Merger bet. GMCR & Clavecilla Not Subject to Capital Gains Tax

May 13, 1993 BIR RULING NO. 210-93 MERGER BET. GMCR & CLAVECILLA NOT SUBJECT TO CAPITAL GAINS TAX 34 (c) (2) (C) 0-91 10-93 Castillo, Laman, Tan & Pantaleon Law Offices, Valero Tower Valero Street, Salcedo Village 1200 Makati, Metro Manila Attention: Attys . Eva Policar-Bautista and Ms . Victoria Sarmiento This refers to your letters dated May 1, July 8 and October 1, 1992, stating that Globe Mackay Cable and Radio Corporation (GMCR) is a corporation organized under the law of the Philippines and is the grantee of a franchise to operate communication systems by radio, wire, cable and satellites and any other means for the reception and transmission of international telecommunications; that its present authorized capital stock is P336,490,000.00, divided into 336,490,000 common shares with a par value of P1.00 per share, of which 105,894,000 have been issued and outstanding; that its shares are listed in the stock exchanges; that Clavecilla Radio Systems (CRS) is a corporation organized under the laws of the Philippines and is the grantee of a franchise to establish, maintain and operate stations for international and domestic telecommunications; that its present authorized capital stock is P100,000,000.00, divided into 10,000,000 shares, with a par value of P10.00 per share; that of the 10,000,000 shares authorized to be issued, 2,500,000 have been issued; that its total paid-up capital as of March 31, 1992 is P96,937,111.00; that in line with the public policy enunciated in Article XII, Section 11 of the Constitution of the Philippines, which seeks to encourage equity participation in public utilities by the general public, and in order to promote economies in operation and efficiency of service to the public, GMCR and CRS will merge, with GMCR as the surviving corporation; that on March 19, 1992, Republic Act No. 7229, which approved the merger of GMCR and CRS, was signed into law; that to effect the merger, all the assets and liabilities of CRS as of March 31, 1992 will be transferred to GMCR; and that since on the effective date of merger, CRS will be wholly owned by GMCR, no GMCR share will be issued to GMCR pursuant to sound corporate practice. cdtech In connection therewith, you now request for confirmation of your opinion that: "1. The merger of GMCR and CRS with GMCR as the surviving corporation, qualifies for non-recognition of gain or loss for income tax purposes in accordance with Section 34(c)(2)(c) of the Tax Code, as amended, . . .; Thus, no taxable gain or loss shall be recognized by GMCR and CRS upon their merger. Your office had occasion to rule on a similar tax fee exchange in BIR Ruling No. 141-84, dated August 27, 1984, ...wherein as a consequence of a parent and a subsidiary being merged, no shares of stock were issued to the surviving parent corporation; "2. Since no shares of stock will be issued, no stamp taxes are likewise due from either party as a result of the merger; "3. The merger will not be subject to gift tax since there is no intention to donate on the part of any of the parties; and "4. The transfer of CRS tangible assets will not be subject to value added tax (VAT) since both GMCR and CRS, being subject to percentage tax, are not subject to VAT. Moreover, the exemption from VAT of transfers effected pursuant to a merger is provided in Section 5(b)(3) of the Revenue Regulation No. 5-87. that in your letter, dated October 1, 1992, you stated that, assuming without admitting that the GMCR and CRS merger does not fall squarely within the income tax deferment provisions of paragraph (c)(2) of Section 34 of the Tax Code, the merger of GMCR and CRS will not result in a taxable gain for both parties since the merger is actually a substitution by GMCR of its P96,937,111 shareholdings in CRS for CRS net assets amount to P44,187,963 (i.e. the difference between assets worth P338,703,209 and liabilities worth P294,515,246). In reply thereto, I have the honor to inform you as follows: 1. The above reorganization is a merger within the contemplation of Section 34(c)(2) and 5(b) of the Tax Code, because a corporation (GMCR) acquired all the assets and assumed all the liabilities of CRS, although no GMCR shares will be issued to GMCR, since on the effective merger date CRS is wholly owned by GMCR, the transaction undertaken being for a bonafide business purpose and not solely for the purpose of escaping from the burden of taxation; The tax deferred character of the merger under Section 34(c) and 5(b) of the Tax Code, is not affected by the non-issuance of the surviving corporation of its shares of stock in exchange for the assets and liabilities of the absorbed corporation in cases of merger of a parent corporation and its subsidiary. (see par. 4305, Vol. 11, Mertens Law of Federal Income Taxation 1986.) 2. Since no GMCR shares of stock will be issued to GMCR, no documentary stamp taxes are due from either party as a result of the merger; 3. The abovementioned transaction is not subject to the gift tax as there is no intention to donate on the part of any of the parties; and 4. The transfer of CRS tangible assets to GMCR is not subject to value-added tax (VAT) since both GMCR and CRS being subject to percentage tax, are not subject to VAT. Moreover, if the total liabilities to be assumed by GMCR, upon the effective merger date, exceed the historical or original acquisition cost (cost basis) of the assets transferred by CRS, the excess shall be recognized a gain of CRS (Section 34(c)(4)(b), Tax code, as amended. It is understood, however, that upon the subsequent sale or exchange of the assets or shares of stock acquired by the parties, the gain derived from such sale or exchange shall be subject to income tax. However, in order that the above-described reorganization can be considered as merger under Section 34(c)(2) of the Tax Code, the parties to the merger should comply with the following requirements: A. The plan of reorganization should be adopted by each of the corporations, parties thereto, the adoption being shown by the acts of its duly constituted responsible officers and appearing upon the official records of the corporation. Each corporation, which is a party to the reorganization, shall file, as part of its return for the taxable year within which the reorganization occurred, a complete statement of all facts pertinent to the non-recognition of gain or loss in connection with the reorganization, including: 1. A copy of the plan of reorganization, together with a statement, executed under the penalties of perjury, showing in full the purposes thereof and, in detail, all transactions incident to, or pursuant to the plan; 2. A complete statement of the cost or other basis of all property, including all stocks or securities transferred incident to the plan; 3. A statement of the amount of stock or securities and other property or money received from the exchange, including a statement of all distribution or other disposition made thereof. The amount of each kind of stock or securities and other property received shall be stated on the basis of the fair market value thereof at the date of the exchange; and cdt 4. A statement of the amount and nature of any liabilities assumed upon the exchange, and the amount and nature of any liabilities to which any of the property acquired in the exchange is subject. B. Every taxpayer, other than a corporation, a party to the reorganization, who received stock or securities and other property or money upon a tax-free exchange in connection with a corporate reorganization, shall incorporate in his income tax return for the taxable year in which the exchange takes place, a complete statement of all facts pertinent to the non-recognition of gain or loss upon such exchange, including: 1. A statement of the cost or other basis of the stock or securities transferred in the exchange; and 2. A statement in full of the amount of stocks or securities and other property or money received from the exchange, including any liabilities assumed upon the exchange, and any liabilities to which the property received is subject. The amount of each kind of stock or securities and other property (other liabilities assumed upon the exchange) received shall be set forth upon the basis of the fair market value thereof at the date of the exchange. C. Permanent records in substantial form shall be kept by every taxpayer who participates in a tax-free exchange in connection with a corporate reorganization showing the cost or other basis of the transferred property or money received (including any liabilities assumed on the exchange, or any liabilities to which any of the properties received were subject, in order to facilitate the determination of the gain or loss from a subsequent disposition of such stock or securities and other property received from the exchange (par. 9803-8, P-H 1963 ed.,p. 9611). In addition to the foregoing requirements, permanent records in substantial form must be kept by the corporation participating in the merger showing the information listed above in order to facilitate the determination of gain or loss from subsequent disposition of the stock received as a consequence of the merger. 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. cdt VICTOR A. DEOFERIO, JR. Deputy Commissioner of Internal Revenue