Tax Consequence of the Proposed Transfer

December 15, 1989 BIR RULING NO. 257-89 34 (c) (2) (c) 227-89 257-89 Gentlemen : This refers to your letter dated November 21, 1989 stating that San Miguel Corporation (SMC) is a corporation duly organized and existing under and by virtue of the laws of the Philippines; that Coca-Cola Bottlers, Philippines, Inc. (CCBPI) is likewise a domestic corporation duly organized and existing under the laws of the Philippines; that CCBPI has an authorized capital stock of 3,200,000 shares divided into 2,700,000 common shares (voting) and 500,000 preferred shares (non-voting) all with par value of P1,000.00 per share; that of the 2,700,000 common shares, 800,000 shares have been fully subscribed and paid-up; that seventy percent (70%) of the subscribed common shares is owned by SMC and thirty percent (30%) is owned by the Coca-Cola Export Corporation; that SMC is the absolute and exclusive owner of real estate properties with a total fair market value of P376,000,000.00 per appraisals of Cuervo Appraisers, Inc. conducted during the first quarter of 1989; that SMC intends to transfer and assign the aforesaid real properties in exchange for 376,000 common shares which CCBPI will issue from out of the unsubscribed and unissued common shares; and that after the transfer, SMC will continue to retain control of the corporation by owning more than 51% of the total voting power of all classes of stock entitled to vote. In connection therewith, you now request confirmation of your opinion to the effect that no gain or loss shall be recognized on the proposed transfer considering that as a result of the said exchange, SMC will retain control of CCBPI. In reply, I have the honor to inform you that pursuant to Section 34 paragraph (c)(2)(c) of the Tax Code, as amended by Republic Act No. 4522 and P.D. Nos. 1705 and 1773, no gain or loss shall be recognized if property is transferred to a corporation by a person, in exchange for shares stock in such corporation of which as a result of such exchange, said person, alone or together with others, not exceeding four persons, gains control of said corporation. The term "control" shall mean ownership of stocks in a corporation possessing at least 51% of the total voting power of all classes of stocks entitled to vote. Control is determined by the amount of stock received, i.e., subscribed, whether for property or for services by the transferor or transferors. In determining the 51% stock ownership, only those persons who transferred property for stock in the same transaction may be counted up to a maximum of five. Accordingly, no gain or loss shall be recognized both to the transferor and the transferee corporation on the transfer by SMC of its real properties in exchange for shares of stock of CCBPI considering that after the exchange and as a result of the exchange, SMC will retain control of the transferee corporation. It should be emphasized, however, that Section 34(c)(2)(c) of the Tax Code merely defers recognition of gain or loss from such transaction, for in determining the gain or loss from a subsequent transaction of the properties or of the stocks involved in the exchange, the original or historical cost of the properties or the stocks is considered. Thus, if the transferors later sell or exchange the shares of stock acquired by them in the exchange, they shall be subject to income tax on the gains derived from such sale or exchange, taking into consideration that the cost basis of the shares of stock shall be the same as the original acquisition cost or adjusted cost basis to the transferors of the properties exchanged therefor; and that the cost basis to the transferee of the properties exchanged for stocks shall be the same as it would be in the hands of the transferor. [Section 34(c)(5)(a) and (b), Tax Code, as amended by Presidential Decree No. 1773] In this connection, you are further advised that in order that the parties to the exchange can avail of the non-recognition of gains provided for in Section 34(c)(2)(c) of the Tax Code, as amended, they should comply with the requirements hereunder mentioned: (a) The transferor must file with its income tax return for the taxable year in which the exchange was consummated a complete statement of all facts pertinent to the exchange, including: 1. A description of the properties transferred, or of its interest in such properties, together with a statement of original acquisition cost or other basis thereof and the adjusted cost basis at the time of the transfer; 2. The kind of stock received and preferences, if any; cd i 3. The number of shares of each class received; and 4. The fair market value per share of each class at the date of the exchange. (b) On the other hand, the transferee corporation must file with its income tax return for the taxable year in which the exchange was consummated the following: 1. A complete description of the property received from the transferor; 2. A statement of the original acquisition cost or other basis of the properties in the hands of the transferor and the adjusted cost basis thereof at the time of the transfer; and 3. Information with respect to the capital stock of the corporation including: a. The total issued and outstanding capital stock immediately prior to and immediately after the exchange, with a complete description of each class of stock; b. The classes of stocks and number of shares issued to the transferor in the exchange; and c. The fair market value as of the date of exchange of the capital stock issued to the transferor. In addition to the foregoing requirements, permanent records in substantial form must be kept by the taxpayers participating in the exchange, showing the information listed above in order to facilitate the determination of gain or loss from a subsequent disposition of stocks/properties received in the exchange. Moreover, pursuant to Section 196 of the Tax Code, as amended, a conveyance or deed whereby land is assigned or transferred to the purchaser is subject to documentary stamp tax based on the consideration or value received or contracted to be paid for such realty. A stock in a corporation is a valuable consideration for transfer of real properties (Section 177, Documentary Stamp Tax Regulations). Accordingly, if a parcel of land, is exchanged with stocks in a corporation as in this case, the latter is the consideration, the value of which shall be the basis of the documentary stamp tax on the Deed of Assignment executed to effect said transfer. (BIR Ruling No. 245-00-000-00-109-82 dated April 6, 1982) Furthermore, under Section 248(d) in relation to Section 173 of the Tax Code, as amended by Executive Order No. 273, in case of failure to affix the proper documentary stamp tax to a document or instrument, there shall, for every violation, be imposed, in addition to the amount of documentary stamp tax required to be paid, an amount equivalent to 25% of such unpaid amount which shall be in lieu of the interest prescribed in Section 249 of the same Code. Finally, the certificates of stocks to be issued by CCBPI are, in all probability, original issues, which are subject to the documentary stamp tax imposed by Section 175 of the Tax Code, as amended. After payment of the corresponding documentary stamp tax, the aforesaid real properties may be registered by the Registers of Deeds concerned in the name of the CCBPI. aisadc Very truly yours, (SGD.) JOSE U. ONG Commissioner