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

July 28, 1998 BIR RULING NO. 115-98 000-00-115-98 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 February 09, 1998 requesting for a ruling on the tax consequences of the proposed transfer of receivables from East Asia Diesel Power Corporation (EADPC) to Solivest Corporation in exchange for the latter's common shares of stock of East Asia Power Resources Corporation (EAPRC). prLL It is represented that EADPC is a domestic corporation; that it owns and holds receivables in the total amount of Forty-Seven Million Eight Hundred Six Thousand Six Hundred Sixty Three and 60/100 Pesos (P47,806,663.60) which it intends to transfer to Solivest Corporation in exchange for the latter's Nine Million Eight Hundred Forty Nine Thousand Two Hundred Ninety One (9,849,291) common shares of stock of EAPRC with a par value of P1.00 per share; that Solivest Corporation is a corporation duly organized and existing under the laws of British Virgin Islands; that EAPRC, on the other hand, is a domestic corporation whose shares are listed with the Philippine Stock Exchange (PSE); and that Solivest Corporation shall transfer the EAPRC shares to EADPC through a cross-sale in the stock exchange. Based on the foregoing representations, you now request your opinion on the following: "1. The gain to be realized by EADPC from the assignment of its receivables in the amount of Forty-Seven Million Eight Hundred Six Thousand Six Hundred Sixty Three and 60/100 Pesos (P47,806,663.60) to Solivest Corporation in exchange for the latter's Nine Million Eight Hundred Forty Nine Thousand Two Hundred Ninety One (9,849,291) common shares of stock of EAPRC shall be the excess of the amount realized therefrom over the cost or adjusted cost of said receivables. Conversely, the loss to be realized by EADPC from the assignment of said receivables shall be the excess of the cost or adjusted cost of the receivables over the amount realized; "2. The amount realized from the assignment of receivables is determined by considering that the selling/transfer price of the receivables shall be the fair market value (FMV) of the property received which are the EAPRC shares; "3. Since the EAPRC shares are listed shares and their transfer to EADPC shall be coursed through a cross-sale in the stock exchange, the FMV of EAPRC shares, for purposes of determining the selling/transfer price of the receivables, shall be the actual selling price of the EAPRC shares as shown in the sale confirmation issued by the member of the stock exchange through whom the sale was effected; and "4. Since the transfer of EAPRC shares from Solivest Corporation to EADPC shall be coursed through a cross-sale in the stock exchange, a percentage tax of 1/2 of 1% shall be imposed on the gross selling price of the EAPRC shares. In reply, please be informed 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 gain to be realized by EADPC from the assignment of its receivables in the amount of Forty-Seven Million Eight Hundred Six Thousand Six Hundred Sixty Three and 60/100 Pesos (P47,806,663.60) to Solivest Corporation in exchange for the latter's Nine Million Eight Hundred Forty Nine Thousand Two Hundred Ninety One (9,849,291) common shares of stock of EAPRC shall be the excess of the amount realized therefrom over the cost or adjusted cost of said receivables, and the loss to be recognized by EADPC from the assignment of said receivables shall be the excess of the cost or adjusted cost of the receivables over the amount realized. llcd 2. The amount to be realized from the assignment of receivables is determined by considering that the selling/transfer price of the receivables shall be the fair market value of the property received which are the EAPRC shares and not the fair market value of the receivables transferred (Section 40(A) of the Tax Code of 1997). 3. Pursuant to Section 6(a)(1) of Revenue Regulations No. 2-82, in the case of shares traded through the stock exchange, "fair market value" shall consist of the actual selling price as shown in the sale confirmation issued by the member of the stock exchange through whom the sale was effected. Considering that the EAPRC shares are listed shares and their transfer to EADPC shall be coursed through a cross-sale in the stock exchange, the fair market value of EAPRC shares, for purposes of determining the selling/transfer price of the receivables, shall be the actual selling price of the EAPRC shares as shown in the sale confirmation issued by the member of the stock exchange through whom the sale was effected. ( Ibid ) 4. Finally, considering that the transfer of EAPRC shares from Solivest Corporation to EADPC shall be coursed through a cross-sale in the stock exchange, a percentage tax of 1/2 of 1% shall be imposed on the gross selling price of the EAPRC shares (Sec. 127(A) of the Tax Code of 1997). Moreover, the transfer of EAPRC shares shall be subject to documentary stamp tax at the rate of One Peso and Fifty Centavos (P1.50) on each Two Hundred Pesos (P200.00), or fractional part thereof, of the par value of said shares pursuant to Section 176 of the Tax Code of 1997. llcd 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.) BEETHOVEN L. RUALO Commissioner of Internal Revenue