Tax Consequences of the Proposed Transfer of Common Shares of Stock in Exchange for Common Shares

May 27, 1998 BIR RULING NO. 075-98 000-00-075-98 Castro Cadiz & Carag Suite 6B, Eisenhower Condominium No. 7 Eisenhower Street 1500 Greenhills, San Juan Metro Manila Attention: Atty . Othelo C . Carag Gentlemen : This refers to your letter dated January 15, 1998 requesting for a ruling on the tax consequences of the proposed transfer of 228,224 common shares of stock of M&M Holdings Corporation (M&M) by East Asia Holdings and Development, Inc. (EAHDI) to Mabuhay Holdings Corporation (MHC) in exchange for the latter's 40,261,340 common shares. It is represented that EAHDI is a corporation duly organized and existing under the laws of the Philippines; that it owns 228,224 common shares of stock of M&M, another domestic corporation; that the M&M shares which are not listed in the Philippine Stock Exchange (PSE) have a total issued value of P23,118,100.00 and a total acquisition cost of P23,118,100.00; that EAHDI intends to transfer the M&M shares to MHC; that in exchange for the M&M shares, MHC shall issue to EAHDI 40,261,340 common shares of stock of MHC; and that the MHC shares which are listed in the PSE, have a par value of P1.00 per share. In connection therewith, you now request confirmation of your opinion that "1. The gain to be realized by EAHDI from the transfer of the M&M shares shall be the excess of the amount realized therefrom by EAHDI over the adjusted cost of the M&M shares. The amount realized from the transfer of M&M shares is determined by considering that the selling/transfer price of the M&M shares shall be the Fair Market Value (FMV) of the shares received in exchange which are MHC shares, and that the difference between the FMV of MHC shares and the acquisition cost or adjusted cost of M&M shares represents the gain realized by EAHDI; "2. Since the MHC shares are listed in the PSE, the FMV of the MHC shares, for purposes of determining the selling/transfer price of M&M shares, shall be the highest closing price of the MHC shares in the stock exchange on the day of the execution of the Deed of Exchange between EAHDI and MHC; "3. Since the M&M shares are unlisted shares, the gain realized by EAHDI from the transfer of M&M shares shall be subject to 5%/10% capital gains tax; and "4. There is no taxable gain or deductible loss from the original issuance of MHC shares by MHC to EAHDI." In reply, please be informed that your opinion is hereby confirmed, as follows: 1. Pursuant to Section 40(A) of the Tax Code of 1997, the gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the basis or adjusted basis for determining gain, and the loss shall be the excess of the basis or adjusted basis for determining loss over the amount realized. The amount realized from the sale or other disposition of property shall be the sum of money received plus the fair market value of the property (other than money) received. Consequently, the gains that will be realized by EAHDI from the transfer of the M&M shares to MHC in exchange for the latter's MHC shares shall be determined by considering that the selling/transfer price of the M&M shares to MHC in exchange for the latter's MHC shares shall be the fair market value of the shares received in exchange which are the MHC shares and not the fair market value of the M&M shares transferred or exchanged; and that the difference between the fair market value of the MHC shares and the acquisition cost or adjusted cost of the M&M shares represents the gain realized by EAHDI. (BIR Ruling No. 143-95 dated September 14, 1995) LLjur 2. Pursuant to Section 6(a)(2) of Revenue Regulations No. 2-82, in the case of shares not traded through the stock exchange, but listed in one or more stock exchange, the highest closing price on the day when the shares are sold, transferred or exchanged, shall be the "fair market value". When no sale is made in any stock exchange, the highest closing price on the day nearest to the day of sale, transfer or exchange of the shares shall be the fair market value. Considering that the MHC shares are listed in the PSE, the fair market value of the MHC shares, for purposes of determining the selling/transfer price of M&M shares, shall be the highest closing price of the MHC shares in the stock exchange on the day of the execution of the Deed of Exchange between EAHDI and MHC. When no sale of MHC shares is made in the stock exchange on the day of the exchange, the highest closing price of the MHC shares on the day nearest to the day of exchange shall be the fair market value. (Ibid) 3. Considering further that the M&M shares are unlisted shares, the gains to be realized by EAHDI from the intended transfer of its M&M shares of MHC, in exchange for the latter's shares of stock shall be subject to the final tax of 5%/10% net capital gains tax imposed under Section 27(D)(2) of the Tax Code of 1997. 4. Finally, Section 55 of Revenue Regulations No. 2 provides that, whether the acquisition or disposition by a corporation of shares of its own capital stock gives rise to taxable gain or deductible loss depends upon the real nature of the transaction, which is to be ascertained from all its facts and circumstances. The receipt by a corporation of the subscription price of shares of its capital stock upon their original issuance gives rise to neither taxable gain or deductible loss, whether the subscription or issue price be in excess of, or less than, the par or stated value of such stock. But if a corporation deals in its own shares as it might in the shares of another corporation, the resulting gain or loss is to be computed in the same manner as though the corporation were dealing in the shares of another. So also if the corporation receives its own stock as consideration upon the sale of property by it, or in satisfaction of indebtedness to it, the gain or loss resulting is to be computed in the same manner as though the payment had been made in any other property. Any gain derived from such transaction is subject to tax, and any loss sustained is allowable as deduction where permitted by the provisions of Title II. Accordingly, the original issuance of MHC shares gives rise to neither taxable gain nor deductible loss, whether the subscription price of the MHC shares is in excess of, or less than the par value of said MHC shares. (Ibid) However, the original issuance of MHC shares are subject to the documentary stamp tax imposed under Section 175 of the Tax Code of 1997, which shall attach upon acceptance by the corporation of the stockholder's subscription regardless of the actual delivery of the certificates of stock. (Commissioner of Internal Revenue vs. Construction Resources of Asia, Inc.) 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, then this ruling shall be considered null and void. Very truly yours, (SGD.) LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue