BIR Ruling No. 002-09

February 10, 2009 BIR RULING NO. 002-09 Sec. 43, TC; RR 6-06; 000-00 Isla Lipana & Co. 29th Floor Philamlife Tower 8767 Paseo de Roxas Makati City Attention: Ms. Malou P. Lim Partner, Tax Services Gentlemen : This refers to your letter dated May 29, 2007 requesting on behalf of your client, CE Philippines II, Inc. ("CEP II") for confirmation of your opinion that the gain realized by CE Philippines Ltd. ("CEP Ltd.") from the redemption made by CEP II of its preferred shares shall be computed using functional currency. As represented, CEP II is a corporation duly organized and existing under the laws of the Philippines. It is registered with the Securities and Exchange Commission (SEC) primarily to acquire, hold, own and use for investment, or otherwise sell, or dispose of properties of every kind and description and wherever situated, to the extent permitted by law. On the other hand, CEP Ltd. is a non-resident foreign corporation organized in Bermuda. CEP II is the wholly-owned subsidiary of CEP Ltd. Its share capital is divided into common shares and Series A preferred shares. The Series A preferred shares shall have no preference in the payment of dividends, and dividends on such shares shall not accrue. It shall, however, have a liquidation preference before any other payment distribution of the assets of CEP II is made to or set apart for the holders of any other equity securities of CEP II, and after payment of all debts and expenses. Series A preferred shares are redeemable based on the fair market value (FMV) of the shares. The redemption period shall be at any date after the issuance of the Series A preferred shares up to eight years from the said issuance, as may be reasonably determined by CEP II. aSTECA As CEP II's income and expenses are primarily in US dollars, its functional currency is the US dollars and not Philippine pesos. Accordingly, on March 25, 2004, CEP II obtained approval from the SEC to use its functional currency, the U.S. dollar, in the reporting of its financial statements pursuant to SEC Memorandum Circular 14 series of 2003. Consequently, the financial statements of CEP II were presented in US dollars beginning the taxable year December 31, 2003. On May 17, 2005, the Board of Directors of CEP II adopted a resolution for the redemption of 187,348 Series A preferred shares at a redemption price of US$8.59 or a total redemption amount of US$1,609,319.32, where CEP Ltd. realized gain. DHACES In reply, please be informed that Section 12 of Revenue Regulations (RR) No. 6-06 provides as follows: "SEC. 12. Treatment of Gain or Loss on Sale of Investment under Functional Currency. an investor which invests in functional currency (other than Philippine peso) securities can compute its gain or loss from the sale of said investment using the functional currency. For example, if Company A invests in a US dollar bond at US$100,000 when the US$:P rate was US$1:40 and sells the same investment at US$102,000 when the US$:P rate was US$1:50, the computation of the capital gain shall be as follows: USD Pesos Selling price 102,000 5,100,000 Cost 100,000 4,000,000 Taxable gain 2,000 In the above illustration, the taxable gain that should be reported is $2,000. Thus, in reporting for tax purposes of the $2,000 gain in equivalent or converted Philippine peso denomination, the equivalent peso denomination is the peso equivalent of 2,000 U.S. dollars using the conversion rate on the date of the consummation of the transaction. ECaITc The above rule shall also apply to non-resident stockholders of an investee company where such investee company in the Philippines uses a functional currency other than Philippine peso for its financial statements. However, if an investor makes an investment in Philippine peso, then it shall compute the gain or loss from sale of said investment using the Philippine peso cost and Philippine peso selling price." Since CEP Ltd. is a non-resident stockholder, the capital gain realized from the redemption of shares should be computed in US dollars since its investments were made in US dollars and CEP II, the investee company, uses the US dollar as its functional currency. Moreover, since CEP II previously qualified to use functional currency in its financial statements under the previous SEC rules as shown in SEC's letter to CEP II dated March 25, 2004, it is covered by RR 6-06 as provided under the Transitory Provision of Section 17 of RR 6-06. In view of the foregoing, this Office confirms your opinion that the gain realized by CEP Ltd. from the redemption of the 187,348 preferred shares of CEP II should be determined on the basis of the functional currency (US dollars). For tax reporting purposes, the conversion rate on the date of consummation of the transaction shall be used to determine the equivalent peso denomination. IcAaEH 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 as null and void. AEIcTD Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Commissioner of Internal Revenue