No Gain or Loss Shall Be Recognized on the Transfer of Properties by Carlos A. Gothing Lines, Inc. and Aboitiz Shipping Corporation Solely in Exchange for the Shares of Stocks of William Gothong and Aboitiz, Inc. Pursuant to a Merger

February 27, 1997 BIR RULING NO. 019-97 34 (c) (2) (6) (b) 000-00 019-97 Sycip, Gorres, Velayo & Co. 6760 Ayala Avenue Makati City Attention: Atty . C . P . Noel Gentlemen : This refers to your letter dated June 21, 1996 requesting for a ruling that no gain or loss shall be recognized on the transfer of properties by CARLOS A. GOTHONG LINES, INC. ("Gothong Lines") with principal office address at Quezon Boulevard, Reclamation Area, Cebu City, and ABOITIZ SHIPPING CORPORATION ("Aboitiz Shipping" which is in the process of being reorganized into Aboitiz Transport System, Inc.) with principal office address at No. 110 Legaspi Street, Legaspi Village, Makati City, solely in exchange for the shares of stocks of WILLIAM GOTHONG AND ABOITIZ, INC. ("WG&A" formerly known as William Lines) with office address at Sergio Osmea, North Reclamation Area, Cebu City, pursuant to a merger under Section 34(c)(2) & (6)(b) of the Tax Code, as amended. It is represented that Gothong Lines, Aboitiz Shipping and WG&A are corporations duly organized and existing under and by virtue of the laws of the Republic of the Philippines and are all duly authorized to engage in the shipping business; that to achieve the following benefits in line with their common business purposes: (a) To optimize the use of resources through the realization of operating economies and efficiencies by eliminating duplication of effort, facilities and personnel relating to parallel activities, and reducing overall business and administrative expenses; (b) To increase financial strength and facilitate the procurement of financing and credit facilities under more favorable terms; and (c) To enable a broader and more complete range of services to be offered to the public and thus better meet the increasing needs of the growing Philippine economy. the said three (3) companies in the shipping industry have entered into a reorganization/merger whereby Gothong Lines and Aboitiz Shipping and/or Aboitiz Transport System, Inc. (ATSI), will transfer substantially all their assets consisting of receivables, inventories, vessels, and real properties as well as liabilities as enumerated and more particularly described in their Subscription Agreement dated January 6, 1996 solely in exchange for the shares of stock of WG&A; that Gothong Lines is the owner of various assets in the aggregate amount of P787,356,600.42 and liabilities in the aggregate amount of P416,955,353.00 as of December 31, 1995; that on the other hand, Aboitiz Shipping/ATSI, is the owner of various assets in the aggregate amount of P3,175,961,767.00 and various liabilities in the aggregate amount of P2,912,240,252.00 as of December 31, 1995; that WG&A has an authorized capital stock of One (1) Billion Pesos divided into One (1) Billion shares with a par value of P1.00 per share; that WG&A is in the process of increasing its authorized capital stock to Two (2) Billion Pesos divided into Two (2) Billion shares of common stock, with a par value of P1.00 per share; that pursuant to their plan of a de facto merger, Gothong Lines and Aboitiz Shipping/ATSI have entered into the said Subscription Agreement dated January 8, 1996 with WG&A (formerly William Lines) whereby Gothong Lines and Aboitiz Shipping/ATSI will subscribe to two Hundred Eighty Four Million Three Hundred Fifty Three Thousand Seven Hundred Forty One (284,353,741) shares and Four Hundred Twenty Six Million Five Hundred Thirty Thousand Six Hundred Twelve (426,530,612) shares in WG&A, respectively; that as full payment of their subscription in the aggregate amount of Seven Hundred Ten Million Eighty Hundred Eighty Four Thousand Three Hundred Fifty Three Pesos (P710,884,353.00), Gothong Lines and Aboitiz Shipping/ATSI will assign, transfer and convey the following: Aboitiz Shipping/ATSI Gothong Lines Total Assets to be transferred P3,016,736,698.35 P630,668,281.73 P3,647,404,980.08 Liabilities to be transferred 344,029,386,00 405,000,000.00 749,029,386.00 Net Assets to be transferred P2,672,707,312.35 P225,668,281.73 P2,898,375,594.08 ============== ============= ============= and that the assets to be transferred by Aboitiz Shipping/ATSI and Gothong Lines pursuant to the merger solely in exchange for their subscription of WG&A shares of stocks, represents more than 80% of their respective total assets; and in support of your request, you have submitted to this Office a copy of the Subscription Agreement dated January 8, 1996 between Gothong Lines, Aboitiz Shipping and WG&A (formerly William Lines). In reply, please be informed as follows: 1. Pursuant to Section 34 paragraphs (c)(2) & (6)(b) of the Tax Code, as amended no gain or loss shall be recognized if in pursuance of a plan of merger or consolidation (a) a corporation which is a party to a merger or consolidation exchanges property solely for stock in a corporation which is a party to the merger or consolidation and, (b) a shareholder exchanges stock in a corporation which is a party to the merger or consolidation solely for the stock of another corporation also a party to the merger or consolidation. The term "merger" or "consolidation" shall be understood to mean: (1) the ordinary merger or consolidation or (2) the acquisition by one corporation of all or substantially all the properties of another corporation solely for stock : Provided, That for a transaction to be regarded as merger or consolidation within the purview of this section, it must be undertaken for a bona fide business purpose and not solely for the purpose of escaping the burden of taxation: Provided further, That in determining whether a bon fide business purpose exists each and every step of the transaction shall be considered and the whole transaction or series of transactions shall be treated as a single unit: Provided finally, That in determining whether the property transferred constitutes a substantial portion of the property of the transferor, the term "property" shall be taken to include the cash assets of the transferor. cdt In addition, "substantially all" was defined in BIR General Circular No. V-253 dated July 16, 1957 to mean "the acquisition by one corporation of at least 80% of the assets, including cash, of another corporation," which "has the element of permanence and not merely momentary holding." Considering the foregoing, your opinion to the effect that the above reorganization is a merger within the contemplation of Section 34(c)(2) & (6)(b) of the Tax Code, as amended, because a corporation (WG&A) acquired substantially all (at least 80%) the assets and assumed the liabilities of two (2) other corporations (Aboitiz Shipping/ATSI and Gothong Line), solely for WG&A shares of stocks, and the transaction undertaken being for a bona fide business purpose and not solely for the purpose of escaping the burden of taxation, is hereby confirmed. 2. Accordingly, your opinion that no gain or loss shall be recognized both by the transferors and the transferee corporation on the transfer by Gothong Lines and Aboitiz Shipping/ATSI of substantially all their assets and liabilities to WG&A solely in exchange for the latter's shares of stock pursuant to a merger under Section 34 paragraphs (c)(2) & (6)(b) of the Tax Code, as amended, is hereby also confirmed. 3. The basis of the assets received by WG&A shall be the same as it would be in the hands of Gothong Lines and Aboitiz Shipping/ATSI. 4. The transfer of assets and liabilities by Gothong Lines and Aboitiz Shipping/ATSI solely in exchange for the shares of stock of WG&A will not be subject to the gift tax since there is no intention to donate on the part of either or both of the parties and the transaction is effected purely for business reasons. 5. For value-added tax (VAT) purposes, the transfer of the assets, by Gothong Lines and Aboitiz Shipping/ATSI pursuant to the merger will not be subject to VAT. (BIR Ruling No. 106-89 dated May 16, 1989); 6. The original issuance of the certificates of stock by WG&A to Gothong Lines and Aboitiz Shipping/ATSI will be subject to the documentary stamp tax imposed by Section 175 of the Tax Code, as amended. 7. Moreover, pursuant to Section 196 of the Tax Code, as amended, a conveyance or deed whereby land is assigned or transferred to the purchaser is subject to documentary stamp tax based on the consideration or value received or contracted to be paid for such realty. A stock in a corporation is a valuable consideration for transfer of real property. (Section 177, Documentary Stamp Tax Regulations). Accordingly, if parcels of land, are exchanged with stocks in a corporation as in this case, the latter is the consideration, the value of which shall be the basis of the documentary stamp tax on the Deed of Assignment executed to effect the aforesaid transfer (BIR Ruling No. 245-00-000-00-109-82 dated April 06, 1982). The value shall be the fair market value which shall not be less than the par value of the stocks. After payment of the corresponding documentary stamp tax, the real properties may be registered by the Register of Deeds concerned in the name of the transferee corporation, WG&A. 8. If pursuant to the exchange transaction and as a part of the consideration, the transferee corporation assumes the liability of the transferor or acquires from the transferor property subject to a liability, such assumed or acquired liability shall not be treated as money and/or other property, and shall not prevent the exchange from being tax free [see Sec. 34(c)(4)(a) of the Tax Code as amended by P.D. No. 1773]. If the amount of the liabilities assumed, plus the amount of the liabilities to which the property is subject, exceed the total of the adjusted basis of the property transferred pursuant to such exchange, then such excess shall be considered as a gain from the sale or exchange of capital asset or of property which is not a capital asset as the case may be [Sec. 34(c)(4)(b) of the Tax Code, as amended]. The cost basis or value of the stocks received by the transferor of property subject to a liability, where the liability transferred and assumed by the transferee corporation does not exceed the transferor's basis or the original and/or acquisition cost of the property transferred, shall be the difference between the liability or liabilities assumed by the transferee corporation and the acquisition or original cost of the property transferred. On the other hand, where the total liabilities to be assumed by the transferee corporation exceed the original or acquisition cost of the property transferred, the excess shall be recognized as gain to the transferor and the value or cost basis of the stocks to the transferor shall be the difference between the original cost of the property transferred subject to a liability (plus the gain recognized to the transferor and the liability or liabilities assumed by the transferee corporation. [Sec. 34(c)(5), supra). It is understood, however, that upon the subsequent sale or exchange of the assets or shares of stock acquired by the parties, the gain derived from such sale or exchange shall be subject to income tax. However, in order that the above-described re-organization can be considered as merger under Section 34(c)(2) and (6)(b) of the Tax Code, as amended, the parties to the merger should comply with the following requirements: A. The Subscription Agreement 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 the 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 Subscription Agreement, 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 reorganization/merger; (2) A complete statement of the cost or other basis of all property, including all stocks or securities, transferred incident to the reorganization/merger; (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 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. B. 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 liabilities assumed on the exchange, or any liabilities 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-B, P-H 1963 ed., p. 9611). 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. (BIR Ruling No. 377-92 dated December 28, 1992; BIR Ruling No. S-34-413-96 dated September 11, 1996). cdta Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue