Abaya & Elias

October 23, 2008 BIR RULING [DA-(S40M-012) 337-08] 40 (C) (2) (6) (c); S-40-109-2002 Abaya & Elias Unit 409 Prestige Tower, F. Ortigas Jr., Rd. Ortigas Center, Pasig City Attention: Atty. Richard Joseph F. Elias Partner Gentlemen : This refers to your letter dated May 22, 2008 requesting for confirmation of your opinion that pursuant to Section 40 (C) (2) and (C) (6) (b) of the Tax Code of 1997, no gain or loss shall be recognized on the merger of Callworx Philippines, Inc. (Callworx) and TRG Philippines, Inc. (TRG) where TRG shall be the surviving corporation. The facts, as represented, are as follows: 1. TRG is a corporation duly organized and existing under Philippine laws and registered as such with the Securities and Exchange Commission with the following purpose: "To engage in the business of providing call/contact center and other facilities and services as may be required by manufacturers and sellers of goods and services and the buyers and consumers thereof, through digital and electronic software applications and other services to facilitate and complete commercial transactions; and, in general, to carry on and undertake such activities which may seem to the corporation capable of being conveniently carried on." 2. TRG has an authorized capital stock of P150,000,000 divided into 1,500,000 shares with a par value of P100.00 per share, of which 1,500,000 shares worth P150,000,000 are subscribed, outstanding and fully paid. It is a 100%-owned subsidiary of The Resource Group International Limited (TRGIL), a company registered in Bermuda; SHaIDE 3. On the other hand, Callworx is a corporation duly organized and existing under Philippine laws, and registered as such with the SEC with the following primary purpose: "To engage in the business of providing outsourced services including, but not limited to, customer service relations, technical support and telemarketing for international and local market." 4. Callworx has an authorized capital stock of P5,000,000 divided into 50,000 shares with a par value of P100.00 per share, of which 50,000 shares worth P5,000,000 are subscribed, outstanding and fully paid. It is a 100%-owned subsidiary of TRG, and is ultimately-owned by TRGIL; 5. TRG and Callworx's principal place of business is located at 8th Floor, Hanston Building, F. Ortigas, Jr. Rd., Ortigas Center, Pasig City; 6. Based on their audited financial statements (AFS) as of September 30, 2007, TRG has total assets of P90,004,115, total liabilities of P146,720,730 and total stockholders' equity of negative P56,716,615 while Callworx has total assets of P15,860,534, total liabilities of P95,642,170 and total stockholders' equity of negative P84,781,636; 7. Callworx's unutilized input value-added tax (VAT) as of September 30, 2007 amounts to P2,599,349. It has no creditable withholding tax (CWT) credits as its customers are non-residents. Callworx also has no net operating loss carryover (NOLCO) balance and minimum corporate income tax (MCIT) credits since it is a BOI-registered entity enjoying income tax holiday until November 2007; 8. On November 10, 2007, the Board of Directors and stockholders of TRG and Callworx unanimously approved the merger of the two corporations and the corresponding Articles of Merger and Plan of Merger; 9. Considering that TRG and Callworx are engaged in the same line of business and that Callworx is a wholly-owned subsidiary of TRG, the merger is mutually advantageous to and will redound to the benefit and welfare of the constituent corporations and their respective stockholders as the integration of the administrative facilities of the two (2) corporations will result in economy of scale and efficiency of operations and duplication of functions and activities will be eliminated; CTSHDI 10. The salient terms and conditions of the Plan of Merger are as follows: (a) upon effectivity of the merger, TRG shall be the surviving corporation and the separate corporate existence of Callworx shall cease; (b) TRG shall continue to possess all its rights, privileges, immunities and powers it currently possesses, and shall be subject to all its duties and liabilities as a corporation organized under the Corporation Code of the Philippines; (c) All the rights, privileges and powers of Callworx arising out of its government licenses, permits and registrations, as well as all the properties, real or personal, contractual and property rights, claims tax refunds, exemptions and applications, bank deposits, and every assets, right or interest belonging or due to Callworx as of September 30, 2007, as shown in the AFS, shall be taken by, conveyed, assigned, transferred to and vested in TRG, without need of further act or deed, by operation of law pursuant to Section 80 (4) of the Corporation Code of the Philippines; (d) It is understood that whatever assets which may not have been reflected in the balance sheet of Callworx as of September 30, 2007 or may have been omitted therefrom for any reason whatsoever as well as other assets which may come to their possession or to which they may be entitled shall be deemed to be included in the conveyance, assignment and transfer; (e) All the liabilities and obligations falling due from Callworx as of September 30, 2007 shall be, as they are hereby, assigned and transferred to and assumed by TRG, as the surviving corporation. TRG shall be liable for all such liabilities and obligations of Callworx in the same manner as if TRG had itself incurred such liabilities and obligations, and any pending claim, application, action or proceeding brought by or against Callworx may be prosecuted by or against TRG. The rights of creditors or liens upon the property of either TRG or Callworx shall not be impaired by the merger; provided that TRG shall have the right to exercise all defenses, rights, privileges, setoffs and counterclaims of every kind and nature which Callworx may have or may invoke under existing laws; DaScHC (f) TRG shall not issue any shares of stock to Callworx's stockholder/s considering that Callworx is a wholly-owned subsidiary of TRG pursuant to sound corporate practice; 11. The Articles of Merger and Plan of Merger of TRG and Callworx were approved by the SEC on March 19, 2008; 12. Based on the foregoing, you now request for a confirmation of your opinions as follows: a. The above merger between TRG and Callworx is a statutory and tax-free merger under Section 40 (C) (2) and (6) (b) of the Tax Code. Hence, no gain or loss shall be recognized on the transfer of assets and liabilities of Callworx to TRG; b. The transfer of assets of Callworx to TRG pursuant to the merger is not subject to value-added tax (VAT) and any unutilized input VAT of Callworx as of the effectivity of the merger shall be absorbed by TRG as the surviving corporation; c. The transfer of assets of Callworx to TRG pursuant to the merger is likewise not subject to donor's tax because there is no intention to donate on the part of the entities involved; d. The transfer of assets of Callworx to TRG pursuant to the merger is not subject to documentary stamp tax pursuant to Section 199 (m) of the NIRC of 1997. e. The basis of the transferred assets and liabilities in the hands of TRG shall be the same as it would be in the hands of Callworx; f. Lastly, the cancellation of TRG's shares of stock in Callworx as a consequence of the merger of Callworx into TRG is not subject to documentary stamp tax. In reply thereto, please be informed as follows: IcHTAa 1. The above reorganization between Callworx and TRG is a merger within the contemplation of Section 40 (C) (2) and (6) (b) of the Tax Code of 1997 since TRG acquired/assumed all the assets and liabilities of Callworx, the transaction being for a bonafide business purpose and not intended to escape the burden of taxation. The tax deferred character of the merger under Section 40 (C) and (6) (b) of the Tax Code of 1997 is not affected by the non-issuance of the surviving corporation of its shares of stock in exchange for the assets and liabilities of the absorbed corporation in cases of merger of a parent corporation and its subsidiary. Therefore, no gain or loss shall be recognized by: A. Callworx, the absorbed corporation, as the transferors, on its assignment of all assets and liabilities to TRG pursuant to the Plan of Merger; and B. TRG, the surviving corporation, as the transferee, on its receipt of the assets and liabilities of Callworx without issuing stock in exchange therefor. Callworx will not be subject to income tax, capital gains tax, or creditable withholding tax on the transfer of its properties to TRG since no gain or loss will be recognized to Callworx upon the transfer and conveyance of its properties to TRG by virtue of the merger. It is understood however, that upon the subsequent sale or exchange of the assets acquired by TRG, the gain derived from such sale or exchange shall be subject to income tax. 2. The transfer of the assets by Callworx to TRG pursuant to the plan of merger will not be subject to value-added tax (VAT). Any unused input tax of Callworx as of the effective date of merger will be absorbed by TRG, as the surviving corporation, pursuant to Revenue Regulations No. 16-2005. 3. The merger is not subject to donor's tax as there is no intention to donate on the part of Callworx and TRG. TCacIA 4. Since no shares of stock were issued pursuant to the Plan of Merger, Section 174 of the Tax Code of 1997, as amended by Republic Act No. 9243, imposing documentary stamp tax (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 Callworx for cancellation. Since Callworx had no shares of stock or real property in its name to transfer to TRG pursuant to the merger, neither party shall be liable for DST on transfers or exchanges of shares of stock and real property, under Section 175 and 196 of the Tax Code of 1997, respectively. Moreover, Section 199 (m) of the Tax Code of 1997 exempts from DST transfers of property pursuant to Section 40 (C) (2) of the Tax Code of 1997. 5. The basis of the assets that will be recognized by TRG shall be the same as it would be in the hands of Callworx. However, 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; ITCHSa 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 or 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, any liability to which property 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. (par. 9803-8, Prentice Hall 1963, ed., p. 9611) aTIAES Finally, the parties shall likewise cause the annotation at the back of the Certificates of Stock of the shares owned by Callworx transferred to TRG pursuant to the merger, the fact that no gain or loss was recognized as a result of the merger, the date the transaction (merger) takes place and the historical cost of acquisition of the shares transferred. 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 are not complied with, 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