Picazo Buyco Tan Fider & Santos

October 8, 2008 BIR RULING [DA-(S40M-009) 278-08] 40 (C) (2) and (6) (b); DA-449-2004; DA-425-04 Picazo Buyco Tan Fider & Santos 18th, 19th & 17th Floors, Liberty Center 104 H.V. dela Costa St., Salcedo Village Makati City Attention: Attys. Peter Donnely A. Barot and Timothy Joseph M. Mendoza Gentlemen : This refers to your letter dated June 10, 2008 requesting on behalf of your client, A. Soriano Corporation (hereinafter, the Company), a ruling confirming that the merger among the following subsidiaries of the Company, namely: Anscor Property Holdings, Inc. (APHI) or the Surviving Corporation, Anscor Land, Inc. (ALI) and Anscor Insurance Brokers, Inc. (AIBI) or the Absorbed Corporations, qualifies as a tax-free exchange under Section 40 (C) (2) and (6) (b) of the Tax Code of 1997, as amended. cSCTID The capital structure of each of the constituent corporations is as follows: 1) APHI's Authorized Capital Stock is P20,000,000.00 divided into 100,000 Common Shares and 100,000 Preferred Shares, all with par value of P100.00 per share. Outstanding Shares is 70,883 Common Shares and 41,000 Preferred Shares; 2) ALI's Authorized Capital Stock is P50,000,000.00 divided into 20,000 Common Shares and 480,000 Preferred Shares, all with par value of P100.00 per share. Outstanding Shares is 10,000 Common Shares and 398,000 Preferred Shares; 3) AIBI's Authorized Capital Stock is P5,000,000.00 divided into 50,000 shares with a par value of P100.00 per share. Outstanding Shares is 50,000 shares. The ownership structure of each of the constituent corporations is as follows: a. Anscor Property Holdings, Inc. Stockholder No. of Shares Amount Subscribed Amount Paid-up A. Soriano Corporation 70,879 Common P7,087,900 P7,087,900 34,000 Preferred 3,400,000 3,400,000 Anscor Consolidated Corp. 7,000 Preferred 700,000 700,000 Eduardo J. Soriano 1 Common 100 100 Andres Soriano III 1 Common 100 100 Ernest K. Cuyegkeng 1 Common 100 100 Jose C. Ibazeta 1 Common 100 100 Total P11,188,300 P11,188,300 ========= ========= b. Anscor Land, Inc. Name No. of Shares Amount Subscribed Amount Paid-up A. Soriano Corporation 9,996 Common P999,600 P999,600 398,000 Preferred 39,800,000 39,800,000 Jose C. Ibazeta 1 Common 100 100 Eduardo J. Soriano 1 Common 100 100 Andres Soriano III 1 Common 100 100 Ernest K. Cuyegkeng 1 Common 100 100 Total P40,800,000 P40,800,000 ========= ========= c. Anscor Insurance Brokers, Inc. Name No. of Shares Amount Subscribed Amount Paid-up A. Soriano Corporation 49,996 P4,999,600 P4,999,600 Andres Soriano III 1 100 100 Eduardo J. Soriano 1 100 100 Jose C. Ibazeta 1 100 100 Ernest K. Cuyegkeng 1 100 100 Total 50,000 P5,000,000 P5,000,000 ====== ======== ======== The merger of the three (3) subsidiaries is being undertaken for a bona fide business purpose and not solely for the purpose of escaping the burden of taxation. The integration of the administrative facilities of the 3 corporations will result in economies of scale and efficiency of operations. TASCDI Pursuant to the Plan of Merger executed among the constituent corporations, all the assets and liabilities of the Absorbed Corporations will be deemed transferred to the Surviving Corporation in accordance with Section 80 of the Corporation Code. Moreover, since the Company is the sole stockholder of all constituent corporations, no new share will be issued by the Surviving Corporation; instead, the net book value of the Absorbed Corporations will be booked as additional paid-in capital of the Surviving Corporation. In view of the foregoing, you request for a BIR ruling confirming that: 1. No gain or loss shall be recognized on the transfer of the assets and liabilities of the Absorbed Corporations to the Surviving Corporation, pursuant to the Plan of Merger; 2. No gain or loss shall be recognized on the booking of the net book values of the Absorbed Corporations as additional paid-in capital of the Surviving Corporation, however, the cost/basis of the shares of stock of the Surviving Corporation owned by the Company shall be increased by the aggregate cost/basis of the shares of stock of the Absorbed Corporations held by the Company; 3. Neither the Absorbed Corporations nor their stockholders are subject to donor's tax, there being no intent to donate; 4. No documentary stamp tax (DST) shall be payable on the transfer of the assets held by the Absorbed Corporations, including the real properties owned by ALI and covered by TCT Nos. N-265099, N-265100, N-265095 and N-265096 of the Registry of Deeds of Quezon City to the Surviving Corporation, as provided in Republic Act No. 9243; 5. The transfer of assets owned by the Absorbed Corporations, including the real properties, to the Surviving Corporation is not subject to value-added tax (VAT); 6. No DST shall be due as no new share of stock shall be issued by the Surviving Corporation. In reply please be informed that: 1. The above reorganization between ALI, AIBI and APHI is a merger within the contemplation of Section 40 (C) (2) and (6) (b) of the 1997 Tax Code since APHI, as the surviving corporation, acquired/assumed all the assets and liabilities of ALI and AIBI for the purpose of achieving economies of scale and efficiency of operations. Thus, the decision to merge ALI, AIBI into APHI, with APHI as the surviving entity, had to be made to place the companies under common ownership and control, attain synchronization in management, reduce costs and expenses, and attain greater operational efficiency. In this sense, the merger is undertaken for a bona fide business purpose, and not for the purpose of escaping the burden of taxation. Hence, no gain or loss shall be recognized on the transfer of the assets and liabilities of the Absorbed Corporations to the Surviving Corporation. ICHcTD 2. No gain or loss shall be recognized on the booking of the net book values of the Absorbed Corporations as additional paid-in capital of the surviving corporation. The cost/basis of the shares of stock of the surviving corporation owned by the Company shall be increased by the aggregate cost/basis of the shares of stock of the absorbed corporations held by the Company; The basis of the assets and properties transferred in the hands of APHI shall be the same as it would be in the hands of ALI AIBI, as transferor, thus: Nature of Asset Transferred Cost Basis of Assets (in Pesos) A. Real Properties 1) TCT 265095 } 2) TCT 265096 } 3,511,302.22 3) TCT 265099 } 4) TCT 265100 } 687,703.14 B. Shares of Stock 1) ALI 40,800,000.00 2) AIBI 5,000,000.00 Total 49,999,005.36 ========== 3. The merger is not subject to donor's tax as there is no intention to donate on the part of ALI, AIBI or APHI nor any of their stockholders. 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 ALI and AIBI to donate its assets and properties to APHI since the transaction is a bona fide merger effected solely for business reasons. 4. No DST shall be due on the transfer by ALI and AIBI of their properties including the real properties listed above to APHI pursuant to the merger transaction. Section 199 (m) of the 1997 Tax Code, as amended by Republic Act (R.A.) No. 9243, expressly provides that transfer of property pursuant to Section 40 (C) (2) of the Tax Code of 1997 is exempt from the DST. SDAcaT 5. Section 105 of the Tax Code identifies the persons liable to VAT. Thus: "SEC. 105. Persons Liable . Any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to the value-added tax (VAT) imposed in Sections 106 to 108 of this Code . . ." However, RR 16-2005, as amended by RR 4-2007, specifically exempts mergers from being subject to output tax. Hence: DTAHSI "Section 4.106-8. Change or cessation of status as VAT-registered Person . xxx xxx xxx (b) Not subject to output tax. 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." Thus, the above-mentioned transaction shall not be subject to VAT, the said transfer including the transfer of the real properties being considered a transaction "not subject to output tax". Moreover, any unused input tax of ALI and AIBI as of the effective date of the merger will be absorbed by APHI, as the surviving corporation. 6. Since no shares of stock were issued pursuant to the merger, Section 174 of the Tax Code, as amended by R.A. 9243, imposing DST on original issuance of shares of stock, is inapplicable to the present case. No DST shall also be due on the surrender by the stockholders of their shares in ALI and AIBI for retirement or cancellation. However, in order that the above-described reorganization can be considered as merger under Section 40 (C) (2) of the Tax Code, 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; CIDTcH 2. A complete statement of the cost or other basis of all properties, including all stocks or securities, transferred 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. DHECac 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 as null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service