Tax Consequence of Merger Between Roche and Boehringer Mannheim

March 12, 1999 BIR RULING NO. 030-99 S.40-000-00-030-99 Castillo Laman Tan Pantaleon & San Jose Law Offices The Valero Tower, 122 Valero Street Salcedo Village, 1227 Makati City Attention: Atty . Maria Victoria D . Sarmiento Gentlemen : This refers to your letter dated September 30, 1998 requesting in behalf of your client, Roche (Philippines), Inc. (Roche), for a ruling that its merger with Boehringer Mannheim (Philippines), Inc. (BMPI) is a tax-free merger under Section 40 (C)(2) and (6)(b) of the Tax Code of 1997. It is represented that Roche and BMPI are corporations organized and existing under the laws of the Philippines; that Roche is engaged, among others, in the manufacture, subdivision, repacking, importing, exporting, buying, selling at wholesale, distribution, transportation and promotion of general merchandise, goods and wares of all kinds and descriptions, particularly but not limited to chemicals, chemical compounds, extracts, drugs, medicines, druggists sundries, cosmetics, perfumeries, toilet articles, scientific apparatus and physicians' and hospital supplies; that its authorized capital stock is One Hundred Million Pesos (P100,000,000.00) divided into Ten Million (10,000,000) shares with a par value of Ten Pesos (P10.00) per share; that Three Million (3,000,000) shares are subscribed, fully paid and outstanding; that as of May 31, 1998, its audited balance sheet shows total assets of P832,907,234, total liabilities of P325,582,856 and stockholders' equity of P507,324,378; that BMPI is a corporation organized and existing under Philippine laws, to import, buy, repack, manufacture, sell at wholesale, distribute, export, transport and promote pharmaceutical preparations, drugs and medicines of all kinds and descriptions; that its authorized capital stock is Thirty Million Pesos (P30,000,000.00) divided into Three Hundred Thousand (300,000) shares with a par value of One Hundred Pesos (P100.00) per share; that One Hundred Eighty Thousand (P180,000) shares are subscribed, fully paid and outstanding; that as of May 31, 1998, its audited balance sheet shows total assets of P159,051,095, total liabilities of P153,176,492 and stockholders' equity of P5,874,603; that in order to promote economies of operation and efficiency in the pharmaceutical business, and in the light of the integration of Roche and BMPI operations worldwide, the stockholders and Board of Directors of the two corporations decided to effect a merger, all the rights, privileges and powers of BMPI arising out of its government licenses, permits and registrations as well as all the properties of BMPI, its contractual and property rights, claims, bank deposits and every asset, right or interest of BMPI shall be conveyed, assigned and transferred to Roche upon the Effective Date of Merger; that Roche, as the surviving corporation, shall be responsible for all the liabilities and obligations of BMPI falling due as of the Effective Date of Merger; that all the outstanding shares of BMPI shall be deemed cancelled by reason of the merger; and that since BMPI is a subsidiary of Roche, Roche shall not issue shares of stock by reason of the merger. LexLib 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 a corporation (Roche) acquired all the assets and assumed all the liabilities of BMPI, although no Roche shares will be issued to Roche, since on the effective merger date, BMPI is wholly owned by Roche, the transaction undertaken being for a bona fide business purpose and not solely for the purpose of escaping from the burden of taxation. The tax deferred character of the merger under Section 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) 2. As a consequence of a parent and a subsidiary being merged, no shares of stock were issued to the surviving parent corporation. Since no Roche shares of stock will be issued to Roche, no documentary stamp taxes are due from such transaction. However, the transfer by BMPI of its certificates of stock and its real properties to Roche shall be subject to the documentary stamp tax imposed under Sections 176 and 196, respectively, both of the Tax Code of 1997. 3. The abovementioned reorganization is not subject to the gift tax as there is no intention to donate on the part of any of the parties. 4. The above-mentioned transactions are not subject to VAT (output tax) under Section 4.100-5(b)(1) of Revenue Regulations No. 7-95, otherwise known as the "Consolidated Value-Added Tax Regulations". The transfer by BMPI of all its assets and liabilities to Roche solely in exchange for the latter's shares of stock shall not give rise to the recognition of gain or loss pursuant to Section 40(C)(2) of the Tax Code of 1997. No gain or loss shall be recognized to BMPI upon the distribution of Roche shares to BMPI stockholders in complete redemption of their stocks under Section 40 (C)(2) of the Tax Code of 1997. No gain or loss shall be recognized to BMPI stockholders upon the exchange of their stocks solely for Roche stocks under Section 40(C)(2) of the Tax Code of 1997. The basis of the assets to be received by Roche shall be the same as it would be in the hands of BMPI. The basis of Roche stocks received by the stockholders of BMPI shall be the same as the basis of the BMPI stocks surrendered in exchange therefore. If the total liabilities to be assumed by Roche upon effective merger date exceed the historical or original acquisition cost (cost basis) of the assets transferred by BMPI. (Section 40 (C)(4)(b), Tax Code of 1997) 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. Moreover, 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: (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 exchange of subject. B. Every taxpayer, other than a corporation, 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. (par. 9803-8, P-H 1963, ed., p. 9611). In addition to the foregoing requirements, permanent records in substantial form must be kept by the corporation participating in the merger showing the information listed above in order to facilitate the determination of gain or loss from subsequent disposition of the stock received as a consequence of the merger. 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. Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue