BIR Ruling [UN-221-94]

July 25, 1994 BIR RULING [UN-221-94] Sycip, Gorres, Velayo & Co. 6760 Ayala Avenue Makati, Metro-Manila Attention: Atty . F . G . Tagao Gentlemen : This refers to your letter dated June 8, 1994 requesting a ruling confirming your opinion to the effect that the conversion into paid-in capital or surplus of a substantial portion of your client's, Koppel, Inc. (KI), outstanding payables to Asia Industries, Inc. (AII), amounting to a total of P114,727,398.00 as of December 31, 1988 which was used to wipe out KI's accumulated deficit of P114,727,398.00 as of the same period is a capital transaction and, therefore, not subject to donor's tax, as well as to income tax. It is represented that KI is a domestic corporation duly organized and existing under Philippine law engaged primarily in the manufacturing business; that as of December 31, 1988, KI had outstanding liabilities (payables) to its sole stockholder, AII, amounting to P126,920,735.00; that as of the same period, that is, the year ending December 31, 1988, KI had an accumulated deficit in the amount of P114,727,398.00; that in KI's desire to wipe out the said accumulated deficit, KI implemented a recapitalization plan, with prior approval of AII as well as the Securities and Exchange Commission, whereby a substantial portion of its outstanding payables as of December 31, 1988 to AII in the amount of P114,727,398.00 was converted instead into paid-in capital of surplus; that no issuance of new shares was involved, in the conversion of the liability into paid-in capital or surplus, as the recapitalization plan has been pursued solely to improve the equity position of the company; that books of the company will show the resultant elimination of the deficit and an increase in the capital contribution of AII without, however, increasing the number of shares issued. In reply, please be informed that your opinion that the conversion into paid-in capital or surplus amounting to P114,727,398.00 representing a substantial portion of Koppel, Inc.'s payables as of December 31, 1988 to Asia Industries Inc., constitutes additional capital contribution on the part of Asia Industries Inc. is a capital investment not subject to the donor's tax because there is no donative intent in a debt-to-equity conversion transaction is hereby confirmed. Moreover, being a capital investment, the same is not within the purview of the term "taxable income" as defined in Section 28 in relation to Section 29 of the Tax Code, as amended, hence, the amount of P114,727,398.00 as stockholder's contribution is not subject to income tax. (BIR Ruling No. 270-87 dated September 8, 1987). cdtech Very truly yours, ALICIA P. CLEMENO Actg. Assistant Commissioner Legal Service