Robinsons Land Corporation

October 17, 2008 BIR RULING [DA-(S40M-010) 315-08] S40, Merger S40 Robinsons Land Corporation Level 2, Galleria Corporate Center Robinsons Galleria, EDSA cor. Ortigas Avenue Quezon City Attention: Mr. Lance Y. Gokongwei Vice-Chairman & Deputy CEO Gentlemen : This refers to your letter dated July 31, 2008 requesting confirmation of your position on the taxability of the proposed merger among Robinsons Land Corporation (RLC) ( i.e., the surviving corporation) and Robinsons Homes, Inc. (RHI), Trion Homes Development Corporation (THDC) and Manila Midtown Hotels and Land Corporation (MMHLC) (collectively the absorbed corporations). The facts as represented are as follows: RLC is a domestic corporation duly organized and existing under the laws of the Philippines having as its primary purpose, to engage in the business of selling, acquiring, building, constructing, development, leasing, disposing of real properties such as land, buildings, shopping malls, commercial centers, housing projects of all types, hotels, motels, and other variants, mixed-used property projects, industrial estates, infrastructure projects, amusement and recreation parks or theme parks, and property development of all kinds and nature. On the other hand, RHI, a wholly-owned subsidiary of RLC, is a domestic corporation having as its primary purpose, to acquire by purchase, lease, donation or otherwise, and to own, use, improve, develop, subdivide, sell, mortgage, exchange, lease, develop and hold for investment or otherwise, real estate of all kinds, whether improve, manage or otherwise dispose of buildings, houses, apartments, and other structures of whatever kind, together with their appurtenances. ICTacD While THDC, another wholly-owned subsidiary of RLC, is a domestic corporation having as its primary purpose, to acquire by purchase, lease, donation or otherwise, and to own, use, improve, develop, subdivide, sell, mortgage, exchange, lease, develop and hold for investment or otherwise, real estate of all kinds, whether improve, manage or otherwise dispose of buildings, houses, apartments, and other structures of whatever kind, together with their appurtenances. Further MMHLC, also a wholly-owned subsidiary of RLC, is a domestic corporation having as its primary purpose, to engage in the development and operation of a commercial center complex, such as hotels, inns, department stores, amusements; condominium, apartments, restaurants, cafe, bar, refreshments, supermarkets, shops, parlors, auditorium, post-exchange, recreations, entertainment and other allied business and to acquire, sell, purchase, assign or lease, buildings and other improvements in connection with its business. You have previously sought our confirmation of your position on the tax implications of the proposed merger by and among RLC, RHI and THDC and for which you obtained BIR Ruling S-40-033-2007 dated October 10, 2006. This request for opinion is based on the same circumstances but with the addition of MMHLC which will also be absorbed by RLC. The constituent corporations, i.e., RLC, RHI, THDC and MMHLC, are all using the fiscal year beginning October 1 and ending September 30 of the following year. With the end in view of the integration of administrative processes, thereby eliminating the duplication of functions and attaining greater efficiency and economy in the management of their operations as well as making possible the more productive use of their resources and achieving more favorable financing and credit facilities, the management of the constituent corporations are considering a plan to merge their respective companies, subject to the following terms and conditions, as follows: 1. RHI, THDC and MMHLC shall be merged with and into RLC with RLC being the surviving corporation; 2. RHI, THDC and MMHLC shall be dissolved and all their assets and rights, privileges, immunities and franchises as well as their liabilities and obligations as of September 30, 2008 shall be transferred to RLC; SIHCDA 3. The merger shall be effective upon SEC approval thereof using as basis the audited financials of the constituent corporations as of September 30, 2008; and 4. RLC, as the holder, together with its nominees, of 100% of the outstanding shares of stock of RHI, THDC and MMHLC, shall, pursuant to sound management practice, waive its right to receive shares of stock as a consequence of the merger; otherwise, RLC would be issuing its own shares to itself. From the foregoing, you are requesting confirmation of your position that: a) The proposed merger of RHI, THDC and MMHLC with and into RLC, considering that the transaction will be undertaken for a bona fide business purpose and not solely for the purpose of escaping the burdens of taxation, qualifies for non-recognition of gain or loss for income tax purposes in accordance with Section 40 (C) (2) of the National Internal Revenue Code of 1997 (NIRC) although no RLC shares shall be issued in exchange for the absorbed corporations' net assets as of September 30, 2008, considering that RHI, THDC and MMHLC are 100%-owned subsidiaries of RLC. b) Since no shares of stock will be issued pursuant to the plan of merger, Section 174 of the NIRC, as amended by R.A. 9243, imposing documentary stamp tax (DST) on original issuance of shares of stock, is inapplicable to this merger. Consequently, there is no obligation, on the part of any of the herein parties, to pay DST on original issuance of shares. c) The proposed transfer of property (whether real property, shares of stock or otherwise) from the absorbed corporations to RLC shall likewise not be subject to DST considering that Section 199 (m) of the NIRC specifically exempts from DST transfers of property pursuant to Section 40 (C) (2) of the same Code. d) The proposed transfer of the assets and liabilities from the absorbed corporations to RLC shall not be considered a transfer of property for insufficient consideration which is subject to donor's tax since there is no intention to donate on the part of any of the parties and the transaction is being effected purely for business reasons. TAacIE e) The proposed assumption or takeover by RLC of the assets and liabilities of the absorbed corporations pursuant to the merger shall not be subject to VAT as provided under Section 4.106-8 (b) (3) of BIR Revenue Regulations 16-2005, otherwise known as the Consolidated Value-Added Tax Regulations of 2005. f) As provided under Section 80 (4) of the Corporation Code of the Philippines, as a result of the merger and without further act or deed, all property, real or personal, and all receivables due on whatever account, including subscriptions to shares and other choses in action, and all and every other interest of, or belonging to, or due to each constituent corporation, shall be taken and deemed to be transferred to and vested in the surviving corporation. Consequently, any creditable withholding tax in the hands of the absorbed corporations shall be deemed transferred to the surviving corporation and may, thus, be applied by the surviving corporation against the latter's income tax liability. Similarly, any net operating loss carry-over (NOLCO) deduction available to the absorbed corporations shall be carried over to the books and records of RLC as the surviving corporation and may be applied as deduction in the latter's income tax return for the next 3 consecutive taxable years immediately following the year of the merger. Any excess minimum corporate income tax (MCIT) payment made by the absorbed corporations may be applied by RLC against the latter's normal corporate income tax for the three immediately succeeding taxable years. SHTEaA Any unused input VAT of RHI, THDC and MMHLC shall be absorbed by RLC as the surviving corporation and may be applied against any output VAT liability of the latter. g) The basis of the RHI, THDC and MMHLC properties received by RLC shall be the same as the basis of such properties in the hands of the RHI, THDC and MMHLC. In reply thereto, please be informed as follows: DSCIEa 1. The merger of RHI, THDC and MMHLC with RLC, the latter as the surviving corporation, is a merger within the contemplation of Section 40 (C) (6) (b) of the Tax Code of 1997, as amended, for the reason that RLC will assume all the assets and liabilities of the absorbed corporations to allow the integration of administrative functions thereby eliminating the duplication of functions, result in greater efficiency and economy in the management of their operations, make possible the more productive use of their properties, and achieve more favorable financing and credit facilities which would result in greater efficiency and economy in management and operations and stem business losses to the advantage and welfare of the constituent corporations and their common ultimate stockholders. Hence, the merger is being undertaken for a bonafide business purpose, and not for the purpose of escaping the burden of taxation. As such, the merger of RHI, THDC and MMHLC with RLC qualifies for non-recognition of gain or loss for income tax purposes in accordance with Section 40 (C) (2) of the 1997 Tax Code, as amended, which provides: "SEC. 40. Determination of Amount and Recognition of Gain or Loss. xxx xxx xxx C) Exchange of Property. (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 stock in a 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 also 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 such corporation, solely for stock or securities in another corporation, a party to the merger or consolidation. . . ." THcaDA Moreover, the tax-deferred character of the merger pursuant to the above provision is not affected by the non-issuance by the surviving corporation of its shares of stock in exchange for the net assets of the absorbed corporations in cases of merger of a parent corporation and its subsidiaries. Consequently, since RHI, THDC and MMHLC are wholly-owned subsidiaries of RLC, the tax-deferred character of the merger of the herein parties will not be affected by the non-issuance by RLC, the surviving corporation, of its shares of stock in exchange for the assets and liabilities of RHI, THDC and MMHLC, the absorbed corporations. (BIR Ruling DA-147-07 dated March 8, 2007; Ruling DA-371-06 dated June 15, 2006; and BIR Ruling 210-93 dated May 13, 1993) Further, no taxable gain or loss shall be recognized by RLC on the receipt of the assets and liabilities of the absorbed corporations. Likewise, no taxable gain or loss, and consequently no income tax, capital gains tax or creditable withholding tax, shall be recognized by the absorbed corporations, including their respective stockholders, upon the transfer of their assets and liabilities to RLC. (BIR Ruling DA-147-07 dated March 8, 2007; BIR Ruling DA-701-06 dated December 13, 2006; and BIR Ruling 210-93 dated May 13, 1993) 2. Since no shares of stock will be issued pursuant to the plan of merger, Section 174 of the NIRC, as amended by R.A. 9243, imposing documentary stamp tax (DST) on original issuance of shares of stock, is inapplicable to this merger. Consequently, there is no obligation, on the part of any of the herein parties, to pay DST on original issuance of shares. (BIR Ruling DA-147-07 dated March 8, 2007; BIR Ruling 210-93 dated May 13, 1993) 3. The basis of the assets of RHI, THDC, and MMHLC transferred to RLC pursuant to the merger shall, in the hands of RLC, be the same as it would be in the hands of RHI, THDC and MMHLC if the merger had not taken place, increased by the gain recognized by RHI, THDC and MMHLC, if any, pursuant to Section 40 (C) (5) (b) of the Tax Code of 1997 which provides: "5) Basis. (a) The basis of the stock or securities received by the transferor upon the exchange specified in the above exception shall be the same as the basis of the property, stock or securities exchanged, decreased by (1) the money received, and (2) the fair market value of the other property received, and increased by (a) the amount treated as dividend of the shareholder and (b) the amount of any gain that was recognized on the exchange: Provided, That the property received as 'boot' shall have as basis its fair market value: Provided, further, That if as part of the consideration to the transferor, the transferee of property assumes a liability of the transferor or acquires from the latter property subject to a liability, such assumption or acquisition (in the amount of the liability) shall, for purposes of this paragraph, be treated as money received by the transferor on the exchange: Provided, finally, That if the transferor received several kinds of stock or securities, the Commissioner of Internal Revenue is hereby authorized to allocate the basis among the several classes of stocks or securities. aDcHIC (b) The basis of the property transferred 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." (Emphasis supplied) Thus, the basis of the assets of RHI, THDC and MMHLC to be transferred to RLC shall be the carrying value of the assets in the books of RHI, THDC and MMHLC increased by the amount of the gain recognized by them, if any, in accordance with Section 40 (C) (5) (b) of the Tax Code of 1997, as amended. If there is gain realized in the transaction, such gain shall be pro-rated to the assets transferred in accordance with Part VI of Revenue Memorandum Ruling No. 2-02 which provides: "2.5 Where the Transferee assumes a liability or liabilities which does not or do not constitute a mortgage, pledge or other encumbrance on any specific property, the amount of such liabilities shall be allocated among the properties transferred in determining the substituted basis of each properties. . . ." Since the total amount of liabilities of RHI, THDC and MMHLC do not exceed the total amount of assets they transferred, the basis of the assets in the hands of RLC therefore shall be the same as it would be in the hands of RHI, THDC and MMHLC. 4. The transfer of assets from RHI, THDC and MMHLC to RLC pursuant to the merger is not subject to VAT. This is expressly provided in Section 4.106.8 of the Revenue Regulations No. 16-2005, otherwise known as the Consolidated Value Added Tax Regulations of 2005, as amended by Revenue Regulations No. 4-2007 which provides: "SEC. 4.106-8. Change or Cessation of Status as VAT-registered Person. . . . (b) Not subject to output tax The VAT shall not apply to goods or properties existing as of the occurrence of the following: (1) Change of control of a corporation by the acquisition of the controlling interest of such corporation by another stockholder or group of stockholders. . . . HcSETI (2) Change in the trade or corporate name of the business; (3) Merger or consolidation of corporations. The unused input tax of the dissolved corporation, as of the date of merger or consolidation, shall be absorbed by the surviving or new corporation." (Emphasis supplied) Thus, the above-mentioned transaction shall not be subject to value-added tax under Section 4.106-8 (b) (3) of Revenue Regulations No. 16-2005, as amended, the said transfer being considered a transaction "not subject to output tax" under the said Section. Moreover, since the merger between RHI, THDC, MMHLC and RLC is a statutory merger, any unused input VAT of RHI, THDC and MMHLC shall be carried over and assumed by RLC. In a statutory merger, any unused input tax of the absorbed corporation will be transferred to the surviving corporation by operation of law. Accordingly, any unused input VAT credit of the absorbed corporations as of the effective date of the merger will be transferred to and absorbed by RLC by operation of law and may be applied against any output VAT liability of the latter. (Revenue Memorandum Ruling No. 01-02, par. 3; BIR Ruling DA-371-06 dated June 15, 2006) 5. 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 RHI, THDC and MMHLC to donate its assets to RLC since the transaction is being undertaken for purely business purposes. Thus, the aforesaid merger will not be subject to gift tax since there is no intention to donate, and the transaction is a bona fide merger effected solely for business reasons. (BIR Ruling Nos. 208-90 dated November 5, 1990, 137-99 dated August 31, 1999, DA 16-02 dated February 7, 2002, DA 17-02 dated February 7, 2002, DA 32-02 dated August 12, 2002, DA 75-03 dated March 11, 2003, DA 660-04 dated December 22, 2004, and DA 371-06 dated June 15, 2006) 6. No documentary stamp tax (DST) shall be due on the transfer by RHI, THDC and MMHLC of their properties to RLC pursuant to the merger transaction. Section 199 (m) of the Tax Code, as amended by R.A. No. 9243, expressly provides that transfer of property pursuant to Section 40 (C) (2) of the Tax Code is exempt from the DST. (BIR Ruling Nos. 208-90 dated November 5, 1990, 137-99 dated August 31, 1999, DA 16-02 dated February 7, 2002, DA 17-02 dated February 7, 2002, DA 32-02 dated August 12, 2002, DA 75-03 dated March 11, 2003, DA 660-04 dated December 22, 2004, DA 371-06 dated June 15, 2006 and BIR Ruling DA-147-07 dated March 8, 2007) LLpr 7. Since the merger between RHI, THDC, MMHLC and RLC is a statutory merger, any balance of RHI, THDC and MMHLC's minimum corporate income tax (MCIT), creditable withholding tax (CWT) and net-operating loss carry-over (NOLCO) shall be transferred to and carried over to RLC in accordance with Section 80 (4) of the Corporation Code. (BIR Ruling Nos. 208-90 dated November 5, 1990, 137-99 dated August 31, 1999, DA 16-02 dated February 7, 2002, DA 17-02 dated February 7, 2002, DA 32-02 dated August 12, 2002, DA 75-03 dated March 11, 2003, DA 660-04 dated December 22, 2004, and DA 371-06 dated June 15, 2006) Moreover, in order that the above-described reorganization can be considered as merger under Section 40 (C) (2) of the Tax Code of 1997, the parties to the merger should comply with the following requirements: A. The plan of reorganization should be adopted by each of the corporations, parties thereto, the adoption being shown by the acts of its duly constituted responsible officers and appearing upon the official records of the corporation. Each corporation, which is a party to the reorganization, shall file, as part of its return for the taxable year within which the reorganization occurred, a complete statement of all facts pertinent to the non-recognition of gain or loss in connection with the reorganization, including: (1) A copy of the plan of reorganization, together with a statement, executed under the penalties of perjury, showing in full the purposes thereof and in detail all transactions incident to, or pursuant to the plan; (2) A complete statement of the cost or other basis of all properties, including all stocks or securities, transferred incident to the plan; (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. cHTCaI 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 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 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. Violation of the above requirements is subject to the penalties provided in Sections 269 and 275 of the Tax Code of 1997, as amended. 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. cHECAS Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service