A MERGER IS TAX-FREE ONCE REQUIREMENTS ARE COMPLIED WITH

A Co. is seeking confirmation whether its merger with W Co. qualifies as a tax-free merger under Section 40(C)(2) of the Tax Code, as amended. In reply, the Bureau opined that since the merger will result in specific benefits to both corporations, the merger of W Co. and A Co. is ascertained to be for business purposes and not to escape the burden of taxation. Hence, per Section 40(C)(2) of the Tax Code, the merger qualifies for non-recognition of gain or loss for income tax purposes. Likewise, since there is no intention for W Co. to donate to A Co. its assets, the merger shall not be subjected to gift tax. Additionally, no documentary stamp tax (DST) is due on the transfer of assets made pursuant to the Plan of Merger under Section 199 (m) of the Tax Code, as amended. However, as provided under Section 174 of the Tax Code, a DST at the rate of Php 1.00 on each Php 200 par value shall be imposed on the original issuance of shares by A Co. to the stockholders of W Co. as a consequence of the merger. Nonetheless, it has to be emphasized that this tax-free merger between W Co. and A Co. will not cover the net operating loss carry-over of the former. Finally, this reorganization shall only be considered a tax-free merger provided that all the requirements are complied with. [BIR RULING NO. 474-2021, DECEMBER 22, 2021]

SALE OR IMPORTATION OF PRODUCTS PRIMARILY USED FOR THE PRODUCTION OF LIVESTOCK AND POULTRY FEEDS IS EXEMPT FROM VAT

S Co. is seeking confirmation whether its importation of Soybean Meal and its sale to B Coop. of the same to be used as raw material in making animal feeds, is exempt from value-added tax (VAT). As represented, S Co. is engaged in the business trading, importer of fruits and other agricultural products. It is likewise registered with the Bureau of Animal Industry (BAI). On November 24, 2021, S Co. and B Coop. executed an Agreement where the former agreed to import on behalf of the latter 5000MT of Soybean Meal. In reply, the Bureau has opined that the importation of Soybean Meal by S Co. as well as its sale to B Coop. are exempt from the 12% VAT pursuant to Section 109 (1) (B) of the Tax Code of 1997, as amended, and as implemented by Revenue Regulations (RR) No. 16-2005, as amended, provided that said product is classified as feed additive, feed ingredient, or feed supplement through the issuance by the BAI of Certificate of Product Registration, and provided further that the said product shall be primarily used for the production of livestock and poultry feeds. [BIR RULING NO. 470-21, DECEMBER 21,2021]

BENEFICIAL TRANSFER OF OWNERSHIP OF SHARES IS VITAL TO THE RECOGNITION OF CGT, DONOR’S TAX, AND DST

H Co. is seeking confirmation on whether the transfer of M Inc. membership share from one trustee to another trustee is not subject to capital gains tax (CGT), donor’s tax, and documentary stamp tax (DST). In reply, BIR ruled that such transfer is not subject to CGT, donor’s tax, and DST. As stated in the Declaration of Trust, the transfer only gives the trustee-appointee the legal ownership of the membership share in which said trustee will be given access to the use and enjoyment of the facilities of M Inc. Consequently, the beneficial ownership of the M Inc. share remains with H Co. Section 24(C) of the 1997 Tax Code, as amended, provides that CGT is imposed on the net gain from the sale, barter, exchange of capital assets. Since the beneficial ownership over the share remains with H Co., there is no actual transfer of ownership and no monetary consideration involved; therefore, the trustee-appointee shall not recognize any gain or profit from the said transfer. As it was merely a transfer by virtue of assignment, the Bureau confirmed that the same is not subject to CGT. The transfer is likewise not subject to DST pursuant to Section 4 of Revenue Regulations (RR) No. 13-2004 which provides that the transfer of stock from a resigned assignee to a newly appointed trustee shall not be taxable when the beneficial ownership of the stock remains with the cestui que trust or resigned assignee.  Furthermore, the absence of subscription agreement or any kind of consideration is proof of the real intention of the transfer, therefore, there is no transfer or new conveyance to speak upon which DST may be imposed. Lastly, since there is no donative intent, and considering that there is no transfer or new conveyance of the M Inc. share from the transferor to the transferee, it will not be subjected to donor’s tax as provided in Section 98 of the 1997 Tax Code, as amended. [BIR RULING NO. 467-2021, DECEMBER 14, 2021]

IDLE PROPERTY OF HOLDING COMPANY IS CAPITAL ASSET

B Co., a holding company, is seeking confirmation that the sale of real property held for investment purposes is subject to the 6% capital gains tax (CGT) and documentary stamp tax (DST) but is not subject to value-added tax (VAT). As a holding company, B Co. did not engage in real estate business nor advertise or hold itself out in public as engaged in buying and selling of real estate properties. B Co. acquired a residential house and lot for investment purposes and not for sale or lease in the ordinary course of business. In reply, the term “capital asset” as defined in Section 39(A)(1) of the 1997 Tax Code, as amended, means property held by the taxpayer (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, or property used in the trade or business, of a character which is subject to the allowance for depreciation provided in Section 34, or real property used in trade or business of the taxpayer. An idle property may be classified as capital or ordinary asset. An idle property classified as ordinary asset is automatically converted into capital asset upon showing of proof that the same has not been used in business for more than two (2) years prior to the consummation of the taxable transaction involving said property. Considering that B Co. is a taxpayer not engaged in the real estate business, being not a real estate dealer, developer or lessor and was organized as a holding company; that the said property has been idle since the time of its acquisition that the concerned Barangay Chairman where the property is located issued a Certification that the property has no reported operation or commercial activity; and that the property has been treated in the books of accounts and are reflected in the audited financial statement as investment property and has not been used in the ordinary course of trade or business, the BIR opined that the subject real property are classified as capital assets, the conveyance of which is subject to CGT and DST but not subject to VAT and creditable withholding tax. [BIR RULING NO. 437-2021, DECEMBER 6, 2021]

INCOME TAX IS THE ONLY EXEMPTION UNDER INVENTORS AND INVENTIONS INCENTIVES ACT OF THE PHILIPPINES

Mr. L is seeking clarification on the tax privilege of the inventors pursuant to the Republic Act (R.A.) No. 7459, otherwise referred to as the “Inventors and Inventions Incentives Act of the Philippines”. In ruling, Section 6 of R.A. 7459 provides that any income from the inventions shall be exempted from all kinds of taxes during the first ten (10) years from the date of the first sale, subject to the rules and regulations of the Department of Finance (DOF). Pursuant to the R.A. 7459, the DOF through the BIR issued Revenue Regulations No. 19-1993 which provides for the tax exemption of an inventor. Relative to the said regulations, the Office of the President made a pronouncement enunciated in OP Case No. 03-G-422 wherein it clarified that the tax exemption granted by Section 6 of R.A. No. 7459 only pertains to income tax. Hence, the tax incentive of the inventors pursuant to R.A. No. 7459 is limited only to income tax exemption on the sale of invention products. The other taxes and obligations applicable thereto are not covered by the exemption. [BIR RULING NO.436-2021, DECEMBER 2, 2021]