Tax Treatment of Transactions Involving Security Instrument Issued to Clients in Certain Proposed Transactions

August 30, 1999 BIR RULING NO. 136-99 127 (A)-000-00-136-99 Sycip Salazar Hernandez & Gatmaitan Sycip Lay - All Asia Capital Center 105 Paseo de Roxas City of Makati 1226 Attention: Atty . Ernesto S . Taio, Jr . and Atty . Gerardo V . Francisco Gentlemen : This refers to your letter dated August 18, 1999 requesting for and in behalf of your clients, Benpres Holdings Corporation (Benpres) and Lopez, Inc. (Lopez) for a ruling on the tax treatment of transactions involving a security instrument which will be issued to your clients in certain proposed transactions. It is represented that under the proposed transaction, Benpres and Lopez, as stockholders of ABS CBN, the shares of which are listed and publicly traded in the Philippine Stock Exchange (PSE), will sell certain of their shares in ABS CBN to a special purpose corporation (SPC) through the PSE; that as part of the transaction, the SPC will issue instruments to Benpres and Lopez which will be called Philippine Depository Receipt (PDR); that each PDR evidences a right on the part of the holder of the PDR to purchase one share of ABS CBN from the SPC for a specified price that it is also envisioned that other shareholders of ABS CBN (other than Lopez and Benpres) may sell their shares to the SPC and will also be issued PDRs; and that after due compliance with the requirements to be imposed by the Securities and Exchange Commission (SEC), particularly under the Revised Securities Act, and by the PSE, these PDRs will be listed and traded on the PSE. prLL In reply thereto, please be informed under Section 22(L) of the Tax Code of 1997, the term " shares of stock " includes warrants and/or options to purchase shares of stock . Verily, a Philippine Depository Receipt (PDR) partakes the nature of a share of stock since PDR evidences a right on the part of the holder to purchase one share of ABS CBN from the Special Purpose Corporation (SPC) for a specified exercise price . The specified exercise price represents the consideration. The transaction applies also to other shareholders of ABS CBN, other than Benpres and Lopez, who are willing to sell their ABS CBN shares and who in return will be issued their corresponding PDRs. Furthermore, a PDR is indeed a warrant and/or option to purchase shares of stock since as represented, after due compliance with the requirements to be imposed by the SEC, particularly under the Revised Securities Act, and by the PSE, these PDRs will be listed and traded in the PSE, like in the case of a share of stock. In BIR Ruling No. 68-96 dated June 25, 1996, this Office opined that a " listed equity-linked warrants " which gives the holder thereof the privilege of buying a specified number of shares of the underlying common stock at the specified exercise price is treated as the same instrument as the underlying listed stocks, hence, subject to the tax rate of of 1% imposed under then Section 124-A of the Tax Code, as amended by Republic Act No. 7717 on the gross selling price or gross value in money of the shares of stock sold, bartered, exchanged or otherwise disposed through the facilities of the Philippine Stock Exchange, (Rev. Regulations No. 3-95 as amended by Rev. Regulations No. 5-95). From the foregoing, it is clear that the PDR in the instant case is similar to the "listed equity-linked warrants". It shall be understood that, aside from the stock transaction tax of of 1%, documentary stamp tax at the rate of P1.50 of every P200 or fractional part of the par value of the stock to be transferred by Benpres and Lopez and other shareholders to SPC. Such being the case, this Office is of the opinion as it hereby holds that a PDR is subject to the tax rate of of 1% of the gross selling price or gross value in money of the shares of stock sold, bartered, exchanged or otherwise disposed which shall be paid by the seller or transferor pursuant to Section 127(A) of the Tax Code of 1997. LibLe x This ruling is without prejudice to the requirements imposed by the Securities and Exchange Commission and the Philippine Stock Exchange and 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