Applicability of RMO No. 63-99 to Inter-Corporate Advances

December 3, 1999 BIR RULING NO. 191-A-99 50 000-00 Balmeo Bautista & Peasales Law Offices Rm. 309 Margarita Building J.P. Rizal cor. Cardona Streets Makati City Attention: Atty. Leonides F. Balmeo Gentlemen : This refers to your letter dated October 1, 1999 stating that the Management and Board of Directors of Aboitiz Group of Companies which are engaged in various lines of business have agreed that when necessity arises, the companies which are financially capable will grant advances to a subsidiary, affiliate and sister company which may be in need of financial assistance or backing; that some of the members of the group which have agreed to lead and or borrow or to extend and or receive inter company advances without any interest to the other group members are: Aboitiz & Co., Inc.; Aboitiz Equity Ventures, Inc.; Aboitiz Transport Systems, Inc.; Aboitiz Air Transport Corp. now Aboitiz One, Inc.; Davao Light & Power Co., Inc.; Aboitiz Jebsen Bulk Transport Corp.; William Gothong & Aboitiz, Inc.; Philippine Fast Ferry Holdings Corp. formerly Aboitiz Parkview Transport Holdings, Inc.; Fil-Agri Holdings, Inc.; Pilmico Foods Corp., Aboitiz Power Corp.; Philippine Hydropower Corp.; Acoland, Inc.; AEV Properties, Inc.; Benguet Hydro Power Dev. Corp.; Bukidnon Hydropower Corp.; and such other corporations which are members of the Aboitiz Group of Companies; that in some instances, the stockholders advances made by the parent companies (in case there are various corporate stockholders) to the subsidiaries are based on the percentage of corporate stockholdings in the borrowing-subsidiary company; that where the stockholders are individuals, such individuals extend loans to the corporate borrowers based on the percentage of stockholdings of such individuals in the corporate borrower; that in case some stockholders are unable to advance their pro-rate share, the remaining capable stockholders take up this quota on a pro-rata basis; that in other instances, it is based on financial ability and resources of the lending companies and the financial need of the borrowing companies; and that such interest free advances are utilized by the borrowing companies as part of their operating capital. Based on the foregoing facts, you now request for confirmation of your opinion that the inter-corporate advances between the Aboitiz Group of Companies and the stockholders advances of individual stockholders to the corporate borrowers are not covered by the provisions of Revenue Memorandum Order No. 63-99 dated July 19, 1999 and are therefore not subject to imputed interest mandated under said RMO. In reply thereto, please be informed that the foregoing inter-corporate advances are not covered by RMO No. 63-99 dated July 19, 1999. Section 2.3 of the RMO states that it does not apply to indebtedness which was in fact a contribution to capital. The foregoing inter-corporate advances are analogous to capital contribution since it is based on percentage of stockholdings of the stockholders making the advances. The fact that some individual stockholders in some instances are not able to contribute to the fund constituting the advances does not destroy its character as an analogous capital contribution. In other instances where the advances are made to financial need of borrowing company and the financial ability of the lending company, it is clear that these are emergency loans to help a related company which is short of capital. These are not the instances covered by Section 4.1 of the RMO which would authorize the Commissioner of Internal Revenue to allocate interest income under Section 50 of the Tax Code of 1997 because such inter-corporate loans are clearly not transactions done for tax avoidance or evasion purposes. 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