Transfer of Assets and Liabilities Solely in Exchange for Shares of Stock Shall Not Give Rise to the Recognition of Gain or Loss

April 16, 1991 BIR RULING NO. 063-91 34 (c) (2) 327-88 063-91 Gentlemen : This refers to your letter dated January 4, 1990 requesting confirmation of your opinion that no gain or loss shall be recognized in the merger of General Foods Philippines, Inc. (GFI) and Krafts Food, Inc. (Philippines) (KFI) pursuant to Section 34 (c) (2) of the Tax Code, as amended. It is represented that GFI is a domestic corporation established and organized on August 28, 1974, the primary purpose of which is: "to manufacture, bottle, produce, grow, prepare, pack age, pack, distribute, sell or otherwise dispose of, on wholesale basis, handle, market, store, import, export, deal and trade in fruit juices, extracts, syrups, coffee, tea, cocoa, wines, liquors, sodas and other drinks and beverages of every kind and description whatsoever, cereals, vegetables, fruits, grains, meats, Dairy Products; foods and food products of every kind and description whatsoever, preserves and conserves, baking powder, pastries, confections, bread, cake flour, cake mixes and baking products of every kind and description whatsoever, cereals, vegetables, fruits, grains, meats, Dairy Products, foods and food products of every kind and description whatsoever, including their by-products, and regardless of whether they are frozen, canned, dehydrated or in any other form," That KFI is a domestic corporation established and organized to: "engage in the cattle industry, and to manufacture, process, buy and sell, or otherwise deal in dairy products, particularly cheese, butter, cream, milk and food and creamy products of every kind and description; to manufacture food products, and to buy, sell and generally deal in and with all kinds of equipment, devices, tools, implements, instruments and apparatus and machines used or useful in connection therewith; to purchase or otherwise obtain control of, the dispose of, to use of grant license in respect of, and to otherwise deal in, as may be deemed advisable, letters patent of the Republic of the Philippines and other countries, copyrights, trademarks, inventions, improvements, processes and methods connected with or related to the purpose of the corporation." cdtech that GFI has an authorized capital stock of Twenty Million Pesos (P20,000,000.00), divided into Two Hundred Thousand (200,000) common shares with a par value of One Hundred Pesos (P100.00) per share; that of the said shares, One Hundred Seven Thousand Two Hundred Twenty-Seven (107,227) have been duly subscribed, issued and are now outstanding in the names of the following shareholders the number of shares indicated opposite their names: STOCKHOLDER NUMBER OF SHARES General Foods Corporation (U.S.) 107,223 Eduardo Puno 1 Ervin R. Shames 1 Jesus B. Bito 1 Mariano M. Lozada 1 107,227 ====== that KFI has an authorized capital stock of Fifty-Six Million Pesos (P56,000,000.00) divided into Five Million Six Hundred Thousand (5,600,000) common shares with a par value of Ten Pesos (P10.00) per share; that of the said common shares, Five Million Four Hundred Fourteen Thousand Ninety-Three (5,414.093) have been duly subscribed, issued and are now outstanding in the names of the following shareholders the number of shares opposite their names: STOCKHOLDERS NUMBER OF SHARES Kraft, Inc. (U.S.) 5,414,086 Ricardo J. Romulo 1 Ma. Asuncion R. Tinga 1 Katz N. Tierra 1 M.A. Miles 1 Eduardo R. Puno 1 Nick F.M. Kuijpers 1 Jack M. Keenan 1 5,414,093 ======= that as a result of the merger, GFI shall cease as a corporation by operation of law and KFI, shall remain as the surviving corporation under the new corporate name of Kraft General Foods Philippines, Inc. (KGFPI); that pursuant to the Plan of Merger dated December 14, 1989 KFI shall issue to GFI, 3,324,037 common shares to be distributed among the stockholders so that for every share of GFI stock surrendered for cancellation by its stockholders, they shall received in exchange Thirty-One (31) shares of KFI stock; that after the merger the shareholders of KGFPI, the total number and total par value of shares outstanding in their names, and the total amount paid up by each shareholder shall be as follows: cd TOTAL NOS. TOTAL TOTAL NAME OF SHARES PAR VALUE PAID-UP Kraft, Inc. 5,414,086 P54,140,860 P54,140,860 General Foods Corp. 3,323,913 33,239,130 33,239,130 Ricardo J. Romulo 1 10 10 Ma. Asuncion R. Tinga 1 10 10 Katz N. Tierra 1 10 10 M.A. Miles 1 10 10 Eduardo R. Puno 32 320 320 Nick F.M. Kuijpers 1 10 10 Jack M. Keenan 1 10 10 Ervin R. Shames 31 310 310 Jesus B. Bito 31 310 310 Marciano M. Lozada 31 310 310 _________ _________ _________ 8,738,130 P87,381,300 P87,381,300 ========= ========= ========= and that the foregoing merger will be effected in view of the merger of its parent companies in the U.S. and with the objectives of achieving greater efficiency and economy of management. In reply, please be informed that your opinion to the effect that the above reorganization is a merger within the contemplation of Section 34 (c) (2) and 5(b) of the Tax Code because a corporation, Krafts Foods, Inc. (Philippines) acquired all the assets and assumed all the liabilities of General Foods Philippines, Inc. under the new corporate name of Kraft General Foods Philippines, Inc. solely for stocks, 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. Accordingly, the transfer of GFI of all its assets and liabilities to KFI under the new corporate name of KGFPI solely in exchange for the latter's shares of stock shall not give rise to the recognition of gain or loss pursuant to Section 34 (c) (2) of the Tax Code. No gain or loss shall be recognized to GFI upon the distribution of KFI (KGFPI) shares of GFI stockholders in complete redemption of their stocks under Section 34 (c) (2) of the Tax Code. No gain or loss shall be recognized to GFI stockholders upon the exchange of their stocks solely for KFI (KGFPI) stocks under Section 34 (c) (2) of the Tax Code. The basis of the assets received by KFI (KGFPI) shall be the same as it would be in the hands of GFI. The basis of KFI (KGFPI) stocks received by the stockholder of GFI shall be the same as the basis of the GFI stocks surrendered in exchange therefor. If the total liabilities to be assumed by KFI (KGFPI) upon effective merger date exceed the historical or original acquisition cost (cost basis) of the assets transferred by GFI, the excess shall be recognized as gain to GFI. [Section 34 (c) (4) (b), Tax Code, as amended by P.D. No. 1773]. 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. The abovementioned transactions shall not be subject to the gift tax as there is not intention to donate on the part of any of the parties. However, in order that the above-described reorganization can be considered a merger under Section 34 (c) (2) of the Tax Code, the parties to the merger should comply with the following requirements: cdt 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 or 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 property, 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. (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. Every taxpayer, other than a corporation, a party of 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 stock or securities and other property or money received from the exchange, including any liabilities assumed upon the exchange, any liabilities 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 set forth upon the basis of the fair market value thereof at the date of the 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 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 properties received from the exchange. (par 9803-B, 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 a subsequent disposition of the stock received as a consequence of the merger. The certificates of stocks to be issued to GFI and KFI stockholders in redemption of their stocks, are in all probability, original issued which are subject to the documentary stamp tax imposed by Section 175 of the Tax Code, as amended. For purposes of the Value-Added Tax (VAT), the unused input tax of the dissolved corporation as of the date of merger shall be absorbed by you as the surviving corporation (Sec. 5 (b) (3), Revenue Regulations No. 5-87) cdta Very truly yours, (SGD.) JOSE U. ONG Commissioner