Employees' Pension Liabilities

March 29, 1989 BIR RULING NO. 048-89 34-c-2-c 331-88 048-89 Gentlemen : This refers to your letters dated October 27, November 21, and December 21, 1988 stating that you are a domestic corporation duly registered with the Securities and Exchange Commission; that you have an authorized capital stock of P130,000,000.00 divided into 130,000,000 shares with a par value of P1.00 per share; that your Balance Sheet as of December 31, 1987 shows total assets of P352,510,451.00, total liabilities of P190,867,468.00 and Stockholder's Equity of P161,642,983.00 that the reorganization involves the transfer of all or substantially all your assets to two corporations; that your land shall be transferred at appraised value to a real estate company (Realty Company) solely in exchange for 51% of the shares of stock of the Realty Company; that the land has an appraised value of P101.1 million; that the balance of the equity of the Realty Company equivalent to 49% will be paid for in cash by Asahi Glass Co. Ltd. of Japan (Asahi) and other Filipino investors; that all or substantially all of your other assets shall be transferred to another corporation which is Republic- Asahi Glass Corporation (Republic-Asahi) also in exchange for shares; that Republic-Asahi is a domestic corporation registered with the Securities and Exchange Commission and has an initial authorized capital stock of P1,000,000.00 divided into 1,000,000 shares with a par value of P1.00 per share; that through the reorganization, its equity structure will be increased to around P1.1 Billion; that all of the shares of stock representing the foregoing entire equity will eventually be owned and/or subscribed by you to the extent of 51% while the rest of the shares representing 49% of equity shall be subscribed to and/or owned by Asahi Glass Company (Asahi) which is a corporation organized under the laws of Japan; that Republic-Asahi is the corporate vehicle to be used by you and Asahi in implementing your joint venture in float glass manufacturing approved by the Board of Investments on a pioneer status; that to implement your foregoing contemplated investments and Asahi into Republic-Asahi the following steps shall be undertaken: cdtech " Step 1 RGC shall subscribe to and/or purchase about P52.020 million worth of shares at par value in the REPUBLIC-ASAHI. ASAHI in turn, shall subscribe to and/or purchase shares worth about P49.980 million at par value. Consequently, the resulting equity structure of REPUBLICAN-ASAHI shall be 51% RGC and 49% ASAHI; " Step 2 RGC transfers to REPUBLIC-ASAHI all or substantially all of its assets (other than land) in exchange for around 249,000,000 shares of stock of REPUBLIC-ASAHI with a total par value of P249 million. These assets have an estimated historical net book value of around P87.3 million as of the date of transfer and an appraised value of P351.3 million as of March 1, 1988 (as appraised by ASIAN APPRAISAL CO., INC.) ASAHI, in turn shall subscribe to and/or purchase adequate amount of shares of stock of REPUBLIC-ASAHI at par value to maintain the 51%-49% ratio between RGC and ASAHI, respectively; " Step 3 As a consequence of the reorganization, the employment of all RGC officers and employees shall be terminated and RGC shall pay the pensions and separation benefits of such officers and employees, RGC maintains a non-contributory pension plan duly registered with the BIR. RGC shall pay the pensions and separation benefits of its officers and employees about the second quarter of 1989." that the accrual in the year 1988 of the employees' pension liabilities refers only to such payments to employees to be paid as a consequence of the re-organization which are over and above the contributions already made by the company to the Employees' Pension Fund in previous years; that the contributions made in previous years to the Employees' Pension Fund already claimed as deductions in previous years shall not form part of the accrual requested; that after the contemplated re-organization, RGC shall continue to exist and shall be the holder of 51% of the shares of stock of Republic-Asahi and 51% of the shares of the Realty Company; and that RGC shall also continue to operate its other businesses, like its silica mining concession, which are not affected by the re-organization. In connection therewith, you are requesting confirmation of your opinion to the effect that: "1) When RGC transfers land to the Realty Company in exchange solely for shares of stock and as a result of which RGC shall own 51% of the shares of stock of the said corporation, it would be a tax-free exchange pursuant to Section 34(c)(2) . . .; "2) On Documentary Stamp taxes: a) On the Deed of Assignment for the transfer of land from RGC to the Real Estate Company, pursuant to Section 196 of the 1988 Tax Code, there shall be collected a documentary stamp tax based on the consideration or value received at the rate of ten (P10.00) Pesos for every one thousand (P1,000.00) Pesos or fractional part thereof; b) On the original issuance of certificates of stock by the Realty Company, pursuant to Section 175 of the 1988 Tax Code, there shall be collected a documentary stamp tax of P1.70 on each P200.00 or fractional part thereof of the par value of such certificates; c) On the Deed of Assignment for the transfer of all other assets and properties (except land) from RGC to REPUBLIC-ASAHI, no documentary stamp tax shall be due. However, for the transfer of real properties, documentary stamp tax shall be due as in (a) above; "3) RGC's transfer of its assets to REPUBLIC-ASAHI in exchange for shares (whereby its total investment inclusive of the original cash investment results in the acquisition and/or maintenance of RGC's 51% equity in REPUBLIC-ASAHI falls squarely within the provision of Section 34(c)(2) (2nd paragraph) as a tax free exchange, and therefore no gain or loss shall be recognized; "4) RGC can accrue as expense and claim as an item of deduction from Gross Income in the year 1988 the employees pension liabilities accruing as a result of the reorganization but payable only on or about the second quarter of 1989". In reply thereto, I have the honor to inform you as follows: (1) Pursuant to Section 34, paragraph (c)(2)(c) of the Tax Code, as amended by Republic Act No. 4522 and Presidential Decree Nos. 1705 and 1773, no gain or loss shall be recognized if property is transferred to a corporation by a person in exchange for stock in such corporation of which as a result of such exchange, said person, alone or together with others, not exceeding four persons, gains control of said corporation. The term, "control" shall mean ownership of stocks in a corporation possessing at least 51% of the total voting power of all classes of stocks entitled to vote. Control is determined by the amount of stock received i.e., subscribed, whether for property or for services by the transferor or transferors. In determining the 51% stock ownership, only those persons who transferred property for stock in the same transaction may be counted up to a maximum of five. Accordingly, no gain or loss shall be recognized both to the transferor and transferee corporation on your transfer of your land to a Realty Company in exchange for the latter's shares of stock considering that after the exchange and as a result of said exchange you shall own 51% of the shares of the Realty Company. Moreover, no gain or loss shall likewise be recognized on your transfer of your other assets (except your land) to Republic-Asahi in exchange for shares of the latter considering that your total investment inclusive of your original cash investment results in your acquisition of 51% equity in Republic-Asahi. It should be emphasized, however, that Section 34(c)(2)(c) of the Tax Code merely defers recognition of gain or loss from such transaction, for in determining the gain or loss from a subsequent transaction of the property or of the stocks involved in the exchange, the original or historical cost of the property or the stocks is considered. Thus, if the transferor later sells or exchanges the shares of stock acquired by it in the exchange it shall be subject to income tax on the gains derived from such sale or exchange, taking into consideration that the cost basis of the shares of stock shall be the same as the original acquisition cost of adjusted cost basis to the transferor of the property exchanged therefore; and that the cost basis to the transferee of the property exchanged for stocks shall be the same as it would be in the hands of the transferor. [Section 34(c)(5)(a) and (b), Tax Code, as amended by Presidential Decree No. 1773] In this connection, you are further advised that in order that the parties to the exchange can avail of the non-recognition of gains provided for in Section 34(c)(2)(c) of the Tax Code, as amended, they should comply with the requirements hereunder mentioned. (a) The transferor must file with its income tax return for the taxable year in which the exchange was consummated a complete statement of all facts pertinent to the exchange, including: 1. A description of the property transferred, or of its interest in such property, together with a statement of the original acquisition cost or other basis thereof, and adjusted cost basis at the time of the transfer; casia 2. The kind of stock received and preference if any; 3. The number of shares of each class received; and 4. The fair market value per share of each class at the date of the exchange. (b) On the other hand, the transferee corporation must file with its income tax return for the taxable year in which the exchange was consummated the following: 1. A complete description of the property received from the transferor; 2. A statement of the original acquisition cost or other basis of the property in the hands of the transferor and the adjusted cost basis thereof at the time of the transfer and; a. The total issued and outstanding capital stock prior to and immediately after the exchange, with a complete description of each class of stocks; b. The classes of stocks and number of shares issued to the transferor in the exchange; and c. The fair market value as of the date of exchange of the capital stock issued to the transferor. In addition to the foregoing requirements, permanent records in substantial form must be kept by the taxpayers participating in the exchange, showing the information listed above in order to facilitate the determination of gain or loss from a subsequent disposition of stocks/properties received in the exchange. (2) 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 a parcel of land is 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 aforesaid deed (BIR Ruling No. 245-00-000-00-102-82 dated April 6, 1982) which is at the rate of ten pesos per one thousand pesos or fractional part thereof in excess of one thousand pesos of such consideration or value; (3) The original issuance of certificate of stocks by the Realty Company and the Republic-Asahi are subject to the documentary stamp tax imposed under Section 175 of the Tax Code, as amended at the rate of one peso and seventy centavos on each two hundred pesos or fractional part thereof, of the par value of such certificates; (4) The Deed of Assignment for the transfer of all your other assets except land to Republic-Asahi is not subject to documentary stamp tax; (5) You can accrue as an expense and claim as an item of deduction in the year 1988, the employees pension liabilities as a consequence of the re-organization considering that said employees pension liabilities are over and above the contributions already made by you to the Employee's Pension Fund in previous years which has already been claimed by you as a deduction. Very truly yours, (SGD.) EUFRACIO D. SANTOS Deputy Commissioner