Puno and Puno Law Offices

December 10, 2009 BIR RULING [DA-(VAT-112) 765-09] 39, 105; DA 510-03; 641-04; 278-05; 276-07; 650-06 Puno and Puno Law Offices 12th Floor, East Tower Philippine Stock Exchange Centre Exchange Road, Ortigas Center City of Pasig, Philippines 1605 Attention: Attys. Ma. Elizabeth Peralta E. Loriega Mercedita L. Ona Garth F. Castaeda Gentlemen : This refers to your letter dated November 16, 2009 requesting, on behalf of your client, GNPower Ltd. Co., confirmation of your opinion on the tax consequences of the First Amended and Restated Mariveles Project Assignment Agreement (the "FARMPAA") proposed to be executed by GNPower Ltd. Co. and GNPower Mariveles Coal Plant Ltd. Co. It is represented that GNPower Ltd. Co. (the "Assignor") and GNPower Mariveles Coal Plant Ltd. Co (the "Assignee") intend to execute the FARMPAA before the end of 2009. The FARMPAA amends and restates the Mariveles Project Assignment Agreement dated June 11, 2008. Under the FARMPAA, the Assignor will absolutely and irrevocably assign to the Assignee, and the Assignee will absolutely and irrevocably assume from the Assignor, all of the Assigned Assets and Liabilities, relating to the Mariveles Project and the Mariveles Project Business which consist of (1) contract rights to various agreements; (2) rights to licenses, permits and franchises; (3) development rights, studies, reports and analyses; (4) certain accounts payable; and (5) all other liabilities of the Assignor to the extent related to any rights acquired by the Assignee through the efforts of the Assignor; that the Assigned Assets and Liabilities do not include real property or any other physical or hard assets; that as consideration for the assignment, the Assignee shall pay the Assignor the Purchase Price, as defined in Section 3.1 of the FARMPAA, consisting of US$48,128,215 payable at the election of the Assignee in any combination of US Dollars or Pesos, minus the total amount of Development Expenses paid by the Assignee to any Person at any time from and including the Closing Date, to and including the Ninety Day Cutoff Date, which shall include the Assigned Accounts Payable, such amount to be denominated in U.S. Dollars based on actual conversion rates obtained by the Assignee in the payment of such expenses. The Purchase Price shall also include a contingent COD Bonus in an amount equal to the lesser (1) US$7,000,000 and (2) an amount computed under Section 3.8.1 of the FARMPAA. The COD Bonus is payable within one hundred twenty (120) days after the Take-Over Date. 1 Based on the foregoing, you now request for confirmation of your opinion that: a) The assignment by the Assignor of the Assigned Assets and Liabilities, as the term is defined under the First Amended and Restated Mariveles Project Assignment Agreement (the "FARMPAA"), in favor of the Assignee shall not attract value-added tax ("VAT") on the Purchase Price, including the contingent component of the Purchase Price. b) The gain, if any, derived by the Assignor from the assignment of the Assigned Assets and Liabilities to the Assignee shall be subject to the normal corporate income tax of 30%, but shall not be subject to withholding tax under Revenue Regulations No. 2-98, as amended. IaEASH c) The FARMPAA shall not be subject to documentary stamp tax ("DST") In reply, please be informed as follows: (1) The assignment shall not attract VAT on the Purchase Price. This Office has consistently held that transfers of assets, which are not held for sale or for lease, are not considered made in the ordinary course of trade or business of the transferor, hence, not subject to VAT. (BIR Ruling No. DA-053-04 dated February 6, 2004; BIR Ruling No. DA-278-05 dated June 23, 2005; BIR Ruling No. DA-510-03 dated December 17, 2003; BIR Ruling No. DA-641-04 dated December 17, 2004; BIR Ruling No. DA-276-07 dated April 27, 2007; In BIR Ruling No. 011-07 dated May 31, 2007) This position finds support in Section 105 of the Tax Code, as amended, which imposes VAT on any person who, in the course of trade or business , sells, barters, exchanges or leases goods or properties. Section 105 of the Tax Code provides: "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 value-added tax (VAT) imposed in Sections 106 to 108 of the said Code. . . ."(Emphasis supplied.) The term "in the course of trade or business" means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a nonstock, nonprofit private organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members or their guests), or government entity. The transfer by the Assignor of the Assigned Assets and Liabilities as contemplated in the FARMPAA is therefore not subject to VAT as these are not held by the Assignor for sale or for lease in its ordinary course of business. AcICTS Furthermore, the Assigned Assets and Liabilities are actually in the nature of capital assets as the term is defined in Section 39 of the Tax Code, thus: "SEC. 39. Capital Gains and Losses. (A) Definitions. As used in this Title (1) Capital Assets. The term "capital assets" means property held by the taxpayer (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, or property used in the trade or business, of a character which is subject to the allowance for depreciation provided in Subsection (F) of Section 34; or real property used in trade or business of the taxpayer." (Emphasis supplied.) The Assigned Assets and Liabilities are capital assets since these do not fall under any of the categories of ordinary assets enumerated in Section 39 of the Tax Code quoted above. As mentioned, the Assigned Assets and Liabilities consist of (1) contract rights to various agreements; (2) rights to licenses, permits and franchises; (3) development rights, studies, reports and analyses; (4) certain accounts payable; and (5) all other liabilities of the Assignor to the extent related to any rights acquired by the Assignee through the efforts of the Assignor; Certainly, these cannot be considered stock in trade or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business. Neither can the Assigned Assets and Liabilities be classified as real property used in trade or business of the taxpayer. Lastly, the Assigned Assets and Liabilities, although arguably used in business, are not property of a character which is subject to the allowance for depreciation. As mentioned, the Assigned Assets and Liabilities exclude real property, or any other physical or hard assets that are subject to depreciation. SIaHDA Considering that the Assigned Assets and Liabilities are in the nature of capital assets, the assignment thereof is not subject to VAT. (BIR Ruling No. DA-(C-112) 367-08 dated October 29, 2008; BIR Ruling No. DA-162-08 dated March 14, 2008; BIR Ruling No. DA-011-08 dated January 15, 2008; BIR Ruling No. DA-212-07 dated April 7, 2007; BIR Ruling No. DA152-04 dated March 31, 2004.) (2) Any gain on the part of the Assignor in transferring the Assigned Assets and Liabilities to the Assignee is subject to income tax but the Purchase Price is not subject to the withholding tax. The transfer of the Assigned Assets and Liabilities to the Assignee may result in gain on the part of the Assignor if the Purchase Price is greater than the cost of the Assigned Assets and Liabilities in the books of the Assignor. Such gain is subject to the corporate income tax of 30%. However, the Purchase Price will not be subject to the withholding tax and the Assignee has no obligation to withhold any creditable withholding tax ("CWT") since the Assignee is not among the top 20,000 corporate taxpayers required to withhold on income payments to local supplier of goods or services under RR 2-98 as amended by RR 14-08 dated November 26, 2008, and the payment of the Purchase Price is not one of those income payments subject to withholding tax under Revenue Regulations No. 2-98, as amended. This Office has consistently held that the transactions subject to the withholding tax scheme as enumerated in RR 2-98, as amended, are exclusive and income payments which are not among those specifically subject to withholding tax under RR 2-98, as amended, are exempt from withholding tax. (BIR Ruling No. DA-086-07 dated February 13, 2007; BIR Ruling No. DA-128-08 dated March 5, 2008; BIR Ruling No. DA-121-05 dated April 6, 2005; BIR Ruling No. DA-075-05 dated March 9, 2005; BIR Ruling No. DA-029-06 dated February 2, 2006; BIR Ruling No. DA-113-07 dated February 22, 2007; BIR Ruling No. DA-625-04 dated December 10, 2004; BIR Ruling DA-353-98 dated July 28, 1998). cDCSTA Thus, the Purchase Price shall not be subject to withholding tax. (3) The FARMPAA shall not be subject to DST The FARMPAA between the Assignee and the Assignor is not subject to DST since it is not one of the agreements enumerated in the Tax Code as specifically subject to DST. (BIR Ruling No. DA-701-07 dated December 28, 2007; BIR Ruling No. DA-381-98 dated August 24, 1998; BIR Ruling No. DA-378-08 dated June 24, 2008) As aptly held by the BIR in BIR Ruling No. DA-650-06 dated November 2, 2006: "In reply, please be informed that documentary stamp tax is an excise tax upon documents, instruments, loan agreements and papers, and upon acceptances, assignments, sales and transfers of the obligation, right or property incident thereto. It is levied on the exercise by persons of certain privileges conferred by law for the creation, revision or termination of specific legal relationships through the execution of specific instruments. ( Belle Corporation vs. CIR , CTA Case No. 6156, citing Philippine Home Assurance Corp., et al. vs. Court of Appeals , 301 SCRA 447). Significantly, Title VII of the Tax Code, as amended by RA 9243, enumerates the specific instruments subject to documentary stamp taxes. The rule of statutory construction with regard to enumerations made in a law provides that the express mention of one person, thing, act or consequence is construed to exclude all others. Thus, in order for a document to be subject to DST, it must be a specific instrument mentioned in Title VII of the Tax Code. This position finds support in a number of rulings issued by this Office. In BIR Ruling No. DA 13-99 dated July 29, 1999, it was ruled that assignment of tax credit certificates, not being among those expressly mentioned in Title VII of the Tax Code, is not subject to DST. Similarly, in BIR Ruling DA 116-98 dated July 30, 1998 (the validity of which was affirmed by the CTA in CTA Case No. 6182 entitled "Filinvest Development Corp. vs. CIR" ), it was said that inter-office memo covering the advances granted by an affiliate company is not subject to DST since there is nothing in Regulations No. 26 (Documentary Stamp Tax Regulations) and Revenue Regulations (Rev. Regs.) No. 9-94 that qualifies the instrument as one subject to documentary stamp tax. Moreover, in BIR Ruling DA 666A-99, as amplified by file Court of Appeals in the case of CIR v. APC Group, Inc., CA-GR. SP. No. 69869, it was held that inter-company advances evidenced by board resolutions and cash vouchers are not subject to documentary stamp tax since board resolutions and cash vouchers do not partake the nature, element and the form of any of the specific instruments mentioned in the law. . . . documentary stamp tax is an excise tax upon documents, instruments, loan agreements and papers, and upon acceptances, assignments, sales and transfers of the obligation, right or property incident thereto. It is levied on the exercise by persons of certain privileges conferred by law for the creation, revision or termination of specific legal relationships through the execution of specific instruments. ( Belle Corporation vs. CIR , CTA Case No. 6156, citing Philippine Home Assurance Corp., et al. vs. Court of Appeals , 301 SCRA 447)." (Emphasis supplied.) HCDAcE The foregoing rulings find application in this case. There is no basis for imposing a tax on the FARMPAA in the absence of a clear and express provision in the Tax Code subjecting the same to documentary stamp taxes. Thus, the FARMPAA is not subject to DST. 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, 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 Footnotes 1. Capitalized terms used herein have the meanings ascribed to them under the FARMPAA.