Tax Consequences of Sun Life's Assignment of T-Bills to Mutual Fund Companies

December 16, 1999 BIR RULING NO. 202-99 40 (C) (2) & (C) (5) Sec. 4.100-5, RR 7-95-000-00-202-99 Sycip Gorres Velayo & Co 6760 Ayala Avenue 1226 Makati City Attention: Mr . Joel L . Tan-Torres Tax Partner Gentlemen : This refers to your letter dated August 16, 1999 requesting for a ruling to the effect that: (a) no gain or loss shall be recognized by Sun Life Assurance Company of Canada (SLAC) on the assignment of its investments in T-Bills to the mutual fund companies (MFCs) and the asset management company (AMC) in exchange for 99.99% of the voting stock of the latter; (b) no documentary stamp tax (DST) shall be imposed on SLAC's assignment of T-Bills to the MFCs and the AMC because this transaction is not among those subject to DST under the Tax Code; (c) the assignment of the T-Bills by SLAC in exchange for voting stock in the MFCs and the AMC shall not be subject to value-added tax (VAT) pursuant to Section 4.100-5 of Revenue Regulations No. 7-95; and (d) the cost basis of the MFC and AMC shares acquired by SLAC shall be the same as the original acquisition cost or adjusted cost basis to SLAC of the T-Bills exchanged therefor, while the cost basis to the MFCs and the AMC of the T-Bills exchanged for stock shall be the same as it would be in the hands of SLAC pursuant to Section 40(C)(5) of the Tax Code. It is represented that SLAC is a life insurance company organized and existing under the laws of Canada and operating in the Philippines through a branch; that it is planning to organize several MFCs and an AMC to manage the investments of the MFCs; that the Articles of Incorporation for three out of five proposed MFCs, namely, Sun Life of Canada Prosperity Philippine Equity Fund, Inc. (Equity Fund), Sun Life of Canada Prosperity Bond Fund Inc. (Bond Fund), and Sun Life of Canada Prosperity Balanced Fund Inc. (Balanced Fund), have been filed with the Securities and Exchange Commission (SEC); that the capital structures of these MFCs are as follows: Name of MFC Authorized Capital Subscribed & Paid-up Par Value Stock Capital Stock Equity Fund P200 Million P50 Million P1.00 Bond Fund 200 Million 50 Million 1.00 Balanced Fund 200 Million 50 Million 1.00 that the Articles of Incorporation of the other two proposed MFCs, namely, Sun Life of Canada Prosperity Global Equity Inc. (Global Equity) and Sun Life of Canada Prosperity U.S. Equity Fund, Inc. (US Equity), have not yet been filed; that the proposed capital structures of Global Equity and US Equity are as follows: Name of MFC Authorized Capital Subscribed & Paid-up Par Value Stock Capital Stock Global Equity P200 Million P60 Million P1.00 US Equity P200 Million 60 Million 1.00 that SLAC has subscribed to 99.99% of the subscribed capital stock of Equity Fund, Bond Fund and Balanced Fund, with the remaining 0.01% being subscribed by nominees of SLAC in trust for the latter; that SLAC will likewise subscribe to 99.99% of the total capital stock of Global Equity and US Equity, with the remaining 0.01% being subscribed by nominees of SLAC in trust for the latter; that SLAC opened a separate custodial accounts in trust for Equity Fund, Bond Fund, Balanced Fund, Global Equity and US Equity; that SLAC deposited its investment in Treasury Bills (T-Bills) in these custodial accounts to cover the total actual and proposed paid-up capital stock of said MFCs details of which are as follows: Name of MFC T-Bills Acquisition Cost Par Value Equity Fund PIBL 1298I355 P51,460,000,000 P53,750,000 Issue 9/09/98 Maturity 9/08/99 (Total: P51,460,000) (Total: P53,750,000) Bond Fund PIBL 1299A048 P 46,430,000.00 P 50,000,000 Issue 1/27/99 Maturity 1/26/00 PIBL 1298I355 P 5,030,000.00 P 5,260,000 Issue 9/09/98 Maturity 8/08/99 (Total: P51,460,000) (Total: P 55,260,000) Balanced Fund PIBL 1298H329 P41,360,000.00 P43,450,000 Issue 8/19/98 Maturity 8/18/99 PIBL 1298I355 P9,260,000.00 P9,670,000 Issue 9/09/98 Maturity 8/08/99 (Total: P50,620,000) P53,120,000) Global Equity PIBL 1299A039 P46,510,000.00 P50,000,000 Issue 1/20/99 Maturity 1/19/00 PIBL 1298I355 P15,250,000.00 P15,930,000 Issue 9/09/98 Maturity 9/08/99 (Total: P61,760,000) (Total: P65,930,000) US Equity PIBL 1298I355 P51,460,000.00 P53,750,000 Issue 9/09/98 Maturity 9/08/99 (Total: P51,460,000) (Total: P53,750,000) that SLAC will subscribe to 99.99% of the total capital stock of the proposed Sun Life Asset Management Company, Inc. (AMC), with the remaining 0.01% to be subscribed by nominees of SLAC in trust for the latter; and that SLAC intends to deposit its investments in T-Bills to cover the paid-up capital stock of the AMC in order to comply with SEC requirements for registration. In reply, please be informed that the assignment by SLAC of its investments in T-Bills in exchange for 99.99% of the voting shares in the MFCs and AMC qualifies as a tax-free exchange under Section 40(C)(2) of the Tax Code, to wit: "No gain or loss shall be recognized if property is transferred to a corporation by a person in exchange for stock or unit of participation in such a corporation of which as a result of such exchange said person, alone or together with others, not exceeding four (4) persons, gains control of said corporation, Provided, That stocks issued in exchange for services shall not be considered as issued in return for property." Considering that SLAC shall own 99.99% of the voting stock in the MFCs and AMC. SLAC shall acquire control of the said companies as a result of its assignment of its investments in T-Bills. As such, no gain or loss shall be recognized by SLAC from the assignment of its investments in T-Bills in exchange for the shares in the MFCs and AMC. Also, the assignment of investments in T-Bills will not be subject to DST because it is not one of the transactions subject to DST under the Tax Code. However, the DST at the rate of P2.00 on each P200 par value shall be imposed on the original issuance of the MFCs and AMC's shares based on the total par value of the shares subscribed and paid-up, pursuant to Section 175 of the Tax Code. Furthermore, SLAC's assignment of the T-Bills is not subject to VAT pursuant to Section 4.100-5 of Revenue Regulations No. 7-95, which provides: "(b) Not subject to output tax . The VAT shall not apply to supply of goods or properties existing as of the occurrence of the following: "(1) change of control of a corporation by the acquisition of the controlling interest of such corporation by another stockholder or group of stockholders. Example: transfer of property to a corporation in exchange for its shares of stock under Section 34 (c)(2) and (6)(c) of the Code." Since as a result of the assignment by SLAC of its investments in T-Bills to the MFCs and the AMC, it will gain control of the said companies, the transaction falls within the ambit of Section (40)(C)(2) and (6)(C) of the Tax Code, and consequently, is not subject to VAT under the above-quoted provision of Rev. Reg. No. 7-95. Finally, pursuant to Section 40(C)(5) of the Tax Code, the cost basis of the MFC and AMC shares acquired by SLAC shall be the same as the original acquisition cost or adjusted cost basis to SLAC of the T-Bills exchanged therefor. On the other hand, the cost basis to the MFCs and AMC of the T-Bills exchanged for stock shall be the same as it would be in the hands of SLAC. 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. cdlex Very truly yours (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue