Quisumbing Torres

June 30, 2022 BIR RULING NO. OT-338-2022 Sec. 28 (B) (5) (c), 40 (C) & (6) (c), Tax Code of 1997, as amended; BIR Ruling No. 377-19; BIR Ruling No. DA-150-00 Quisumbing Torres 12th Floor, Net One Center 26th Street corner 3rd Avenue Crescent Park West, Bonifacio Global City 1634 Taguig City Attention: AAA BBB Gentlemen : This refers to your letter dated March 19, 2020 requesting on behalf of your client, Infinera International Corporation (" Infinera ") for confirmation that the transfer of the shares of capital stock of Coriant Philippines, Inc. [formerly Tellabs Philippines, Inc.] (" Coriant Ph ") from Coriant International, Inc. [formerly Tellabs International, Inc.] (" Coriant US ") to Infinera, pursuant to an offshore merger between Coriant US and Infinera, is not subject to the capital gains tax (CGT) imposed under Section 28 (B) (5) (c) of the National Internal Revenue Code of 1997 (Tax Code), as amended. Background Infinera is a corporation duly organized and registered under the laws of the State of Delaware, United States of America (USA), with principal office at 160 Greentree Drive, Suite 101 Dover Delaware 19904, United States. Coriant US was a corporation duly organized and registered under the laws of the State of Illinois, United States of America. Coriant US was the legal and beneficial owner of 106,955 shares and beneficial owner of five (5) shares in Coriant Ph, which represent 100% of the total subscribed capital stock of Coriant Ph. Effective December 31, 2019, Infinera and Coriant US merged, with Infinera as the surviving corporation. As a consequence of the merger, the shares of the capital stock of Coriant Ph were transferred from Coriant US to Infinera by operation of law. In reply thereto, please be informed as follows: Income Tax/CGT Sections 40 (C) (2) and 6 (b) of the Tax Code, as amended, does not make any qualification or distinction as to its application to a corporation. Thus, its application to non-resident foreign corporation is well-settled. 1 It provides: "SEC. 40. Determination of Amount and Recognition of Gain or Loss. xxx xxx xxx (C) Exchange of Property. xxx xxx xxx (2) Exception. No gain or loss shall be recognized if in pursuance of a plan of merger or consolidation (a) A corporation, which is a party to a merger or consolidation, exchanges property solely for stock in a corporation, which is a party to the merger or consolidation; or (b) A shareholder exchanges stock in a corporation, which is a party to the merger or consolidation, solely for the stock of another corporation also a party to the merger or consolidation; or (c) A security holder of a corporation, which is a party to the merger or consolidation, exchanges his securities in such corporation, solely for stock or securities in such corporation, a party to the merger or consolidation . xxx xxx xxx (6) Definitions. xxx xxx xxx (b) The term 'merger' or 'consolidation,' when used in this Section, shall be understood to mean: (i) the ordinary merger or consolidation; or (ii) the acquisition by one corporation of all or substantially all the properties of another corporation solely for stock: Provided, That for a transaction to be regarded as a merger or consolidation within the purview of this Section, it must be undertaken for a bona fide business purpose and not solely for the purpose of escaping the burden of taxation: Provided, further, That in determining whether a bona fide business purpose exists, each and every step of the transaction shall be considered and the whole transaction or series of transactions shall be treated as a single unit: Provided, finally, That in determining whether the property transferred constitutes a substantial portion of the property of the transferor, the term 'property' shall be taken to include the cash assets of the transferor." The application of Section 40 (C) (2) of the Tax Code, as amended, to nonresident foreign corporation is well-settled. Section 40 (C) (2) of the Tax Code, as amended, does not make any qualification or distinction as to its application to a corporation. It provides that: "No gain or loss shall also be recognized if property is transferred to a corporation by a person, alone or together with others, not exceeding four (4) persons, in exchange for stock or unit of participation in such a corporation of which as a result of such exchange the transferor or transferors, collectively, gains or maintains control of said corporation: Provided, That stocks issued for services shall not be considered as issued in return for property." In a merger, the surviving/absorbing corporation succeeds to the rights and liabilities of the absorbed corporation and merely carries on the identity of the latter. 2 The underlying assumption of tax-free exchange provisions generally is that the new property received is substantially a continuation of the old investment still unliquidated. 3 Hence, a merger does not involve a sale, exchange or disposition of shares. Therefore, the transfer of the shares of capital stock of Coriant Ph from Coriant US (absorbed corporation) to Infinera (surviving corporation) pursuant to a merger effected in accordance with the laws of the State of Delaware, USA is not subject to the CGT imposed under Section 28 (B) (5) (c) of the Tax Code, as amended. Applying the above-quoted provisions in this case, the merger of Infinera and Coriant US is a merger within the contemplation of Section 40 (C) (2), in relation to 40 (C) (6) (b) of the Tax Code, as amended, because upon the effective date of the merger, all property, assets, rights and interests owned by Coriant US shall, in accordance with the Delaware General Corporation Law, immediately vest in Infinera subject to any liabilities, charges, debts and provisos attached thereto. Such merger is being undertaken for a bona fide business purpose as a matter of strategic management to consolidate ownership in the companies' assets and liabilities and not for the purpose of escaping the burden of taxation. Thus, it qualifies for non-recognition of gain or loss for income tax purposes in accordance with Section 40 (C) (2) of the Tax Code, as amended, and that no gain or loss shall be recognized by Coriant US, as the transferor of all its assets and liabilities, to Infinera pursuant to the merger. Likewise, no gain or loss shall be recognized by Infinera, on its receipt of the Coriant US shares pursuant to and as a consequence of the merger. Cost Basis Section 40 (C) (5) (a) and (b) of the Tax Code, as amended, states: "SEC. 40. Determination of Amount and Recognition of Gain or Loss. xxx xxx xxx (C) Exchange of Property. xxx xxx xxx (5) Basis. (a) The basis of the stock or securities received by the transferor upon the exchange specified in the above exception shall be the same as the basis of the property, stock or securities exchanged, decreased by (1) the money received and (2) the fair market value of the other property received, and increased by (a) the amount treated as dividend of the shareholder and (b) the amount of any gain that was recognized on the exchange: Provided, That the property received as 'boot' shall have as basis its fair market value: Provided, further, That if as part of the consideration to the transferor, the transferee of property assumes a liability of the transferor or acquires from the latter property subject to a liability, such assumption or acquisition (in the amount of the liability) shall, for purposes of this paragraph, be treated as money received by the transferor on the exchange: Provided, finally, That if the transferor receives several kinds of stock or securities, the Commissioner is hereby authorized to allocate the basis among the several classes of stocks or securities. (b) The basis of the property transferred in the hands of the transferee shall be the same as it would be in the hands of the transferor increased by the amount of the gain recognized to the transferor on the transfer." Indubitably, the basis of the Coriant Ph shares in the hands of the transferee (Infinera) shall be the same as it would be in the hands of the transferor (Coriant US) increased by the amount of the gain, if any, recognized to the transferor on the transfer. Value-Added Tax (VAT) Section 105 of the Tax Code, as amended, reads: "SEC. 105. Persons Liable. Any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to the value-added tax (VAT) imposed in Sections 106 to 108 of this Code . xxx xxx xxx The phrase 'in the course of trade or business' means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a non-stock, non-profit private organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members or their guests), or government entity." In view thereof, the transfer of the Coriant Ph shares as a consequence of the merger is not subject to VAT pursuant to Section 105 of the Tax Code, as amended. The transfer of the Coriant Ph shares to effectuate a merger is not made in the course of business but by operation of law pursuant to the merger. Donor's Tax Well-settled in our jurisprudence is the fact that the essential elements of a valid donation are: (1) the reduction of the patrimony of the donor; (2) the increase in the patrimony of the donee; and, (3) the intent to do an act of liberality ( animus donandi ). Clearly, there is no intention on the part of any of the parties to the merger Coriant US to donate to Infinera its Coriant Ph shares since the transaction is purely for a legitimate business purpose. Thus, the merger will not be subject to donor's tax since there is no intention to donate and the transaction is a bona fide merger effected solely for business reasons. Documentary Stamp Tax Section 199 (m) of the Tax Code, as amended by Republic Act (RA) No. 9243 and as implemented by Revenue Regulations (RR) No. 13-2004, states as follows: "SEC. 199. Documents and Papers Not Subject to Stamp Tax. The provisions of Section 173 to the contrary notwithstanding the following instruments, documents and papers shall be exempt from documentary stamp tax: xxx xxx xxx (m) Transfer of property pursuant to Section 40(c)(2) of the National Internal Revenue Code of 1997, as amended." Thus, no DST is due on the surrender by Coriant US shareholders of their Coriant Ph shares for cancellation pursuant to the merger. Also, while Section 9 of RR No. 13-2004 states that the shares of stocks issued in exchange of property is subject to DST due under Section 174 of the Tax Code, as amended, if they are original issues, still, the shares of stock issued by Infinera is not subject to DST on original issuance of shares under Section 174 of the Tax Code, as amended, because Infinera is a corporation organized and existing under the laws of Delaware, USA, therefore, not within the Philippine taxing jurisdiction. Section 173 of the Tax Code, as amended, only imposes DST on obligations or rights arising from Philippine sources or property situated in the Philippines. Strict compliance of requirements to avail non-recognition of gains provided for in Section 40 (C) (2) and (6) (c) of the Tax Code In order that the parties to the exchange can avail of the non-recognition of gains provided for in Section 40 (C) (2) of the Tax Code, as amended, they should comply with the requirements hereunder mentioned. The parties shall cause the Corporate Secretary of Coriant Ph to annotate at the back of the Certificates of Stock the date the merger was executed, the original or historical cost of acquisition of the shares of stock involved, and the fact that no gain or loss was recognized as a result of such merger; provided however, that any violation by the Corporate Secretary of this condition shall be penalized under Section 275 of the Tax Code, as amended. It is further required that the Certificate of Stock that bears the annotation of substituted bases of the shares of stock transferred/received in connection with this transaction, as duly certified by the Corporate Secretary, should be submitted to the Law and Legislative Division, Bureau of Internal Revenue, 7/F National Office Building, Diliman, Quezon City within ninety (90) days from the date of the receipt of this Ruling, by any of the parties to the transaction. Otherwise, this ruling shall be void and without effect, and the Chief, Law and Legislative Division shall refer the docket of the case to the Prosecution Division for appropriate action. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) CAESAR R. DULAY Commissioner of Internal Revenue Footnotes 1. BIR Ruling No. 377-2019 dated July 5, 2019. 2. BIR Ruling No. UN-397-95 dated October 14, 1995 citing Cashman vs. Brownlee , 27 N.E. 560. 3. BIR Ruling No. 024-05 dated December 23, 2005.