Fujitsu Philippines, Inc.

December 3, 2008 BIR RULING [DA-(S40M-020) 481-08] Section 40 (c) (2) (a); S40-018-2003 Fujitsu Philippines, Inc. Head Office, 2/F United Life Building A. Arnaiz Avenue, Legaspi Village 1229 Makati City Attention: Mr. Joseph Bautista Vice President Treasurer Gentlemen : This refers to your letter dated August 21, 2007 requesting for a ruling that the proposed merger among the wholly-owned subsidiaries namely, WeCare Technology Services Corporation (WeCare), WeSolve Open Computing, Inc. (WeSolve), and Uniserve Systems International, Inc. (Uniserve), into its parent corporation Fujitsu Philippines, Inc. (FPI), with the latter as the surviving entity, qualify as a tax-free exchange merger under Section 40 (C) (2) (a) of the Tax Code of 1997. In your letter it is represented that: FPI is a corporation duly registered with the Securities and Exchange Corporation (SEC) and is primarily engaged to deal in and with electronic data processing computer systems, peripheral devices and other equipment allied to computer systems, electrical power equipment, communication instruments and equipment and render maintenance services. It has an authorized capital stock amounting to P200,000,000 divided into 20,000,000 shares with a par value of P10.00, of which 17,478,334 shares worth P174,783,340.00 are subscribed and fully paid. Uniserve is a corporation duly registered with the SEC primarily to engage in the business to render technical services of software development; to undertake, market export software, system analysis, design and programming services, application packages, documentation and/or complete turn-key systems. It has an authorized capital stock of P40,000,000 divided into 4,000,000 with a par value of P10.00, of which 3,000,000 worth P30,000,000 shares are subscribed and fully paid. EcHAaS WeCare is a corporation duly registered with the SEC primarily to engage in the business of providing technology services focused on internet technology and e-commerce infrastructure; conduct operation, management and support data center facilities, network, helpdesk, service center, customer contacts, disaster recovery sites; as well as render support and maintenance service to electronic data processing computer systems, peripherals and other devices allied to computer systems and other equipment allied to internet infrastructure, spare parts and accessories and all business appertaining thereto. It has an authorized capital stock amounting to P40,000,000 divided into 4,000,000 shares with a par value of P10.00 per share of which 2,000,000 shares worth P20,000,000 are subscribed and fully paid. WeSolve is a corporation duly registered with the SEC primarily to engage in the business of trading and dealing in and with electronic data processing computer systems, communication instruments and equipment, peripheral devices and other equipment related to computer systems and technical services of software development. It has an authorized capital stock of P50,000,000 divided into 5,000,000 shares with a par value of P10.00 per share, of which 5,000,000 shares worth P50,000,000 are subscribed and fully paid. The condensed audited balance sheets of the three corporations as of March 31, 2007 are as follows: FPI Uniserve WeCare WeSolve Total Assets 1,700,273,084 97,336,938 220,435,020 683,046,278 Liabilities 1,037,279,940 3,671,897 194,630,436 525,525,003 Capital Stock 182,287,010 30,000,000 20,000,000 50,000,000 Retained Earnings 506,968,979 63,665,041 5,804,584 107,521,275 Treasury Shares (26,262,845) - - - Total Liabilities 1,700,273,084 97,336,938 220,435,020 683,046,278 & Stockholders' Equity The Board of Directors and stockholders of the four (4) corporations approved the merger in accordance with the Corporation Code of the Philippines and the terms and conditions in the Plan of Merger by and between FPI, WeCare, WeSolve and Uniserve (Plan of Merger) which as filed with the SEC on July 31, 2007. In reply thereto, please be informed as follows: 1. The above reorganization is a merger within the contemplation of Section 40 (C) (2) and (6) (b) of the Tax Code of 1997, because FPI acquired all the assets and assumed all the liabilities of WeCare, WeSolve and Uniserve, although no FPI shares will be issued to WeCare, WeSolve and Uniserve, since on the effective merger date, FPI wholly-owned the outstanding shares of WeCare, WeSolve and Uniserve. The transaction undertaken being for a bona fide business purpose and not solely for the purpose of escaping the burden of taxation. AEHTIC The tax-deferred character of the merger under Sec. 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. [par. 4305, Vol. II, Mertens Law of Federal Income Taxation-1986] (BIR Ruling No. 030-99 dated March 12, 1999) (a) The merger of FPI and WeCare, WeSolve and Uniserve qualifies for non-recognition of gain or loss for income tax purposes in accordance with Section 40 (C) (2) of the Tax Code, that no gain or loss shall be recognized by WeCare, WeSolve and Uniserve, as the transferor of all assets and liabilities to FPI pursuant to the Plan of Merger; and (b) No gain or loss shall be recognized by FPI, as the transferee, on its receipt of the assets and liabilities of WeCare, WeSolve and Uniserve pursuant to and as a consequence of the merger. 2. The basis of the assets to be received by FPI shall be the same as it would be in the hands of WeCare, WeSolve and Uniserve, and that the cost basis to the transferee of the properties transferred pursuant to the merger shall be the same as it would be in the hands of WeCare, WeSolve and Uniserve. Accordingly, the substituted bases of the assets transferred by Uniserve to FPI, pursuant to the merger are as follows: Type of Property Substituted Basis Current Assets Cash P5,000 Due from Related Parties 91,225,850 Prepaid Expenses 6,106,088 Total Current Assets P97,336,938 Current Liabilities Due to related party P3,671,897 Total Liabilities P3,671,897 Accordingly, the substituted bases of the assets transferred by WeCare to FPI, pursuant to the merger are as follows: SCADIT Type of Property Substituted Basis Current Assets Cash P11,822,006 Receivables, net. 150,906,850 Due from related parties 14,974,019 Inventories 30,447,545 Prepaid expenses and other current assets 4,037,065 Total Current Assets P212,187,485 Non-current Assets Property and Equipment P6,536,329 Other non-current assets 1,711,206 Total Non-Current Assets P8,247,535 TOTAL P220,435,020 =========== Current Liabilities Accounts payable and Accrued Expenses P127,577,597 Due to related parties 35,177,936 Current portion of obligations under finance lease 129,760 Total Current Liabilities 162,885,293 Non Current Liabilities Accrued Retirement Benefits P26,103,757 Obligation under finance lease net of current portion Unearned revenue 5,641,386 Total Non Current Liabilities P31,745,143 TOTAL P194,630,436 ============ Accordingly, the substituted bases of the assets transferred by WeSolve to FPI, pursuant to the merger are as follows: Type of Property Substituted Basis Current Assets Cash P5,880,370 Receivables, net. 525,828,903 Due from related parties 35,760,661 Inventories 51,912,197 Other Current Assets 37,979,793 Total Current Assets P657,361,924 Non Current Assets Property and Equipment P5,433,778 Deferred Income tax asset 19,582,904 Other non-current assets 667,672 Total Non-Current Assets P25,684,354 TOTAL P683,046,278 ============ Current Liabilities Accounts Payable and accrued expenses P360,098,555 Due to related parties 143,652,313 Total Current Liabilities P503,750,868 Non-Current Liabilities Accrued Retirement Benefits P18,334,295 Unearned Revenue 3,439,840 Total Non-Current Assets P21,774,135 TOTAL P525,525,003 ============ It is understood, however, that upon the subsequent sale or exchange of the assets acquired by FPI, the gain derived from such sale or exchange shall be subject to income tax taking into consideration the above basis of the assets to be transferred. 3. 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 WeCare, WeSolve and Uniserve to donate to FPI its assets, since the transaction is purely for legitimate business purpose. Thus, the aforesaid merger will not be subject to donor's tax since there is no intention to donate and the transaction is a bona fide merger effected solely for business reasons. 4. No VAT should be imposed on the transfer of the assets by WeCare, WeSolve and Uniserve to FPI pursuant to the plan of merger. This is in accordance with Section 4.100-5 (b) of Revenue Regulations No. 7-95, as amended by Section 4.106-8 of Revenue Regulations No. 16-2005 dated November 1, 2005, viz. : "(b) Not subject to output tax. The VAT shall not apply to goods or properties existing as of the occurrences 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 stockholder, Example: transfer of property to a corporation in exchange for its shares of stock under Section 34(c)(2) and (6)(c) of the Code; (2) Change in 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. 5. As a consequence of a parent and its subsidiaries being merged, no shares of stock were issued to the surviving corporation. Since no FPI shares of stock were issued to WeCare, WeSolve and Uniserve, no documentary stamp tax imposed under Sec. 175 and Sec. 199 (m) of the same Code are due from such transaction. (BIR Ruling No. 030-99 dated March 12, 1999) 6. Under Revenue Bulletin No. 1-2003 dated July 14, 2003 one of the instance identified as "No-Ruling Area" is the determination of whether there is/there is no substantial change in the ownership or enterprise (whether as a result of a merger or otherwise) for purposes of applying the Net-Operating Loss Carry-Over (NOLCO) provision under Section 34 (D) (3) of the Tax Code of 1997, as defined under Revenue Regulations No. 14-2001. 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: cAEDTa (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. TcSAaH 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. 7. Since the excess MCIT of WeCare, WeSolve and Uniserve are among the rights, privileges, properties and/or interests to be transferred to and vested in FPI by reason of the merger, FPI may carry forward and credit the excess MCIT of WeCare, WeSolve and Uniserve against its normal income tax liability for the three (3) immediately succeeding taxable years pursuant to Section 27 (E) (2) of the 1997 Tax Code ( BIR Ruling S-40-121-2001 ). 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. 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 null and void. DEScaT Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service