APAC Tax Matters: November 2012

Philippines

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Prescriptive period for tax-free exchange rulings under Section 40(C)(2) of the Tax Code

Property-for-share swaps under Section 40(C)(2) of the Tax Code, on which transferors not more than five (5) who gain at least 51% of the voting stock of the transferee-corporation, are required to be covered by rulings issued by the Bureau of Internal Revenue (BIR).

These rulings issued under Section 40(C)(2) of the Tax Code shall be valid only for ninety (90) days counted from the date of receipt of the ruling by any of the parties to the exchange transaction. The properties and shares of stock involved in the transfer should be conveyed to the transferee/s and transferor/s, respectively, within this period.

A photocopy of the Transfer Certificate of Title (TCT) or Condominium Certificate of Title (CTC) or Share of Stock that bears the annotation of the substituted basis of the real property/shares of stock transferred/received in connection with the transaction, duly certified by the Register of Deeds/Corporate Secretary, should be submitted to the Law Division of the Bureau of Internal Revenue also within 90 days from the receipt of the ruling or certification, by any of the parties to the exchange transaction.

Any violation of the RMC by any of the parties to the exchange transaction or by any public officer or employee shall be subject to the appropriate penalties under Section 269 and 275 of the Tax Code.

Revenue District Offices are directed not to honor such rulings beyond 90 days counted from the date of receipt of the ruling by any of the parties to the exchange transaction, unless an extension of period is granted by the Commissioner of Internal Revenue in meritorious cases. (Revenue Memorandum Circular (RMC) No. 40-2012 dated 3 August 2012)


Upstream Mergers

In an upstream merger where (i) the parent company (surviving corporation) merges with its wholly-owned subsidiary (absorbed corporation), (ii) as a result of the merger, the subsidiary transfers its assets to its parent but (iii) the parent/surviving company does not issue shares for the assets received from the subsidiary/absorbed corporation, the BIR has ruled that the upstream merger is not considered a tax-free merger under Section 40(C)(2) of the Tax Code.

The transfer of assets to the parent without the issuance of shares of stock to the subsidiary in exchange for the assets partakes of a donation made by the subsidiary to its parent, contrary to what is contemplated in Section 40(C)(2) of the Tax Code. (BIR Ruling No. 508-2012 dated 3 August 2012)

Donations to strangers are subject to a 30% donor’s tax.


Grace period for listed companies to comply with the Philippine Stock Exchange’s minimum public ownership requirement

Listed companies with the Philippine Stock Exchange (PSE) are given a grace period of up to 31 December 2012 to comply with the minimum public ownership (MPO) requirement. Immediately after the grace period, the PSE will impose a trading suspension on the said listed shares for a period not more than six (6) months.

The sale of said shares during the trading suspension may be effected only outside the trading system of the PSE and shall be subject to the regular 5%/10% capital gains tax and seventy-five centavos (0.75) on each two hundred pesos (P200.00) documentary stamp tax of the par value of the stock.

If the fair market value of the shares of stock sold is greater than the consideration or selling price, the amount by which the fair market value of the shares exceeds the selling price shall be deemed a gift that is subject to donor’s tax under Section 100 of the Tax Code.

Absent any issuance by the BIR to the contrary, the rules set out in Revenue Regulations No. 6-2008 for determining the fair market value of listed shares of stock which were sold, transferred or exchanged outside of the trading system and/or facilities of the PSE shall apply. (PSE Memorandum CN No. 2012-0046 dated 22 August 2012)

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