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February 18, 2009

BIR RULING [DA-(S40M-003) 094-09]


40 (C) (2) & (6) (b); S-40-004-2003
Manabat San Agustin & Co.
6787 Ayala Ave.
1226 Makati City
Attention: Atty. Roberto L. Tan
Principal, Tax & Corporate Services
Gentlemen :
This refers to your letter dated November 28, 2008 requesting for confirmation
of your opinion that the merger of Calamba Steel Center, Inc. (CSCI) with United
Steel Center Manila, Inc. (USCMI), with the former as the surviving entity, qualifies
as a tax free merger under Section 40 (C) (2) of the National Internal Revenue Code
(NIRC) of 1997, as amended.
BACKGROUND
CSCI is a corporation duly organized and existing under Philippine laws with
principal office at Barangay Saimsim, Calamba City, Province of Laguna. It has an
authorized capital stock of Three Hundred Thirty Six Million Pesos
(P336,000,000.00) divided into Three Million Three Hundred Sixty Thousand Shares
(3,360,000) with a par value of P100.00 per share. CSCI is a 100% wholly owned
subsidiary of USCMI.
On the other hand, USCMI is a holding corporation duly organized and
existing under Philippine laws with principal office at Barangay Saimsim, Calamba
City, Province of Laguna. It has an authorized capital stock of Four Hundred Million
Pesos (P400,000,000.00) divided into Four Million Shares (4,000,000) with a par
value of P100.00 per share. USCMI is 90 percent-owned by Sumitomo Corporation
and 10 percent-owned by Mitsui & Co. Ltd. Sumitomo Corporation and Mitsui & Co.
Ltd. are both non resident Japanese corporations.
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Based on the audited financial statements as of December 31, 2007, USCMI


has total assets of P291,663,606.00, total liabilities of P110,206.00 and total
stockholders' equity of P291,553,400.00.
On August 27, 2008, the respective Board of Directors and stockholders of
CSCI and USCMI unanimously approved the merger of the two corporations whereby
USCMI will merge with and into CSCI, with CSCI as the surviving entity.
Since both corporations have the same ultimate parent, the merger is deemed
desirable in order to simplify operations and to achieve efficiency and economy of
operations by reducing administrative and operating costs involved in maintaining two
(2) separate entities.
Pursuant to their Plan of Merger dated September 24, 2008 and duly filed with
the Securities and Exchange Commission on September 26, 2008, the following are
the salient terms and conditions of the merger between CSCI and USCMI:
Upon effectivity of the merger, CSCI and USCMI will become a single
corporation with CSCI as the surviving corporation. USCMI will cease to exist and its
legal personality will be terminated.
CSCI will continue to possess all its rights, privileges, immunities and powers,
and will continue to be subject to all its duties, liabilities, existing prior to the Merger.
All rights, privileges, immunities, permits, franchises and powers that USCMI
owns will be transferred to CSCI in addition to those originally belonging to CSCI.
All assets belonging to USCMI as of December 31, 2007 based on its Audited
Balance Sheet, including real or personal, tangible, or intangible properties, all
receivables due on whatever account, including subscription to shares and choses in
action, and all and every other interest of, belonging to, or due to USCMI will be
transferred to CSCI without further act or deed.
ISDCHA

All liabilities and obligations of USCMI as of December 31, 2007 based on its
Audited Balance Sheet will effectively be transferred to and become the liabilities and
obligations of CSCI in the same manner as if CSCI had itself incurred such liabilities
and obligations.
Upon approval of the Merger by the SEC, and as consideration of the transfer
of the net assets or equity of USCMI as of December 31, 2007 based on its audited
balance sheet, CSCI will issue its existing 2,810,000 shares with a par value of
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P100.00 each or a total par value of P281,000,000.00 to Sumitomo Corporation and


Mitsui & Co. Ltd. as shareholders of USCMI and in addition, issue an additional
190,000 shares with a par value of P100.00 each or a total par value of P19,000,000
from its unissued capital stock. The excess in the value of the USCMI assets over the
value of the CSCI shares that will be issued to the shareholders of USCMI will be
treated as additional paid-in capital or surplus in the books of CSCI.
Based on the foregoing, you now request for confirmation of the following:
1. The above merger between CSCI and USCMI is a statutory and tax-free
merger under Section 40 (C) (2) and (6) (b) of the NIRC of 1997, as amended. Hence,
no gain or loss shall be recognized on the transfer of assets and liabilities of USCMI
to CSCI. The basis of the transferred assets and liabilities in the hands of CSCI shall
be the same as it would be in the hands of USCMI.
2. The transfer of assets of USCMI to CSCI pursuant to the merger is not
subject to value-added tax (VAT) and any unused input tax of USCMI as of the
effectivity of the merger shall be absorbed by USCMI as the surviving corporation
pursuant to Section 4.106-8 (b) (3) of Revenue Regulations (RR) No. 16-2005,
otherwise known as the Consolidated Value-Added Tax Regulations of 2005,
implementing Republic Act (R.A.) No. 9337.
3. The transfer of the assets and liabilities by USCMI to CSCI for the latter's
shares would not be considered as transfer of property for an insufficient
consideration subject to donor's tax since there is no intention to donate on the part of
the parties inasmuch as the transaction to be effected is purely for a business purpose.
4. The Net Operating Loss Carry Over (NOLCO) balance of USCMI shall
be transferred and vested in CSCI as a consequence of the merger and CSCI may
claim such NOLCO as a deduction from its gross income pursuant to Section 34 (D)
(3) of the NIRC of 1997, as amended, subject to the three (3) year period limitation.
SIaHTD

5. The transfer of assets of USCMI to CSCI pursuant to the merger is not


subject to documentary stamp tax (DST), pursuant to Section 199 (m) of R.A. No.
9243, otherwise known as An Act Rationalizing the Provisions on the Documentary
Stamp Tax (DST) of the NIRC of 1997, as amended, as implemented by RR No.
13-2004.
6. Finally, the cancellation of Sumitomo Corporation and Mitsui & Co.
Ltd.'s USCMI shares and the issuance of CSCI shares in favor of Sumitomo
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Corporation and Mitsui & Co. Ltd. in exchange for the cancelled shares as a
consequence of the merger is not subject to DST.
In reply thereto, please be informed as follows:
1. The above reorganization of CSCI and USCMI, with the former as the
surviving corporation, is a merger within the contemplation of Section 40 (C) (6) (b)
of the Tax Code of 1997, as amended, for the reason being that CSCI will
acquire/assume all the assets and liabilities of USCMI solely in exchange for stocks.
Hence, the merger is being undertaken for a bona fide business purpose, and not for
the purpose of escaping the burden of taxation.
caIACE

(a)

The merger of CSCI and USCMI qualifies for non-recognition of


gain or loss for income tax purposes in accordance with Section 40
(C) (2) of the 1997 Tax Code, as amended, that no gain or loss
shall be recognized by USCMI, as the transferor of all assets and
liabilities, to CSCI pursuant to the Plan of Merger; and

(b)

No gain or loss shall be recognized by CSCI, as the transferee, on


its receipt of the asset and liabilities of USCMI pursuant to and as
a consequence of the merger.

2. Section 105 of the Tax Code of 1997, as amended by R.A. 9337,


identifies the persons liable for the Value-Added-Tax. Thus,
"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.
aSIHcT

xxx

xxx

xxx."

However, Section 4.106-8 (b) (3) of Revenue Regulations (RR) No. 16-2005
specifically excludes mergers from being subject to output tax. Hence,
"SEC. 4.106-8.

Change or Cessation of Status as VAT-registered Person.

xxx
(b)

xxx

xxx

Not subject to output tax.

The VAT shall not apply to goods or properties existing as of the occurrence of
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the following:
(1)

...

(2)

...

(3) Merger or consolidation of corporations. The unused input tax of the


dissolved corporation, as of the date of merger or consolidation, shall be
absorbed by the surviving or new corporation."

Thus, the above-mentioned transaction shall not be subject to value-added tax,


and any unused input VAT of USCMI as of the effective date of merger will be
transferred to and absorbed by CSCI pursuant to Section 4.106-8 (b) (3) of RR No.
16-2005, otherwise known as the "Consolidated Value-Added Tax Regulations of
2005", the said transfer being considered a transaction "not subject to output tax"
under the said Section.
3. 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-USCMI to donate to CSCI its assets since the transaction is purely for
legitimate business purpose. Thus, the aforesaid merger will not be subject to gift tax
since there is no intention to donate, and the transaction is a bona fide merger effected
solely for business reasons.
TcIaHC

4. Section 34 (D) (3) of the Tax Code of 1997, as amended, and being
implemented by Revenue Regulations (RR) No. 14-2001, provides to wit:
"(3) Net Operating Loss Carry-Over. The net operating loss of the
business or enterprise for any taxable year immediately preceding the current
taxable year, which had not been previously offset as deduction from gross
income shall be carried over as deduction from gross income for the next three
(3) consecutive taxable years immediately following the year of such loss:
Provided, however, That any net loss incurred in a taxable year during which the
taxpayer was exempt from income tax shall not be allowed as a deduction under
this Subsection: Provided, further, That a net operating loss carry-over shall be
allowed only if there has been no substantial change in the ownership of the
business or enterprise in that

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Not less than seventy-five percent (75%) in nominal value of outstanding


issued shares, if the business is in the name of a corporation, is held by or on
behalf of the same persons; or
Not less than seventy-five percent (75%) of the paid-up capital of the
corporation, if the business is in the name of a corporation, is held by or on
behalf of the same persons.
For purposes of this Subsection, the term 'net operating loss' shall mean
the excess of allowable deduction over gross income of the business in a taxable
year:
TDaAHS

xxx

xxx

xxx."

In a merger, the surviving corporation (CSCI) succeeds to the rights and


liabilities of the absorbed corporation (USCMI) and merely carries on the identity of
the latter. Consequently, no gain was realized by the surviving corporation. (BIR
Ruling No. 112-96 dated October 25, 1996)
Accordingly, CSCI can claim as NOLCO deduction the NOLCO balance of
USCMI, which shall be transferred and vested in the surviving corporation by
operation of law pursuant to a statutory merger. (S-40-207-2001 dated October 24,
2001 citing BIR Ruling No. 137-99 dated August 31, 1999)
5. The transfer of assets by USCMI to CSCI shall not be subject to DST
pursuant to Section 199 (m) of the Tax Code, as amended by R.A. No. 9243, which
provides:
aACHDS

"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 the 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."

6. The transfer of the USCMI shares by Sumitomo Corporation and Mitsui


& Co. Ltd. in exchange for CSCI shares is exempt from DST pursuant to Section 199
(m) of the Tax Code, as amended. Section 199 (m) of the Tax Code provides that the
transfer of property pursuant to Section 40 (C) (2) of the Tax Code, wherein merger is
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covered is exempt from DST.


In BIR RULING NO. S-40-023-05, November 24, 2005, discussing the merger
between Air Liquide Pipeline Utilities Service, Inc. and Air Liquide-NCTO Industrial
Gas, Inc., the BIR held:
"No documentary stamp tax (DST) shall be due on the transfer by AL-NCTO of
its properties to ALPLUS pursuant to the merger transaction. Section 199 of the
Tax Code, as amended by R.A. No. 9243, expressly provides that transfer of
property pursuant to Section 40(C)(2) of the Tax Code is exempt from the DST.
However, the original issuance of shares of stock by ALPLUS to Air Liquide
Phils. Inc. is subject to the DST at the rate of P1.00 per P200.00, or fractional
part thereof, of the par value of such shares of stock."

For DST purposes, therefore, the transfer and issuance of the 2,810,000 CSCI
shares to the USCMI stockholders pursuant to a merger is an exempt transaction
under Section 199 (m) of the 1997 Tax Code, as amended.
On the other hand, the original issuance by CSCI of 2,810,000 and 190,000
shares to the stockholders of USCMI shall be subject to DST pursuant to Section 174
of the Tax Code, as amended.
7. The basis of the assets to be received by CSCI pursuant to the merger
shall be the same as it would be in the hands of USCMI. [Sec. 40 (C) (5) (a) and (b)
of the Tax Code of 1997].
Accordingly, the substituted bases of the assets transferred by USCMI to CSCI,
based on USCMI's audited financial statements as of May 31, 2005, are as follows:
ASSETS

Cash
Receivables
Other current assets
Deferred tax asset
Investment in subsidiaries
TOTAL

SUBSTITUTED BASIS
(ORIGINAL COST)
P3,347,400.00
5,644.00
336,263.00
16,499.00
287,957,800.00

P291,663,606.00
=============

On the other hand, the bases of the CSCI shares to be received by the
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stockholders of USCMI pursuant to the merger shall be the same as the basis of the
assets to be transferred therefor, decreased by the cash and the amount of liabilities to
which the aforesaid properties are subject.
cHDEaC

No. of Shares Allocated

190,000

Substituted Basis
(Net Book Value)
P291,553,400.00

Substituted Basis
Per Share
P1,534.49

It is understood, however, that upon the subsequent sale or exchange of the


assets acquired by CSCI, the gain derived from such sale or exchange shall be subject
to income tax.
Moreover, in order that the above-described reorganization can be considered
as merger under Section 40 (C) (2) of the Tax Code of 1997, the parties to the merger
should comply with the following requirements:
A.

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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 the cost or other basis of all


properties, 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; and

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(4)

B.

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.

Every taxpayer, other than a corporation, who is a 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:
TCaAHI

C.

(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 the stock or securities


and other property or money received from the exchange,
including any liability assumed upon the exchange, and any
liability 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 exchange.

Permanent 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 liability
assumed on the exchange, or any liability to which any of the
properties received were subject), in order to facilitate the
determination of gain or loss from a subsequent disposition of such
stock or securities and other property received from the exchange.
(par. 9803-8, Prentice Hall 1963, ed., p. 9611)
SaIHDA

In addition to the foregoing requirements, the parties shall enclose with their
respective income tax returns for the taxable year in which the merger occurred a
copy of the request for ruling filed with, and the corresponding ruling issued by, the
Bureau of Internal Revenue, both duly stamp-received by the appropriate office of the
Bureau of Internal Revenue. Such parties shall include as a note to their respective
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audited financial statements for the taxable year in which the merger occurred a
statement to the effect that they hold such assets/shares acquired in a merger and the
year in which such merger occurred, and in the taxable years until the subject
properties are subsequently transferred to another transferee.
Finally, the parties are required to submit proof of annotation of the substituted
basis of the shares of stock and/or real properties involved in the transfer within
ninety (90) days from receipt of this ruling. Violation of this requirement is subject to
the penalties provided in Section 275 of the Tax Code of 1997.
cADEIa

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 is not complied with, then this ruling
shall be considered null and void.

Very truly yours,


Commissioner of Internal Revenue
By:

(SGD.) JAMES H. ROLDAN


Assistant Commissioner
Legal Service
Bureau of Internal Revenue

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