BIR Ruling [UN-080-94]

March 2, 1994 BIR RULING [UN-080-94] Angara Abello Concepcion Regala & Cruz Law Offices ACCRA Building 122 Gamboa St., Legaspi Village Makati, Metro Manila Attention: Atty . Rolando F . Del Castillo Gentlemen : This refers to your letter dated February 17, 1993 requesting for a ruling confirming that the transfer by ALCORN (PHILIPPINES), INC. (API) of a 2% participating interest in Block "C" of Service Contract no. 14 with the Republic of the Philippines covering the West Linapacan Oil Field in exchange for shares of stock of Unioil & Gas Development Corporation (UNIOIL) is a tax-free exchange under the provisions of Section 34(c) (2) and (6) (c) of the Tax Code, as amended. It is represented that API is a corporation organized under the laws of Delaware and has been duly authorized to engage in business in the Philippines by the Securities and Exchange Commission (SEC); that it is the holder of a 7.6% participating interest in Block "C" of Service Contract No. 14 with the Republic of the Philippines; that UNIOIL is a corporation organized under the Philippine laws and is presently actively engaged in oil explorations; that it had an authorized capital stock of ONE HUNDRED MILLION PESOS (P100,000,000.00) divided into TEN BILLION (10,000,000,000) shares, out of which a total of EIGHT BILLION EIGHT HUNDRED MILLION (8,800,000,000) shares were issued and outstanding; that its directors and stockholders duly approved an increase in its authorized capital stock from ONE HUNDRED MILLION PESOS (P100,000,000.00), consisting of TEN BILLION SHARES (10,000,000,000) to SIX HUNDRED MILLION PESOS (P600,000,000.00), consisting of SIXTY BILLION (60,000,000,000) shares of stock, each at the par value of one centavo (0.01), which has been subsequently approved by the SEC; that the lone subscriber to the increase in the authorized capital stock of UNIOIL was API, which was not a stockholder at all prior to the increase; that out of the increase of FIVE HUNDRED MILLION PESOS (P500,000,000.00), API subscribed to ONE HUNDRED TWENTY-FIVE MILLION PESOS (P125,000,000.00) shares, payment for which was by way of an assignment of a 2% participating interest in Block "C' of Service Contract No. 14, which came from API's present 7.6% interest; that after the increase in UNIOIL's capital stock was approved by the SEC, API obtained ownership of 58.68% of the total issued and outstanding capital stock of UNIOIL, thus obtaining control of UNIOIL within the meaning of Section 34(c) (2) and (6)(c) of the Tax Code, as certified by the Corporate Secretary of UNIOIL; that the amount of TWO MILLION FIVE HUNDRED THOUSAND United States Dollars (U.S. $2,500.000) paid by UNIOIL for each 1% participating interest in Block "C" of service Contract No. 14 is the fair market value of the participating interest; that very recently, in July of 1992, API sold a 1% participating interest in the same area to the Philodrill Corporation at a price of US$2.2 million for the 1% participating interest, plus reimbursement of API's development costs in the amount of FOUR HUNDRED THIRTY THOUSAND U.S. DOLLARS ($US$430,000.00) or a total of TWO MILLION SIX HUNDRED THIRTY THOUSAND U.S. DOLLARS (U.S.$2,630,000); that the price paid by UNIOIL to API for each 1% participating interest was slightly less than what had been paid by the Philodrill Corporation for its own participating interest, since in the case of the assignment to UNIOIL, it was not required to reimburse any of API's development costs; that the valuation of the 2% participating interest that was assigned to UNIOIL was duly approved by the Examination Division of the Securities and Exchange Commission; that the net book value of the properties transferred as of September 18, 1992 attributable to the 2% participating interest in Block "C" of Service Contract 14 sold to Unioil Exploration & Mineral Development Co., Inc. as per Agreement on Assignment of Participating Interest is U.S $1,272,693.00; and that you submitted to this Office photocopies of the following documents: 1. Certificate of Filing of Change of Name of a Foreign Corporation together with the Certificate of Incorporation and the amendments thereof; 2. Secretary's Certificate reflecting UNIOIL's increase in its authorized capital stock; 3. SEC Registration No. 138879 with the corresponding Amended Articles of Incorporation; 4. Deed of Sale and/or Assignment; 5. Certification by the Transferor as to the original or historical cost of acquisition/adjusted cost basis of the API's shares to be transferred to UNIOIL; and 6. Agreement on Assignment of Participating Interest. In reply thereto, please be informed that pursuant to Section 34, paragraphs (c)(2) and (6)(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 stock in such a 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 stocks received, i.e., total 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 stocks in the same transaction may be counted up to a maximum of five. Accordingly, your opinion that no gain or loss shall be recognized both to the transferor and the transferee corporation on the transfer by API of its 2% participating interest in Block C of Service Contract No. 14 with the Republic of the Philippines in exchange for shares of stock of the transferee corporation, UNIOIL, considering that as a consequence of the exchange, the transferor gained control of the transferee corporation by owning 58.68% of its voting stocks, is hereby confirmed. It should be emphasized, however, that Section 34(c) (2) and (6)(c) of the Tax Code merely defers recognition of the gain or loss from such transaction, for in determining the gain or loss from subsequent transaction of the properties or of the stocks involved in the exchange, the original or historical cost of the properties or stocks is considered. Thus, if the transferor later sells or exchanges the shares of stock acquired by it in the exchange, it shall be subject to income tax on gains derived from such sale or exchange, taking into consideration that the cost basis of the shares shall be the same as the original acquisition cost or adjusted cost basis to the transferor of the property exchanged therefor; and that the cost basis to the transferee of the property exchanged for stocks shall be the same as it would be in the hands of the transferor. (Section 34(c) (5)(a) and (b) of the Tax Code, as amended by Presidential Decree No. 1773). In this connection, your 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) and (6)(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 transaction was consummated, a complete statement of all facts pertinent to the exchange, including: 1. A description of the property transferred, or of its interest in such property, with a statement of the original acquisition cost/adjusted cost basis or other basis thereof at the time of the transfer; 2. The kind of stocks received and preferences, if any; 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 property 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 the 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. The parties shall also cause to be annotated on the Transfer parties shall also cause to be annotated on the Transfer Certificate of Title and at the back of the Certificate of Stock, 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. Moreover, pursuant to Section 196 of the Tax Code, as amended, as 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 property. (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 the aforesaid transfer (BIR Ruling No. 109-82 dated April 6, 1982). The value shall be the fair market value which shall not be less than the par value of the stocks. Finally, the certificates of stock to be issued by UNIOIL, which in all probability are, original issues, 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 real property may be registered by the Register of Deeds concerned in the name of the transferee corporation UNIOIL. 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. cdtech Very truly yours, JAIME M. MAZA Associate Commissioner (Legal Service)