDE The facts, as represented are as follows: On May 31, 2007, the Securities and Exchange Commission has approved the merger of Banco de Oro Universal Bank now Banco de Oro Unibank Inc., (BDO) and Equitable PCI Bank Inc. (EPCI) with BDO as the surviving corporation. As a consequence, various subsidiaries of EPCI became subsidiaries of BDO. As part of its post-merger rationalization moves, BDO has decided to merge PCIA and EDCI in order to eliminate duplication and streamline its business structure. Equitable Data Center Inc. (EDCI) is a domestic corporation registered with Securities and Exchange Commission (SEC); that the authorized capital stock of EDCI is Fifty Million Pesos (P50,000,000.00) divided into Two Hundred Fifty Thousand (250,000) common shares with a par value of P100.00 and Two Hundred Fifty Thousand (250,000) preferred shares with a par value of P100.00 per share. PCI Automation Center, Inc. (PCIA) is a domestic corporation registered with Securities and Exchange Commission (SEC); that its total authorized capital stock is Five Million Pesos (P5,000,000.00) divided into Fifty Thousand (50,000) common shares with par value of P100.00 per share. The shareholders of EDCI and PCIA have determined that the merger of the two (2) 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. Under the plan of merger, EDCI will not issue new shares, accordingly, each of the outstanding certificates of stock of PCIA held by Banco de Oro (BDO) as of the effective date of the merger shall be deemed cancelled by reason of the merger. TAIESD BDO, being the 100% owner of all the outstanding shares of EDCI shall no longer receive new shares from EDCI, and in lieu EDCI shall recognize the net assets of PCIA absorbed/transferred as additional paid-in capital in the books (of EDCI). Under the plan of merger, PCIA cease to exist as a corporations by operation of law, on the other hand, EDCI corporate existence shall continue and its Articles of Incorporation shall provide among others that EDCI 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 PCIA. Considering the complimentary business of EDCI and PCIA, 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 corporations. DHTECc Based on the foregoing, you are now requesting for confirmation of your opinion that 1. The plan of merger between EDCI and PCIA is a merger within the contemplation of Section 40 (C) (2) and 40 (C) (6) (b) of the Tax Code of 1997, as amended, considering that it is being undertaken for a bona fide business purpose and not for the purpose of escaping the burden of taxation. Therefore, no gain or loss shall be recognized by EDCI and PCIA on the transfer of all assets and assumption of liabilities pursuant to the Plan of Merger. 2. The tax-free exchange resulting from the merger is not affected by the non-issuance by EDCI of shares of stock considering that the ownership structure of the two corporations is such that they are directly and or indirectly related through common ownership of shares. 3. No DST shall be due on the surrender of PCIA shares for cancellation due to the cessation of the corporate existence of the absorbed corporation. 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 other party to the merger and if DST had been previously paid thereon 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). 4. The transfer of real properties registered in the name of PCIA, as absorbed corporations, to EDCI, 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 under the Tax Code. EAIcCS 5. The transfer of properties by PCIA to EDCI 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; 6. The transfer of properties by PCIA to EDCI pursuant to the plan of merger will not be subject to any output VAT imposed under Section 106 of the Tax Code. 7. In the event that there should be any excess minimum corporate income tax (MCIT), such excess MCIT of PCIA shall be transferred to EDCI and carried forward as credits against the normal income tax due of EDCI or three (3) immediately succeeding taxable years; EIcSTD 8. Any excess creditable withholding tax of PCIA shall be transferred to EDCI and carried forward and credited against MCIT, normal income tax due of EDCI for succeeding year(s); and 9. The aggregate Net Operating Loss Carry Over (NOLCO) balance 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 EDCI and PCIA, whereby all the assets and liabilities of PCIA shall be transferred to EDCI 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 DaTICE (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 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 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 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. 210-1993; DA-371-2006, in order to highlight the tax free character of an exchange resulting from a merger. In BIR Ruling 210-1993, 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 facts of 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. cDCEIA Following the provisions under Sec. 40 (C) (2) of the 1997 Tax Code, as amended, PCIA shall transfer all assets and liabilities to EDCI 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 EDCI and PCIA qualifies as a tax-free merger. 2. 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 EDCI and PCIA, being 100% owned by BDO (the parent), EDCI shall no longer issue new shares corresponding to the net value of the assets transferred and instead additional paid-in capital shall be recognized in the books of EDCI corresponding to the net asset value transferred. The fact that no shares were issued will not prevent the merger from qualifying for the non-recognition of gain or loss under Section 40 (C) (2) of the Tax Code, as amended (BIR Ruling No. 210-1993) . In BIR Ruling Nos. 30-1999 and S-40-221-2001, this Office had occasioned 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 of merger of a parent and subsidiary (par. 4305, Vol. II Mertens Law of Federal Income Taxation 1986)" 3. Considering that all the outstanding shares of PCIA 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) . CcSEIH 4. No DST shall be due on the transfer of properties by PCIA 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. 5. The transfer of properties of PCIA to EDCI 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. Accordingly, the transaction will not be considered as a transfer of properties for insufficient consideration and there is no deemed gift under Section 100 of the Tax Code. 6. The transfer of properties of PCIA to EDCI 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 transfer or business by any of the parties involved, but to pool the resources among the parties to the merger. 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). The trade or business of the parties to the merger is the sale of computer services which is exempt from VAT. It is, therefore, clear that the transfer of properties by the absorbed entities to the surviving entity is not in the course of trade or business, which presupposes regularity, nor is it considered to be incidental to an activity subject to 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: aHCSTD i. Change of control of a corporation by the acquisition of the controlling interest of such corporation by another stockholder or group of stockholder; ii. Change in trade or corporate name of the business; and iii. Merger or consolidation of corporation." 7. 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 Rulings, 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, as amended. 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 PCIA shall be transferred and vested in EDCI 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) 8. 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, EDCI is entitled to carry forward and apply these excess creditable withholding taxes as credit against its MCIT or normal income tax liabilities. 9. 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 or 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, EDCI, by operation of law (S-40-207-2001 dated October 24, 2001 citing BIR Ruling No. 137-99 dated August 31, 1999) HEcaIC However, in order that the above described reorganization can be considered as 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 or other disposition made thereof. The amount of each kind of stock or securities and other property received shall be stated on their fair market value as of 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. EDCcaS 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). 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. IaEASH Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service