BIR Ruling No. 557-12

September 6, 2012 BIR RULING NO. 557-12 RR 6-2008; 00-000 Sycip Salazar Hernandez & Gatmaitan SyCip Law Center 105 Paseo de Roxas Makati City Attention: Attys. Mia G. Gentugaya Jose Florante M. Pamfilo Joy Stephanie C. Tajan Gentlemen : This refers to your letter dated April 29, 2011 requesting on behalf of your clients, Pacven Walden Ventures III L.P. (PW3), Sino-French Capital Investment Co. (Sino-French), OWWI Limited (OWWI), Nikko Pacven Walden Investments Ltd. (Nikko), Info Tech Ventures Ltd. (InfoTech), and Walden AB Ayala Ventures Co., Inc. (WAAVCI) [collectively the "Sellers"], for confirmation that the sale by the Sellers of their common shares of stock in Software Ventures International Corporation (SVI), a Philippine corporation whose shares are not traded in the Philippine Stock Exchange (PSE), is not subject to donor's tax under Section 7 (c) (c.1) (c.1.4) of Revenue Regulations No. 6-2008, in relation to Section 100 of the Tax Code of 1997. aCTADI It is represented that each of the Sellers is a venture capital fund; that a venture capital fund is engaged in making investments in and providing management assistance to innovative, growth-oriented businesses in various industries, for the purpose of achieving medium-to long term capital appreciation; that with the exception of OWWI, all the Sellers form part of Walden International, an established global venture capital firm; that at present, the Sellers hold an aggregate of 61,708,189 shares in SVI (the Shares),registered under their respective names in the books of the corporation; that their shareholdings and the respective acquisition costs are broken down as follows: Table 1. Seller No. of Shares Acquisition Cost PW3 27,927,012 PhP28,161,203.34 PhP3,763,392.84 US$1,820,496.79 Sino-French 3,464,016 PhP3,522,498.75 PhP470,895.00 US$222,916.02 OWWI 3,812,083 PhP3,416,694.35 Nikko 5,163,520 PhP5,228,953.70 PhP699,436.04 US$334,374.76 InfoTech 1,214,937 US$199,786.94 WAAVCI 20,126,621 PhP23,483,325.00 PhP3,139,300.00 US$998,287.11 Total 61,708,189 ========== that the Shares were obtained on various dates through a combination of the following modes: (1) subscription to unissued shares; (b) purchase of previously-issued shares; (c) stock splits; and (d) stock dividends. (a) With respect to PW3 Annex Document Title B Subscription Agreement dated May 21, 1996 C Deed of Sale dated May 31, 1996 (notarized on June 3, 1996) D Deed of Assignment dated June 26, 1998 E Secretary's Certificate dated April 25, 2011 (b) With respect to Sin-French Annex Document Title B Subscription Agreement dated May 21, 1996 C Deed of Sale dated May 31, 1996 (notarized on June 3, 1996) D Deed of Assignment dated June 26, 1998 E-1 Secretary's Certificate dated April 25, 2011 (c) With respect to OWWI Annex Document Title F Contract to Sell and Deed of Assignment of Shares dated January 3, 2007 (d) With respect to Nikko Annex Document Title B Subscription Agreement dated May 21, 1996 C Deed of Sale dated May 31, 1996 (notarized on June 3, 1996) D Deed of Assignment dated June 26, 1998 E-2 Secretary's Certificate dated April 25, 2011 (e) With respect to InfoTech Annex Document Title D Deed of Assignment dated June 26, 1998 E-3 Secretary's Certificate dated April 25, 2011 (f) With respect to WAAVCI Annex Document Title B Subscription Agreement dated May 21, 1996 C Deed of Sale dated May 31, 1996 (notarized on June 3, 1996) D Deed of Assignment dated June 26, 1998 E-4 Secretary's Certificate dated April 25, 2011 that on March 31, 2011, the Sellers sold the Shares to the following purchasers (collectively, the "Purchasers") for a total consideration of US$102,435.00 (the Selling Price),broken down as follows: aTHCSE Table 2. Seller No. of Shares Purchaser Selling Price PW3 7,066,582 Jae M. Guanio US$11,731.00 PW3 20,860,430 Lisa Guanio US$34,628.00 Sino-French 3,464,016 Florante A. Bautista US$5,750.00 OWWI 3,812,083 Florante A. Bautista US$6,328.00 Nikko 5,163,520 Abelardo Mondonedo US$8,571.00 InfoTech 1,214,937 Abelardo Mondonedo US$2,017.00 WAAVCI 20,126,621 Florentino Santos, Jr. US$33,410.00 that the sale of the Shares were prompted by the following reasons: (1) The Sellers are undergoing liquidation and, accordingly, need to liquidate their investment in SVI. The Sellers are undergoing liquidation, thus: (a) PW3 was automatically placed on liquidation when the second extension of its initial 10-year life expired on October 18, 2006. Aside from its investment in SVI, PW3 has liquidated all of its investments and has unliquidated investments only in one other company, which it is also trying to dispose of. (b) OWWI was placed under liquidation on October 18, 2010. (c) Nikko was placed under voluntary winding-up on September 5, 2006. With the exception of its investment in SVI, all of Nikko's investments have been liquidated. (d) InfoTech was voluntarily wound-up on June 4, 2007. With the exception of its investment in SVI, all of InfoTech's investments have been liquidated. (e) WAAVCI was dissolved and placed under liquidation on January 12, 2006. Aside from its investment in SVI, WAAVCI has liquidated all of its investments and has unliquidated investments only in one other company, which it is also trying to dispose of. (f) Sino-French is not under formal liquidation proceedings but has wound-up its business. With the exception of its investment in SVI, all of Sino-French's investments have been liquidated. that since late 2009, the Sellers have been trying to dispose of the Shares, but have encountered a number of obstacles in their various attempts to consummate a sale; that for instance, in November 2009, the Sellers received an offer from CBCP World Corporation (CBCP) to purchase the Shares for US$105,402.12; that however, the sale to CBCP was objected to by SVI because CBCP is allegedly a direct competitor of SVI; that on the other hand, in January 2010, the Sellers obtained an offer to purchase the Shares for US$163,693.87 from Mr. Renato Romeo; that however, eventually, Mr. Romero desisted from purchasing the Shares and decided to purchase only the shares belonging to another SVI investor which were being offered for sale together with the Sellers' Shares; that in June 2010, the Sellers obtained another offer to purchase from Anuncio Digital, Inc. (Anuncio),again the sale was objected to by SVI on the ground that Anuncio is a competitor of SVI; and that in November 2010, the Sellers and the Purchasers began to negotiate for the sale of the Shares and the sale was consummated and the Deeds of Absolute Sale were finally executed in March 2011. ECAaTS SVI's financial performance has deteriorated over the years. When the Sellers (or in the case of OWWI, its predecessor) invested in SVI in 1996 and 1998, SVI was one of the leading information technology services companies in the Philippines. Thus, the Sellers expected significant appreciation in the value of the Shares, and returns on their investment, within five years. On the contrary, however, the gross revenues of SVI and its subsidiaries have been declining, and the company has been incurring losses (save for the years 2002 and 2004 when SVI made a small profit) in the last decade. The table below summarizes the revenues and profits/losses of SVI and its subsidiaries from 2001 to 2009, as reported in SVI's Audited Financial Statements. Table 3. Fiscal Year Gross Revenue Net Income/(Loss) Ending (Amount in 000 Pesos) Before Tax December 31 (Amount in 000) Consolidated Parent (SVI Consolidated Parent (SVI (SVI and Only) (SVI and Only) Subsidiaries) Subsidiaries) 2001 - 1,072,426 - (108,2444) * 2002 - 116,404 - 21,242 2003 1,630,779 - (378,105) (387,210) 2004 1,494,565 - 34,984 23,344 2005 1,041,731 - 1,070 (254,969) 2006 455,410 533 (225,473) (227,708) 2007 260,363 1,566 (247,661) (254,323) 2008 285,367 691 (191,123) (252,929) 2009 196,524 689 (51,420) (74,052) that the foregoing demonstrate that in recent years, SVI has experienced negative growth, and its management has had limited success in reversing the trend. At present, it is a much smaller company than it was when the Sellers made their initial investment in 1996. As such, the Sellers no longer consider the Shares a significant asset and they no longer expect to realize any meaningful returns on their investment in SVI. Donor's Tax Assessment After the execution of the Deeds of Absolute Sale, the same (together with other supporting documents) were presented to BIR Revenue District Office (RDO) No. 39 (South Quezon City),where all the Sellers (save for WAAVCI) are registered, and RDO No. 050 (Makati City) where WAAVCI is registered, for computation of capital gains tax. Upon computation, both RDOs concluded that no capital gains taxes were due because the acquisition cost for the Shares were greater than both the Selling Price and the book value of the Shares. However, RDO 39 and RDO 050 concluded that, since the book value of the Shares was greater than the Selling Price, the Sellers should be liable for donor's tax on the difference between such book value and the Selling Price. The RDOs computation of the selling price, book value and acquisition cost are set out below: Table 4. Transaction Selling Price Book Value Acquisition Cost Seller: PW3 PhP510,638.69 PhP5,794,597.24 PhP20,595,553.24 Purchaser: Jae M. Guanio Seller: PW3 PhP1,507,322.21 PhP17,105,552.60 PhP60,797,723.24 Purchaser: Lisa Guanio Seller: Sino-French PhP250,291.75 PhP2,840,493.12 PhP13,245,077.32 Purchaser: Florante A. Bautista Seller: OWWI PhP275,451.51 PhP3,125,908.06 PhP26,016,876.87 Purchaser: Florante A. Bautista Seller: Nikko PhP373,087.05 PhP4,234,086.40 PhP19,805,945.40 Purchaser: Abelardo Mondonedo Seller: InfoTech PhP87,797.99 PhP996,248.34 PhP8,291,757.37 Purchaser: Abelardo Mondonedo Seller: WAAVCI PhP1,454,303.89 PhP16,556,870.59 PhP67,979,534.93 Purchaser: Florentino Santos, Jr. Based on the foregoing representations, you now request for confirmation of your opinion that the sale by the Sellers of their common shares of stock in SVI is not subject to donor's tax under Section 7 (c) (c.1) (c.1.4) of Revenue Regulations No. 6-2008, in relation to Section 100 of the Tax Code of 1997. SDHAEC In reply thereto, please be informed that Section 7 (c.1.4) of Revenue Regulations No. 6-2008, states that: "(c) Determination of Amount and Recognition of Gain or Loss. (c.1) Determination of Selling Price. In determining the selling price, the following rules shall apply:" (c.1.4) In case the fair market value of the shares of stock sold, bartered, or exchanged is greater than the amount of money and/or fair market value of the property received, the excess of the fair market value of the shares of stock sold, bartered or exchanged over the amount of money and the fair market value of the property, if any, received as consideration shall be deemed a gift subject to the donor's tax under Sec. 100 of the Tax Code, as amended ." (Underscoring supplied) corollarily, Section 100 of the Tax Code, as amended, provides thus: "Section 100. Transfer for Less Than Adequate and full Consideration . Where property, other than real property referred to in Section 24(D),is transferred for less than an adequate and full consideration in money or money's worth, then the amount by which the fair market value of the property exceeded the value of the consideration shall, for the purpose of the tax imposed by this Chapter, be deemed a gift, and shall be included in computing the amount of gifts made during the calendar year." Prescinding from the above-mentioned provisions, it is undisputed that there is no mentioned of any exempt transaction. The provisions are clear and free from any doubt or ambiguity. Hence, there is no room for interpretation. There is only room for application. ( Cebu Portland Cement Co. vs. Municipality of Naga, Cebu, et al. , G.R. No. 24116-17, August 22, 1968). The Supreme Court Decision in the case of Commissioner of Internal Revenue vs. B.F. Goodrich Phils., Inc. [now Sime Darby International Tire Co., Inc.] and the Court of Appeals ,G.R. No. 104171, February 24, 1999 which was used as reference in various BIR Rulings invoked is not applicable in this case because the issue resolved in that case was about prescription. It is noteworthy to state a significant portion of the said Decision, to wit: DaACIH "Ineludibly, the BIR failed to show that private respondent's 1974 return was filed fraudulently with intent to evade the payment of the correct amount of tax. Moreover, even though a donor's tax, which is defined as 'a tax on the privilege of transmitting one's property or property rights to another or others without adequate and full valuable consideration',is different from capital gains tax, a tax on the gain from the sale of the taxpayer's property forming part of capital assets, the tax return filed by private respondent to report its income for the year 1974 was sufficient compliance with the legal requirement to file a return. In other words, the fact that the sale transaction may have partly resulted in a donation does not change the fact that private respondent already reported its income for 1974 by filing an income tax return ." Accordingly, the sale of shares of stock in SVI by the Sellers at a price lower than the book value of the shares, undertaken for the bonafide business purpose of liquidation, is NEVERTHELESS SUBJECT to donor's tax as provided under Section 100 of the Tax Code, as amended, in relation to Section 7 (c.1.4) of Revenue Regulations No. 6-2008. 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. This REVOKES all previously issued rulings which are inconsistent herewith. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue