Examination of Books of Accounts - Corporate Reorganization Plan

January 23, 1990 BIR RULING NO. 005-90 45 (c) 000-00 005-90 Gentlemen : This refers to your letter dated October 27, 1989 in behalf of your client, the Ault & Wiborg Company (Far East) Philippine Branch, in effect, requesting a ruling that in the process of reorganizing your client into a subsidiary, a tax clearance to be issued without causing your books of accounts to be examined for the current or prior years. It is represented that Ault & Wiborg Company (Far East) Philippine Branch (Ault & Wiborg) was duly registered and licensed to do business in the Philippines on November 25, 1947; that its specific line of business involves manufacturing and marketing all types of printing ink and industrial finishes including automotive, metal, decorating, plywood, wood and leather finishes, paper, board, and foil coatings, lacquers and everprint varnishes, textile colors and finishes, adhesives and sealants, synthetic resins and varnishes, pigment dispersions, marking and stencil inks and marking pigments, etc., that it is intending to change its status as a branch to a subsidiary in accordance with the corporate reorganization of Ault & Wiborg Company, U.S.A., which was duly approved by BOI per Certificate of Authority No. 1986; that the reorganization plan calls for the transfer of the operations, markets, assets and liabilities of the branch to the subsidiary corporation; that the subsidiary shall in turn issue 200,000 common shares with a par value of P100.00 per share, or a total amount of P20,000,000.00; and 550,000 preferred shares with a par value of P100.00 per share or a total of P55,000,000.00 which represents 100% of the subsidiary's authorized, subscribed and paid-up capital. aisa dc In reply, please be informed that a corporate reorganization plan calling for the transfer of all assets of the Philippine branch of a foreign corporation to a subsidiary to be organized under the laws of the Philippines results in the dissolution of the branch and the formation of subsidiary. It arises even if the change of status from a branch to a subsidiary did not result in the distribution of net assets and earnings of a branch to the parent company. Under Section 235(e) of the Tax Code which reads as follows: "(e) In the exercise of the Commissioner's power under Section 7(b) to obtain information from other persons, in which case, another or separate examination and inspection may be, made. Examination and inspection of books of accounts and other accounting records shall be done in the taxpayer's partnerships or persons that retire from business shall, within ten days from the date of retirement or within such period of time as may be allowed by the Commissioner in special cases, submit their books of accounts, including the subsidiary books and other accounting records to the Commissioner or any of his deputies for examination, after which they shall be returned. Corporations and partnerships contemplating dissolution must notify the Commissioner, and shall not be dissolved until cleared by any tax liability." it is clear that a branch contemplating dissolution will retire from business; hence, its books of accounts should be examined before a tax clearance shall be issued. However, this Office will not interpose objection towards the organization of the subsidiary without prejudice to the examination of the books of accounts corresponding to the period when the entity was still a branch and that the subsidiary will assume payment of any tax liability of the branch ascertained after said examination. cd Very truly yours, (SGD.) JOSE U. ONG Commissioner