Picazo Buyco Tan Fider & Santos

October 21, 2008 BIR RULING [DA-(S40M-011) 322-08] 40 (C) (2) and (6) (b); S40-045-2003 Picazo Buyco Tan Fider & Santos 18th, 19th & 17th Floors, Liberty Center 104 H.V. dela Costa St., Salcedo Village Makati City Attention: Atty. Gabriel A. Dee Gentlemen : This refers to your letter dated September 23, 2008 requesting on behalf of your clients, Panay Power Corporation (Panay for brevity or the Surviving Corporation) and Avon River Power Holdings, Corp. (Avon River or the Absorbed Corporation), for a ruling confirming that their merger qualifies as a tax-free exchange under Section 40 (C) (2) and (6) (b) of the Tax Code of 1997, as amended. Documents submitted show that the capital structures of the Surviving Corporation and the Absorbed Corporation are as follows: a. Surviving Corporation Name of the Corporation: Panay Power Corporation Authorized Capital Stock: Php820 Million divided into 8.2 Million shares of common stock with par value of Php100.00 per share, increased to Php1.3 Billion divided into 13 Million common shares with par value of Php100.00 per share Outstanding Shares: 7,393,000 Common Shares b. Absorbed Corporation Name of the Corporation: Avon River Power Holdings, Corp. Authorized Capital Stock: Php100,000.00 divided into 100,000 shares of common stock with Php1.00 per share Outstanding Shares: 25,000 Common Shares and the ownership structures of the Surviving Corporation and the Absorbed Corporation are as follows: IECcaA a. Surviving Corporation Stockholder No. of Amount Subscribed Shares and Paid-up (in Php) Claredon Towers Holdings, Inc. 7,392,996 739,299,600.00 Demetrio S. Aquino, Jr. 1 100.00 Francisco G. Co 1 100.00 Roderico V. Puno 1 100.00 David L. Kho 1 100.00 Total 7,393,000 739,300,000.00 ======== ============ b. Absorbed Corporation Stockholder No. of Amount Subscribed Shares and Paid-up (in Php) Claredon Towers Holdings, Inc. 24,996 24,996.00 Demetrio S. Aquino, Jr. 1 1.00 Francisco G. Co 1 1.00 Roderico V. Puno 1 1.00 David L. Kho 1 1.00 Total 25,000 25,000.00 ====== ======= The merger of the Surviving Corporation and the Absorbed Corporation 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 two corporations will result in economies of scale and efficiency of operations. Pursuant to the Plan of Merger, all the assets and liabilities of the Absorbed Corporation will be deemed transferred to the Surviving Corporation in accordance with Section 80 of the Corporation Code. In view of the foregoing, you now request for a BIR ruling confirming that: 1. No gain or loss shall be recognized on the transfer of assets and liabilities of the Absorbed Corporation 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 Corporation as additional paid-in capital of the Surviving Corporation: however, the cost/basis of the shares of stock of the Surviving Corporation shall be increased by the aggregate cost/basis of the shares of stock of the Absorbed Corporation; 3. Neither the Absorbed Corporation nor their stockholders are subject to donor's tax, there being no intent to donate; HTASIa 4. No documentary stamp tax (DST) shall be payable on the transfer of assets held by the Absorbed Corporation; 5. The transfer of assets owned by the Absorbed Corporation to the Surviving Corporation is not subject to value-added tax (VAT). In reply please be informed that: 1. The above reorganization between Avon River and Panay is a merger within the contemplation of Section 40 (C) (2) and (6) (b) of the 1997 Tax Code since Panay, as the surviving corporation, acquired/assumed all the assets and liabilities of Avon River for the purpose of achieving economies of scale and efficiency of operations. Thus, the decision to merge Avon River with Panay 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 Corporation to the Surviving Corporation. 2. No gain or loss shall be recognized on the booking of the net book values of the Absorbed Corporation as additional paid-in capital of the surviving corporation. The cost/basis of the shares of stock of the surviving corporation shall be increased by the aggregate cost/basis of the shares of stock of the Absorbed Corporation; The basis of the assets and properties transferred in the hands of Panay shall be the same as it would be in the hands of Avon, as transferor, thus: Nature of Asset Cost Basis Transferred (in Pesos) Real Properties Powerhouse 1,527,668,841.00 Bldgs. and Land Improvement 101,983,153.00 Electrical Distribution System 58,197,973.00 Machinery and Equipment 47,832,573.00 Other Property and Equipment 10,407,819.00 Construction in Progress 1,125,755.00 Sub-Total 1,747,216,114.00 Other Assets 341,397,593.00 Grand Total 2,088,613,707.00 ============= On the other hand, the substituted bases of the shares to be issued in favor of the stockholders of Avon River pursuant to the merger shall be the same as the basis of the assets to be transferred, decreased by the cash and liabilities to be assumed by Panay in the transaction, thus: EScAID Cash and Cash Liabilities Substituted Exchange Ratio of Shares to equivalents Basis be applied in the Merger P5,462,950.00 P1,475,981,949 P607,168,808 P82.26 Panay common shares for every 1 common share of Avon River 3. The merger is not subject to donor's tax as there is no intention to donate on the part of Avon 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 Avon River to donate its assets and properties to Panay since the transaction is a bona fide merger effected solely for business reasons. 4. No DST shall be due on the transfer by Avon River of its properties including the real properties listed above to Panay 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. But the issuance by Panay of its shares of stock to Avon River is subject to the DST pursuant to Section 174 of the 1997 Tax Code, as amended by R.A. 9243 and implemented by Revenue Regulations (RR) No. 13-04 dated December 23, 2004. 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 . . ." CIHTac However, RR 16-2005, as amended by RR 4-2007, specifically exempts mergers from being subject to output tax. Hence: "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." As such, 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 Avon as of the effective date of the merger will be absorbed by Panay, as the surviving corporation. 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; 2. A complete statement of the cost or other basis of all properties, including all stocks or securities, transferred incident to the plan; ETAICc 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. aTcSID 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. Finally, the surviving corporation shall cause the annotation at the back of the newly issued Certificates of Stock, 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 the merger. It is further required that within ninety (90) days from receipt of this ruling, the surviving corporation must submit to the Law Division, Bureau of Internal Revenue, certified copies of the duly annotated Certificates of Stock with respect to the shares of stocks issued by virtue of the merger. 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