Bureau of Local Government Finance Opinion

January 26, 2016 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION 1st Indorsement Respectfully returned to the OIC-Municipal Treasurer, Teresa, Rizal, the within letter dated November 3, 2015, seeking clarification whether the acquisition of Lafarge Republic, Inc. (LRI) shares by AEV-CRH Holdings, Inc. (AEV-CRH) can be subject to "Tax on the transfer of business of trade or activity" pursuant to the pertinent provision of Municipal Ordinance No. 7 (revised), s. 2014 of Teresa, Rizal. The above request is in relation to the letter of Atty. Andres David M. Bolinas , Legal Counsel of Lafarge Republic, Inc. (LRI) dated October 20, 2015, stating that the transaction between LRI and AEV-CRH on September 15, 2015, wherein 88.85% of LRI's shares were sold to AEV-CRH, cannot be subject to the tax on transfer of business provided under Section 2C.01, Chapter II, Article C of Municipal Ordinance No. 7 (revised), s. 2014 of said Municipality. Further, in the letter of Atty. Bolinas, it was clarified that 88.85% of LRI's shares, then owned by Lafarge Holdings Philippines, Inc.; Calumboyan Holdings, Inc.; Round Royal, Inc.; and South Western Cement Ventures, Inc., as well as an additional 10.24% then held by the public, were sold to and acquired by AEV-CRH on September 15, 2015. The particular transaction between LRI and AEV-CRH is the subject of the herein clarification whether such transaction can be considered as subject to tax provided under Section 2C.01. Article C of Municipal Ordinance No. 7 ("Ordinance"), which reads: "ARTICLE C Tax on the Transfer of Business or Activity SEC. 2C.01. Imposition of Tax . There is hereby levied a tax on the transfer of business of trade or activity by sale, donation, barter or any other form or mode of conveyance at the rate of one percent (1.1%) (sic) of the total consideration or in the absence of specific consideration, the gross sales or receipts of the preceding calendar year on file at the Municipal Treasurer's Office, or the fixed amount of Five Hundred Pesos (P500.00) whichever is higher." Based on the abovequoted provision of the Ordinance, it can be deduced that the law speaks of transfer of business or activity which by ordinary understanding would mean that there is an actual transfer or conveyance of the business or activity from the "owner" to the "new owner" either by sale, donation, barter or any other form or mode of conveyance. Clearly, however, based on the representations made by both parties, the OIC-Municipal Treasurer and Atty. Bolinas, the transaction involved the acquisition of the 88.85% shares from LRI by AEV-CRH Holdings, Inc. To be precise, there was no transfer of business or activity to speak of. LRI remains a business entity separate and distinct from AEV-CRH and therefore there is no transfer of business or activity but merely an acquisition of shares of stock which however, is not the subject of the aforequoted Section 2C.01 of the Ordinance. As already discussed above, there was no transfer of business trade or activity and the transaction involved the acquisition of shares of stock only. The foregoing considered, it is our view that said transaction is not subject to the " tax on the transfer of business of trade or activity " mentioned under Section 2C.01 of the Ordinance of Teresa, Rizal. Be guided accordingly. (SGD.) JOCELYN T. PENDON OIC-Executive Director ATTACHMENT Republic of the Philippines Municipal Government of Teresa Municipal Hall, M.L. Quezon Ave., Barangay Poblacion, Teresa, Rizal-1880 2340865 local 202 www.teresarizal.gov.ph Office of the Mayor Treasurer November 3, 2015 Atty. Jocelyn T. Pendon OIC-Executive Director, Bureau of Local Government Finance Department of Finance 8th Floor EPDC Building Bangko Sentral ng Pilipinas Complex Roxas Boulevard, Manila 1004 Dear Madam, This has reference to the attached letter of Atty. Andres David M. Bolinas, Legal Counsel of Lafarge Republic, Inc. dated October 20, 2015 stating that the transaction between said company and AEV-CRH Holdings, Inc. on September 15, 2015 wherein 88.85% of LRI shares which were sold to said holding company cannot be subject to the tax on transfer of business provided under Section 2C.01, Chapter II, Article C of Municipal Tax Ordinance No. 7, series of 2014 as revised (formerly Municipal Ordinance No. 16, series of 2005), to wit: "Section 2C.01. Imposition of Tax . There is hereby levied a tax on the transfer of business of trade or activity by sale, donation, barter, or any other form or mode of conveyance at the rate of one point one percent (1.1%) of the total consideration or in the absence of specific consideration, the gross sales or receipts of the preceding calendar year on file at the Municipal Treasurer's Office, or the fixed amount of Five Hundred Pesos (Php500.00) whichever is higher". CAIHTE In view hereof may we be clarified if the above mentioned transaction can be considered subject of our tax imposition as stated in the ordinance? If subject to our imposition what would be the basis of computation of tax on transfer of business? Is the sale of shares of stocks considered transfer of ownership as in the case of LRI and AEV-CRH? Your early response and assistance to this matter will be highly appreciated. Respectfully yours, (SGD.) ROMULO SJ. DORADO OIC-Municipal Treasurer Lafarge October 20, 2015 Mr. Romulo SJ. Dorado OIC Municipal Treasurer Municipality of Teresa Province of Rizal Dear Treasurer Dorado: We write to you further to our meeting held at the Mayor's Office last October 13, 2015, together with Administrator Butch Aquino and Mayor Raul Palino, where we discussed the recent transactions involving Lafarge Republic, Inc. (LRI) and whether such transactions are a 'transfer of business', within the purview and coverage of Section 2C.01, Chapter II, Art. C of Municipal Ordinance No. 16, series of 2005, which reads: SEC. 2C.01. Imposition of Tax. There is hereby levied a tax on the transfer of business of trade or activity by sale, donation, barter or any other form or mode of conveyance at the rate of one percent (1.1%) of the total consideration or in the absence of specific consideration, the gross sales or receipts of the preceding calendar year on file at the Municipal Treasurer's Office, or the fixed amount of Five Hundred Pesos (P500.00) whichever is higher. (Emphasis supplied) As explained during the meeting, 88.85% of LRI's shares, then owned by Lafarge Holdings Philippines, Inc.; Calumboyan Holdings, Inc.; Round Royal, Inc.; and South Western Cement Ventures, Inc., as well as an additional 10.24% then held by the public, were sold to and acquired by AEV-CRH Holdings, Inc. (AEV-CRH) on September 15, 2015. It bears stress that our company, LRI, still owns the business conducted at Teresa, same as prior to the change in LRI's stockholders. The business of LRI, including that in Teresa, remains to be with LRI. In stark contrast, the situation clearly being contemplated in the Ordinance above-quoted is the transfer of a business of trade or activity (in this case, the cement manufacturing business) to another party. Hence, had LRI sold its Teresa Plant to another company, such transaction may fall within the coverage of the Ordinance because there would be a transfer of the cement making business . The sale of shares resulting in a change of ownership of LRI, however, is NOT a transfer of LRI's cement making business. The merit in our position is established beyond all doubt by no less than the Ordinance itself. Section 2C.02 thereof states: "Section 2C.02. Rules and Regulations. 1. The new owner to whom the business was transferred shall be liable to pay the unpaid taxes, fees or charges due the former owner , if there is any. 2. The permit issued to the former owner shall be surrendered to the Municipal Treasurer, thru the Office of the Mayor, who shall cancel the same in his records. 3. Any person, natural or juridical , who was granted a permit to operate or conduct business or trade activity in this municipality who transferred his business to another , shall inform in writing the Chief, Business Permit and Inspection Division, Office of the Mayor within ten (10) days of such transfer, and submit a sworn statement of the gross sales or receipts of his business for the current year. 4. The Municipal Mayor or his authorized department head shall issue other necessary rules and regulations for the effective implementation of this article. (Emphasis supplied)" A cursory reading of the above-cited provision clearly shows that the subject tax can only apply when there is a transfer of the business from one person (whether natural or juridical) to another. The Ordinance therefore does NOT apply in our case. Indeed our transaction cannot be considered a transfer of business under the Ordinance when there is neither a transferor nor transferee. It would certainly be incomprehensible to consider LRI as both the transferor (former owner) and at the same time, the transferee (new owner). During our October 13 meeting, Mr. Aquino suggested that the " new owner " or 'transferee' being referred to, pertains to the new majority stockholders of LRI (AEV-CRH), while the " former owner " or 'transferor' pertains to LRI's previous majority stockholders (Lafarge Holdings Philippines, Inc.; Calumboyan Holdings, Inc.; Round Royal, Inc.; and South Western Cement Ventures, Inc.). This theory, however, is belied by, among others, items number 2 and 3 of the above-quoted provision. This theory simply cannot hold true because the permit being the subject of items number 2 and 3 above, is the business permit issued to LRI as the owner of the cement manufacturing business. There was no such permit issued to LRI's previous majority stockholders themselves; hence, they cannot, by any stretch of the imagination, be considered the " former owner " contemplated in the Ordinance. Conversely, it would be equally be absurd to consider AEV-CRH as the " new owner " in the context of the Ordinance, and in whose name the new business permit should then be issued by the municipality. Should we follow this concept, then the minority stockholders of LRI, including the public stockholders who acquired shares from the stock market, will also be considered a "new owner" necessitating each of them secure a business permit. Truth be told, even as AEV-CRH is the new majority owner of LRI, AEV-CRH is not and will not by itself directly engage in the cement manufacturing business and therefore need not and will not apply for a business permit for that purpose. At this point, it cannot be overstressed that the business of LRI remains to be with LRI. It has not, by virtue of the change in its shareholders, in fact and in law, transferred its business to any other person or entity. It is continuing its business and is therefore not surrendering its business permit for cancellation in the manner described in item 2 above-quoted. Furthermore, we would like to lay down the clear distinction between this transaction and the 2009 merger between FR Cement Corporation and Republic Cement Corporation (now LRI), which was the subject of a similar controversy. Unlike this present transaction, the 2009 merger may arguably be said to have some form of transfer involved, in relation to the Ordinance, as it in fact involved the surviving company (RCC) absorbing another company (FR Cement Corporation) and by operation of law, acquiring the latter's assets. Hence, in recognition of the remote probability of such a vague interpretation, we agreed to settle the issue amicably. This present transaction, however, is completely different, as elucidated above. DETACa We do trust that you will understand and see the clear merits in our position and we sincerely hope that we continue enjoying and strengthening our harmonious and mutually-beneficial relationship. Thank you very much. Very truly yours, (SGD.) ATTY. ANDRES DAVID M. BOLINAS Legal Counsel Lafarge Republic, Inc. Plant Sites: Bulacan Plant, Norzagaray Plant, Teresa Plant, Batangas Plant, & Danao Plant 25/F The Salcedo Tower, 169 H.V. Dela Costa Street Salcedo Village, 1227 Makati City, Philippines Tel: (632) 885-4599/238-9881 Fax: (632) 815-2668