BDO Life Assurance Company, Inc.

May 3, 2021 BIR RULING NO. S40M-148-21 Sec. 40 (C) (2) & (6) (b), NIRC; RR No. 18-01; BIR Ruling Nos. 214-12 & 100-17 BDO Life Assurance Company, Inc. BDO Corporate Center, 7899 Makati Avenue Makati City Attention: AAA _______________ Gentlemen : This refers to your letter dated October 24, 2017 requesting for confirmation of your opinion that the statutory merger of BDO Life Assurance Holdings Corp. ("BDO Life Holdings"), as the absorbed corporation, and BDO Life Assurance Company, Inc. ("BDO Life"), as the surviving corporation, is a tax-free transfer/exchange pursuant to Section 40 (C) (2) in relation to Section 40 (C) (6) (b) of the National Internal Revenue Code, as amended (the "Tax Code"). Background BDO Life Holdings is a corporation duly organized and existing under the laws of the Philippines with Securities and Exchange Commission (SEC) Company Registration No. A199909579 and Tax Identification Number (TIN) 000-000-000-000, having its principal place of business at BDO Corporate Center, 7899 Makati Avenue, Makati City. BDO Life Holdings is engaged in the business of acquiring, purchasing, exchanging, assigning, gifting, and selling, assigning, transferring, exchanging, leasing, letting, developing, mortgaging, pledging, dealing, or otherwise operating, enjoying and disposing of all properties of every kind, and description, real, personal or otherwise, and wherever situated. BDO Life, on the other hand, is a corporation duly organized and existing under the laws of the Philippines with SEC Company Registration No. A199910386 and TIN 000-000-000-000, having its principal place of business at BDO Corporate Center, 7899 Makati Avenue, Makati City. BDO Life is engaged in the business of carrying on the business of life insurance in all its branches. BDO Life Holdings and BDO Life deemed it necessary and advisable to merge the corporations into one, with BDO Life as the surviving corporation, in order that greater efficiency and economy in the management and operations of the corporations may be achieved to their and their stockholders' advantage and welfare, since the corporations own, hold, and manage various assets for the same beneficial owner. The Plan of Merger was approved by a majority of the Board of Directors of BDO Life Holdings at its special meeting held on November 24, 2016, and was approved by a majority of the Board of Directors of BDO Life at its special meeting held on November 24, 2016. CAIHTE The Plan of Merger was approved by the stockholders of BDO Life Holdings ("BDO Life Holdings Shareholders") representing at least 2/3 of its outstanding capital stock at a special stockholders' meeting held on December 3, 2016, and was approved by the stockholders of BDO Life ("BDO Life Shareholders") representing at least 2/3 of its outstanding capital stock at a special stockholders' meeting held on December 3, 2016. The SEC approved the Articles and Plan of Merger on September 4, 2017, by virtue of which the SEC issued a Certificate of Filing of the Articles and Plan of Merger. Under the approved Articles and Plan of Merger, the merger shall become effective on the date when the Certificate of Merger shall have been issued and released by the SEC. Accordingly, the merger took effect on September 4, 2017 ("Effective Date of Merger"). Pursuant to the Plan of Merger, BDO Life will issue a total of 15,931,324 shares to the BDO Life Holdings Shareholders, which shares are composed of the 15,150,505 shares reacquired by BDO Life as a consequence of the merger, and 780,819 shares from the unissued authorized capital stock of BDO Life. BDO Life Holdings (Prior to the Effective Date of Merger) Type of Share Authorized Issued and Outstanding Par Value No. of Shares Amount Common 400,000 shares 100,002 shares P_____ 100,002 P__________ Preferred 3,300,000 shares 2,983,800 shares P_____ 2,983,800 P__________ BDO Life (Prior to the Effective Date of Merger) Type of Share Authorized Issued and Outstanding Par Value No. of Shares Amount Common 10,000,000 shares 2,500,002 shares P_____ 2,500,002 P__________ Preferred 14,000,000 shares 12,650,503 shares P_____ 12,650,503 P__________ Beginning on the Effective Date of Merger, the authorized capital stock and issued and outstanding capital stock of BDO Life are as follows: BDO Life (Beginning the Effective Date of Merger) Type of Share Authorized Issued and Outstanding Par Value No. of Shares Amount Common 10,000,000 shares 2,525,319 shares P_____ 2,525,319 P__________ Preferred 14,000,000 shares 13,406,005 shares P_____ 13,406,005 P__________ Based on the foregoing representations, you now request for your confirmation that: 1. The statutory merger of BDO Life and BDO Life Holdings qualifies for non-recognition of gain or loss for income tax purposes in accordance with Sections 40 (C) (2) in relation to 40 (C) (6) (b) of the Tax Code. Therefore, no gain or loss shall be recognized by BDO Life and BDO Life Holdings on the transfer of all assets and assumption of liabilities pursuant to the Articles and Plan of Merger, and neither BDO Life and BDO Life Holdings will be subject to income tax, withholding tax, or capital gains tax on the transfer. HEITAD 2. The transfer of assets by BDO Life Holdings to BDO Life pursuant to the merger is not subject to DST under Sections 199 (e) and (m) of the Tax Code. 3. The surrender by the BDO Life Holdings Shareholders of their BDO Life Holdings shares pursuant to the merger is not subject to DST. 4. The DST at the rate of P1.00 on each P200 par value, or fractional part thereof, shall be imposed on the following: (a) original issuance of BDO Life shares in favor of the BDO Life Holdings Shareholders as a consequence of the merger; and (b) issuance of BDO Life shares that were previously owned by BDO Life Holdings and were reacquired by BDO Life as a consequence of the merger, in favor of the BDO Life Holdings Shareholders. 5. The transfer of assets by BDO Life Holdings to BDO Life will not be considered as a transfer of property for an insufficient consideration subject to Donor's Tax since there is no intention to donate on the part of BDO Life Holdings and that the merger was undertaken purely for legitimate business purposes. 6. The transfer of assets by BDO Life Holdings to BDO Life pursuant to the merger is not subject to value-added tax (VAT). 7. Since the legal and beneficial ownership of excess creditable withholding taxes were effectively transferred to BDO Life as a consequence of the merger, BDO Life as the surviving corporation is now entitled to exercise all the attributes of ownership over them. Hence, BDO Life is entitled to carry forward and apply these excess creditable withholding taxes as credit against its Minimum Corporate Income Tax (MCIT) or regular corporate income tax liabilities. In reply thereto, please be informed as follows: 1. The foregoing merger of BDO Life and BDO Life Holdings is a merger within the contemplation of Section 40 (C) (2), in relation to Section 40 (C) (6) (b) of the Tax Code, as amended, because BDO Life shall acquire/assume all the assets and liabilities of BDO Life Holdings and the same is necessary and advisable and is to the advantage and welfare of the merging corporations and their respective stockholders since the corporations own, hold, and manage various assets for the same beneficial owner. Hence, the merger of BDO Life and BDO Life Holdings is being undertaken for a bona fide business purpose and not for the purpose of escaping the burden of taxation. The merger of BDO Life and BDO Life Holdings 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, in that no gain or loss shall be recognized by BDO Life Holdings, as the transferor of all assets and liabilities, to BDO Life pursuant to the Articles and Plan of Merger. Accordingly, no gain or loss shall be recognized by BDO Life, as the transferee, on its receipt of the assets and liabilities of BDO Life Holdings pursuant to and as a consequence of the merger. The basis of the shares of stocks to be received by Shareholders of BDO Life Holdings upon the exchange shall be the same as the basis of the properties, stocks or securities exchanged, decreased by (1) the money received, and (2) the fair market value of the other property/ies received and increased by (a) the amount treated as dividend of the shareholders and (b) the amount of any gain that was recognized in the exchange. (Sec. 40 (C) (5) (a) of the Tax Code) ATICcS The basis of the property transferred in the hands of the transferee (BDO Life),listed in Annex "A" hereof, shall be the same as it would be in the hands of the transferor (BDO Life Holdings) increased by the amount of the gain, if any, recognized to the transferor on the transfer. (Sec. 40 (C) (5) (b), supra ) If the amount of the liabilities assumed plus the amount of the liabilities to which the property is subject exceed the total of the adjusted basis of the property transferred pursuant to such exchange, then such excess shall be considered as a gain from the sale or exchange of a capital asset or of property which is not a capital asset, as the case may be. (Sec. 40 (C) (4) (b), supra ) The substituted bases of the properties transferred by BDO Life Holdings to BDO Life should strictly comply with the rule that cash and other cash items will be excluded from the computation of the adjusted bases of the properties transferred for purposes of determining whether liabilities assumed and to which the property is subject do not exceed the adjusted basis of the property transferred, pursuant to No. IV (A) (2) of Revenue Memorandum Ruling (RMR) No. 2-2002 dated June 10, 2002. ETHIDa Accordingly, the allocated shares and the substituted basis of the properties transferred by BDO Life Holdings shall be as follows: Assets Amount Allocated Liabilities Allocated Shares Substituted Basis Cash in bank __________ 2,121 __________ Available-for-sale financial assets-net __________ _____ 1,790,920 __________ Accrued income __________ _____ 311 __________ Investments in subsidiaries __________ _____ 14,137,972 __________ Total __________ 1 _____ 15,931,324 __________ Liabilities Amount Trade and other liabilities __________ Total __________ 2. No DST is due on the transfer of assets, consisting mainly financial assets, of BDO Life Holdings to BDO Life pursuant to the Articles and Plan of Merger under Section 199 (m) of the Tax Code, as amended by Republic Act No. 9243, in relation to Section 40 (C) (2) of the Tax Code, as amended. Furthermore, no DST is due on the transfer of shares of stock listed and traded through the local stock exchange that are legally and beneficially owned by BDO Life Holdings to BDO Life pursuant to the merger under Section 199 (e) of the Tax Code, as amended by Republic Act No. 9648. 3. No DST is due on the surrender by the BDO Life Holdings Shareholders of their BDO Life Holdings shares of stock for cancellation pursuant to the merger under Section 199 (m) of the Tax Code, as amended by Republic Act No. 9243, in relation to Section 40 (C) (2) of the Tax Code, as amended. 4. Pursuant to Section 174 of the Tax Code, as amended, DST at the rate of P1.00 on each P200 par value, or fractional part thereof, shall be imposed on the following: (a) original issuance of BDO Life shares in favor of the BDO Life Holdings Shareholders as a consequence of the merger; and (b) issuance of BDO Life shares that were previously owned by BDO Life Holdings and were reacquired by BDO Life as a consequence of the merger, in favor of the BDO Life Holdings Shareholders. 5. 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 BDO Life Holdings to donate to BDO Life its assets 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. 6. The transfer of assets/properties of BDO Life Holdings to BDO Life as a consequence of merger is not subject to value-added tax (VAT) pursuant to Section 105 of the Tax Code, as amended. The transfer of assets/properties to effectuate a merger is not made in the course of business but by operation of law pursuant to the merger. cSEDTC 7. The excess and unutilized creditable withholding taxes (CWT) of the absorbed corporation, BDO Life Holdings, as of the effective date of the merger, which form part of the assets to be transferred by the absorbed corporation to BDO Life as a consequence of the merger, may be applied as a tax credit by BDO Life against its income tax due for the taxable year 2017, the effective date of the merger being September 4, 2017, and in the succeeding taxable years, or may be the subject of a claim for refund or issuance of a tax credit certificate (TCC). 8. It is to be emphasized, however, that the net operating loss carry-over (NOLCO), under Section 34 (D) (3) of the Tax Code, and as implemented by RR No. 14-2001, of the Tax Code, of the Absorbed Corporation, if any, is not one of the assets of the latter that can be transferred and absorbed by the surviving corporation, as this privilege or deduction can be availed of by the absorbed corporation only. Accordingly, the tax-free merger between BDO Life Holdings and BDO Life does not cover the NOLCO of the former. However, in order that the above-described reorganization can be considered as merger under Section 40 (C) (2) and (6) (b) of the Tax Code, the parties to the merger should comply with the following requirements set forth under Revenue Regulations No. 18-2001: 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 all 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; 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, 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 stock or securities and other property or money received from the exchange, including any liabilities assumed upon the exchange, and any liabilities to which 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. 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 gain or loss from subsequent disposition of such stock or securities and other property received from the exchange. SDAaTC In addition to the foregoing requirements, the parties shall enclose with their respective income tax returns for the taxable year in which the tax-free exchange occurred a copy of the request for ruling filed with, and the corresponding ruling issued by the Bureau of Internal Revenue, both duly stamped received by the appropriate office of the Bureau of Internal Revenue. Such persons shall include as a note to their respective audited financial statements for the taxable year in which the exchange occurred a statement to the effect that they hold such assets/shares acquired in a tax-free exchange and the year in which such exchange occurred, and in the taxable years until the subject properties are subsequently transferred to another transferee. Moreover, the shareholders of both BDO Life Holdings and BDO Life shall record in their respective books of accounts the mandatory accounting entries stated in Annex "B" hereof, pursuant to Revenue Memorandum Order No. 17-2016. The parties shall cause to annotate at the back of the Transfer Certificates of Title and Certificates of Stock, as the case may be, the date the deed of exchange was executed, the original or historical cost of acquisition of the properties or shares of stock involved, and the fact that no gain or loss was recognized as a result of such exchange; provided however, that any violation by the Corporate Secretary of this condition shall be penalized under Section 275 of the same Code. It is further required that within ninety (90) days from receipt of this ruling, the parties to the transaction must submit to the Law and Legislative Division, Bureau of Internal Revenue, certified true copies by the Corporate Secretary, of duly annotated Certificates of Stock, in respect of the shares of stock of transferee corporation, including the allocation of shares and computation of the substituted bases of the properties which shall be in accordance with RMR No. 2-2002. 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. Very truly yours, (SGD.) CAESAR R. DULAY Commissioner of Internal Revenue ANNEX A List of Property/ies Transferred (Pursuant to Section 40 (C) (2) and 6 (c) of the TaxCode of 1997, Revenue Regulations No.18-2001 dated November 13, 2001, and Revenue Memorandum Order No.32-2001 dated November 28, 2001) Name of Transferee: BDO Life Assurance Company, Inc. Name of Issuing Corporation Type of Shares of Stock Stock Certificate No. Number of Shares BDO Life Assurance Company, Inc. Common HP 001 12,650,503 Common HP 017 2,499,995 Note: Since the issuing corporation is the Surviving Corporation, the shares of stock transferred shall be treated as Treasury Shares. ANNEX B Particulars Individual Shareholder's Book (The entry/ies shall be per individual shareholder of the absorbed corporation) Transferee's Book Journal Entry to Record the Tax-Free Exchange Investment in ___________________ (name of transferee) xxx.xx Investment in ___________________ (issuing corp.,for shares of stock) xxx.xx Investment in ____________________ (name of dissolving corporation) xxx.xx PPE Land & Improvement (for real props.) xxx.xx Dividend Income (net of FWT on dividend) xxx.xx Other Assets (as applicable) xxx.xx Liabilities xxx.xx Capital Stock xxx.xx Additional Paid-In Capital xxx.xx To record the Tax-Free Exchange (TFE) of investment in ___________ (share type) shares of ____________________ (name issuing corporation/s) with aggregate fair market value of P_______ in exchange for ____________________ (type and no. of share) of ____________________ (name of transferee) with par value of P____ per share. To record the Tax-Free Exchange (TFE) of real properties, investment in __________ (share type) shares of ____________________ (name issuing corp/s) , and other assets with aggregate fair market value of P_____, including liabilities assumed resulting from merger, in exchange for ____________________ (type and no. of share) of ____________________ (name of transferee) with par value of P_____ per share. Balance Sheet Notes Entry Investment includes ____________________ (no. and type of share/s) with par value of P______ in ____________________ (name of transferee) resulting from the Tax-Free Exchange of investment in ____________________ (no. and type of share/s) of ____________________ (issuing corporation/s) covered by Stock Certificate No/s. ______ which were acquired for the total cost of ____________________ (substituted basis) and which have fair market value as of the date of exchange amounting to P_______. Real properties, investment in _______________ (no. and type of share/s) of ____________________ (issuing corporation/s) and other assets were acquired through merger as evidenced by Plan of Merger and Articles of Merger, including the increase of the Authorized Capital Stock of ___________________ (name of transferee) , approved by the Securities and Exchange Commission on ________ (date) . The total acquisition cost/substituted cost to ____________________ (name of transferee) of the investment/s amounts to ____________________ (FMV at the time of exchange) . The real properties, investment/s and other assets were previously covered by Transfer Certificate of Title and Stock Certificate No/s. ______ issued by ____________________ (issuing corporation/s) and are now presently covered by Stock Certificate No/s. ______ constituting ____________ (no. and type of share/s) [total] shares in the name of ____________________ (name of transferee) . Proforma Entries to Record Subsequent Sale/ Transfer Cash or Accounts Receivables xxx.xx Cash or Accounts Receivables xxx.xx Investment in ____________________ (name of transferee) xxx.xx Investment in ____________________ (name of issuing corp.) /PPE Land & Improvement/Other Assets) xxx.xx Gain on Sale of Investment xxx.xx Gain on Sale of Investment xxx.xx To record subsequent sale/transfer of investment acquired thru Tax-Free Exchange To record subsequent sale/transfer of real properties, investment/s and/or other assets acquired thru Tax-Free Current xxx.xx Current xxx.xx Tax Payable xxx.xx Tax Payable xxx.xx Provision for Tax as follows: Provision for Tax as follows: Tax Type Tax Rate* Multiply By Amount Tax Type Tax Rate* Multiply By Amount 1) Net Capital Gains Tax 5% on P100,000 and 10% on excess Gains realized on TFE xxx.xx 1) Net Capital Gains Tax 15% Gains realized on subsequent sale of investment/s xxx.xx OR Stock Transaction Tax 1/2 of 1% FMV of inv/s at the time of the TFE OR Stock Transaction Tax 6/10 of 1% Selling price of investment at the time of subsequent sale 2) Net Capital Gains Tax 15% Gains realized on subsequent sale of investment/s xxx.xx Total Tax Payable xxx.xx OR Stock Transaction Tax 6/10 of 1% Selling Price of investment at the time of subsequent sale Total Tax Payable xxx.xx Tax Type Rate Multiply By Amount * If subsequent sale/s of investment/s was/were made before January 1, 2018, the tax rates used in the computation of Net Capital Gains Tax and Stock Transaction Tax at the time of tax-free exchange shall apply. 1) Withholding Tax ONETT 1.5% to 6% per RR No. 6-2001 Fair Market Value (FMV) of the property/ies at the time of subsequent sale/transfer xxx.xx * Computation of Gain Realised on Subsequent Sale of Investment: 2) Documentary Stamp Tax (DST) 1.5% for every P1,000 and fractional part thereof Selling Price xxx.xx 3) Value-Added Tax (VAT) 12% xxx.xx Total Tax Payable xxx.xx Less: Cost (Substituted Basis) xxx.xx Net Capital Gain on sale of unlisted shares xxx.xx ====== * Gain on sale of property/ies is subject to Normal Corporate Income Tax (NCIT) * Per RMO 17-2016, the substituted basis of the stock or securities received by the transferor on a tax-free exchange shall be as follows: (1) The original basis of the property, stock or securities to be transferred; (2) Less: (a) money received, if any, and (b) the fair market value of the other property received, if any; and (3) Plus: (a) the amount treated as dividend of the shareholder, if any, and (b) the amount of any gain that was recognized on the exchange, if any. * FMV at the time of subsequent sale/transfer refers to the selling price, zonal value or the value reflected in the tax declaration, whichever is highest. Footnotes 1. Based on the Audited Financial Statements as of December 31, 2016.