No Gain or Loss Recognized Both to the Transferor and the Transferee Subsidiary on the Transfer by Marubeni of a Substantial Portion of Either the Assets and/or Retained Earnings of Its Philippine Branch in Exchange for Shares of Stock of the Wholly-Owned Philippine Subsidiary to be Set Up, Considering that as a Consequence of the Exchange, the Transferor Will Gain Control of the Transferee Subsidiary by Owning More than 51% of Its Total Voting Stocks

July 11, 1997 BIR RULING NO. 077-97 34 (c) 000-00 077-97 Marubeni Corporation (Manila Branch) 8 & 9 Floors, L.V. Locsin Building Corner Ayala and Makati Avenues Makati, Metro Manila Attention: Mr . Takeshi Hojo General Manager Gentlemen : This refers to your letter dated December 5, 1995 requesting for a ruling that no gain or loss shall be recognized on the conversion by Marubeni Corporation ("Marubeni") of a substantial portion of the assets of its Philippine Branch into capital of a wholly-owned Philippine subsidiary as this constitutes a tax-free exchange under Section 34(c)(2) of the Tax Code as amended; that the conversion of the retained earnings of the Philippine branch of Marubeni into capital of the wholly-owned Philippine subsidiary is not subject of the branch profit remittance tax as there was no actual remittance of branch profit abroad; and that the Philippine subsidiary is subject to the ordinary corporate income tax imposed under Section 24(a) of the Tax Code, as amended. cdt It is represented that Marubeni is a corporation duly organized and existing under the laws of Japan which is duly licensed to do business in the Philippines through its Philippine branch office; that the business engaged in by the Philippine branch is that of an indentor and contractor; that Marubeni is seriously considering the setting up of a wholly-owned Philippine subsidiary in response to President Ramos' campaign for expanded foreign investment into the country; that Marubeni intends to use the retained earnings and/or assets of its Philippine branch in the setting up of the aforementioned wholly-owned subsidiary; that the Philippine subsidiary will have as its primary purposes the following business activities: 1. Import, export and sale of foreign and domestic goods; 2. Manufacture and wholesale of general merchandise; 3. Processing and repair business related to any of the foregoing item numbers; 4. Marine transportation, overland transportation, air transportation, harbor transportation; 5. Warehousing; 6. Import, export, and sale of: a) Coal, petroleum, gas (including pressurized gas and liquefied gas) and products derived therefrom; b) Chemical (including industrial chemicals, pharmaceuticals, agricultural chemicals, toxic and dangerous substances, etc.) toiletries and their raw Materials, medical instruments; c) Foodstuffs, alcohol, liquor, alcoholic beverages, salt, tobacco products, seeds and seedlings, fertilizer, feedstuff, feed additives, livestock; 7. Renting equipment and materials for civil engineering works, construction machinery, vehicles, office equipment, medical instruments, and other equipment and instruments; 8. Planning, acquisition, preservation, utilization and sale of intangible property rights such as industrial property rights and copyrights, know-how, systems engineering and other software; 9. Management of sports, recreational, sightseeing, lodging and medical facilities, and travel business; 10. Planning, management and implementation of events of all kinds; 11. Commodities investments and trading agency business and commodities advisory business; 12. Contracting for document preparation services, secretary, receptionist, interpreter and telephone operator services, services involving the handling of office or communication equipments, and system programming and other work processing services; 13. Temporary personnel business; 14. Related to any of the foregoing item numbers: a) Research, development and consulting business; b) Training, guidance and education business; c) Agency, brokerage and factorage business; 15. Agency for non-life insurance, insurance under the Automobile Liability Compensation Law and other types of insurance, and brokerage of life insurance; 16. To engage in the business of investment by way of purchase on acquisition of any share or shares on interest in corporations, associations, partnership or any other business entity; and 17. Any and all other business related or incidental to any of the foregoing item numbers. that for the initial capitalization of the Philippine subsidiary, a substantial portion of either the assets and/or retained earnings of the Philippine branch will be transferred to the Philippine subsidiary which will be converted into capital or equity thereof. In reply, please be informed that pursuant to Section 34(c) (2) and (6) (c) of the Tax Code, as amended, 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 is 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 shares of stock 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 stocks received i.e., total subscribed, whether for property or services by the transferor or transferors. In determining the 51% of stock ownership, only those persons who transferred property for stocks in the same transaction may be counted up to a maximum of five. (BIR Ruling Nos. 278-93 dated June 28, 1993 and 132-95 dated August 29, 1995) Accordingly, no gain or loss shall be recognized both to the transferor and the transferee subsidiary on the transfer by Marubeni of a substantial portion of either the assets and/or retained earnings of its Philippine branch in exchange for shares of stock of the wholly-owned Philippine subsidiary to be set up, considering that as a consequence of the exchange, the transferor will gain control of the transferee subsidiary by owning more than 51% of its total voting stocks. (BIR Ruling No. 210 dated October 18, 1991) It should be emphasized, however, that Section 34(c) (2) and (6) (c) of the Tax Code merely defers recognition of the gain or loss from such transaction, for in determining the gain or loss from a subsequent transaction of the properties or of the stocks involved in the exchange, the original or historical cost of the properties or 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 gains derived from such sale or exchange, taking into consideration that the cost basis of the shares shall be the same as the original acquisition cost or adjusted cost basis to the transferor of the properties exchanged therefor; and that the cost basis to the transferee of the properties exchanged for stocks shall be the same as it would be in the hands of the transferor. (Section 34(c) (5) (a) and (b) of the 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) and (6) (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 transaction was consummated, a complete statement of all the facts pertinent to the exchange, including: 1. A description of the properties transferred, or of its interest in such properties, together with a statement of the original acquisition cost/adjusted cost basis or other basis thereof at the time of the transfer; 2. The kind of stocks received and preferences, 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 all the properties received from the transferor; 2. A statement of the original acquisition cost or other basis of the properties in the hands of the transferor and the adjusted cost basis thereof at the time of the transfer; and 3. Information with respect to the capital stock of the corporation including: a) The total issued and outstanding capital stock immediately prior to and immediately after the exchange with a complete description of each class of stock; b) The classes of stock and number of shares issued to the transferor in the exchange; and c) The fair market value as of the date of the 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. The parties shall also cause to be annotated on the Transfer Certificates of Title and at the back of the Certificates of Stocks, the date the deed of exchange was executed, the original or historical cost of acquisition of the properties or shares of stock involved, and the fact that no gain or loss was recognized as a result of such exchange. The transfer of machineries and equipment which are considered real properties is subject to documentary stamp tax imposed under Section 196 of the Tax Code, as amended. A stock in a corporation is a valuable consideration for transfer of real property (Section 177, Documentary Stamp Tax Regulations). Accordingly, if real property, 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 Deed of Assignment executed to effect the aforesaid transfer (BIR Ruling No. 109-82 dated April 6, 1982). The tax shall be based on the par value of the stocks. Moreover, the certificate of stocks to be issued by the Philippine subsidiary are, in all probability original issues, which are subject to the documentary stamp tax imposed by Section 175 of the Tax Code, as amended. On the other hand, the transfer of profits by a branch office in the Philippines of a foreign corporation to its wholly owned Philippine subsidiary in payment of its subscription in the capital stock thereof is considered an indirect remittance of profits and is, therefore, subject to the branch profit remittance tax of 10% of the total amount thereof pursuant to paragraph 5, Protocol of the RP-Japan Tax Treaty. (BIR Ruling dated March 14, 1977) Finally, the Philippine subsidiary will be subject to tax imposed under Section 24(a) of the Tax Code, as amended, on its taxable income derived from within or without the Philippines subject to the deductions allowed Section 29 thereof. Section 24(a) and pertinent portion of Section 29 of the Tax Code provide: "Section 24. Rates of Tax on Domestic Corporations . (a) In general. Unless otherwise provided, a tax of 35% is hereby imposed upon the taxable income received during each taxable year from all sources within and without the Philippines by every corporation organized in, or existing under the laws of the Philippines, and partnerships, no matter how created or organized, but not including general professional partnerships." xxx xxx xxx "Section 29. Deductions from Gross Income . In computing taxable income subject to tax under Section 21(a), 24(a) (b) and (c); and 25(a) (1), there shall be allowed as deductions the items specified in paragraphs (a) to (i) of this Section: . . ." 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. aisadc Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue