Republic of the Philippines

DEPARTMENT OF FINANCE
Roxas Boulevard Comer Pablo Ocampo, Sr. Street
Manila 1004

DOF Opinion No. 012.2018

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DEGUZMAN CELIS & DIONISIO LAW OFFICES $o,Tllll'J,iL?rill|ll*"

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Suite C, 1sth Floor, Strata 2000 Building
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Pasig City 1605

RE: REVIEW OF BIR RULING NO. 508-12 DATED 3 AUGUST 2012

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Gentlemen:

This is in reference to your request for review, in behalf of your client Nutri-
Asia, Inc. (NAl), of the Bureau of Internal Revenue (BlR) Ruling No. 508-12 dated 3
August 2012, which held that the transfer of assets of NA Prime Resources
Corporation (NPRC) to NAI pursuant to a plan of merger is subject to donor's tax and
that such has the effect of dissolution and liquidation without payment of taxes, to
wit:

"ln reply thereto, please be informed that after a careful

review of the above corporate re-organization, the intended
re-organization is an upstream merger between a parent
company [NAl] and its subsidiary [NPRC], where the former
will not be issuing any shares to [NpRC], in exchange for the
assets to be transferred by [NPRC] to NAI as a result of the
merger. In effect, the said transfer partakes the nature of a
donation made by a subsidiary to its parent company,
contrary to what is contemplated on Section 40(CX2) of the
Tax Code of 1997, as amended. In the same manner, the
intended merger has also the effect of dissolving and
liquidating [NPRC] without payment of the corresponding
taxes."

As culled from the records, the facts are as follows:

Nutri-Asia, Inc. (NAl) is a corporation duly existing and registered under

Philippine laws. lt has an authorized capital stock ol One Hundred Million
(P100,000,000.00) divided into Ten Million (10,000,000) shares with a par value of
Ten Pesos (P10.00) per share; that the total capital stock issued and outstanding of
NAI amounts to Sixty-Three Million Pesos (P63,000,000.00). NAI owns 10Oo/o of tne
outstanding capital stock of NA Prime Resources Corporation (NPRC), a domestic
corporation also duly registered in the Philippines, with an authorized capital stock of
Four Million Pesos (P4,000,000.00) divided into Fofi Thousand (40,b00) shares
with a parvalue of One Hundred Pesos (sP100.00) pershare, 10,0d0 of which may
have been issued and outstanding.
 At separate meetings on 16 August 2010, the Board of Directors and
Stockholders of each corporation approved the Plan and Agreement of Merger of
NAI and NPRC, with NAl, the parent corporation, as the surviving entity, for the
following business reasons:

1. the integration of the administrative facilities of the constituent corporations

will result in economies of scale and efficiency of operations;
2. the consolidation of the assets of the constituent corporations will allow the
procurement and financing and credit facilities under more favorable
terms; and
3. The merger will make possible the productive use of the properties of the
constituent corporations.

In consequence, NAI shall be deemed to have acquired all the assets, rights
and privileges, and assumed allthe liabilities of NPRC and allthe outstanding shares
of the latter shall be deemed cancelled. NPRC shall cease to exist and its legal
personality is considered terminated.

However, since NPRC is a wholly-owned subsidiary of NAl, NAI will not issue
any shares in consideration of the merger. NAI justified its non-issuance of shares in
exchange for the assets of NPRC by reasoning that it was done to avoid the shares
from becoming treasury shares, as it would be issuing shares to itself since it wholly
owns NPRC. NAI contended that the denial of the Commissioner of Internal
Revenue of the applicability of Section 40(C)(2) on the merger of NAI and NPRC
would defeat the purpose of the Congress in enacting said provision, which is to
promote corporate unions or combinations for the economic development of the
country.

NAI further argued that the dissolution of NPRC is an incidental consequence

of the merger and that NPRC's dissolution pursuant to the merger is by operation of
law. The merger resulted into the dissolution of NPRC without liquidation and NAI
becomes the legal successor of the absorbed subsidiary.

Lastly, NAI further posited that there is no donation as there is no animus

donandior intent to donate on the part of the transferor, NPRC, and that the transfer
of NPRC's properties to NAI was motivated purely by business considerations, as it
was for the purpose of consolidating the assets of the constituent corporations to
allow the procurement and financing of credit facilities under more favorable terms,
and to make possible the productive use of the properties of the constituent
corporations.

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 We find partial merit in this request.

As defined, merger pertains to the absorption of one or more corporations by

another existing corporation, which retains its identity and takes over the rights,
privileges, franchises, properties, claims, liabilities and obligations of the absorbed
corporation(s). The absorbing corporation continues its existence while the life or
lives of the other corporation(s) is or are terminated.l

The Tax Code describes such instance by which any gain or loss resulting
from a merger between two or more corporations is not recognized, the
reorganization having been considered as a tax-free merger. Section 40(CX2) of the
Tax Code, as amended, states:

SECTION 40. Determination of Amount and Recognition of Gain or

Loss.
- -xxx-
(c) Exchange of Property.-
-xxx-
(2) Exception. No gain or loss shall be recognized if in
-
pursuance of a plan of merger or consolidation
-
(a) A corporation, which is a party to a merger or consolidation,
exchanqes propertv solelv for stock in a corporation, which is a
party to the merger or consolidation;

A reading of this provision will reveal that in order for any gain or loss in
pursuance to a merger to not be recognized, the same requires that the constituent
corporation2 exchanges its property solely for the stock of another constituent
corporation. In this case, there was, however, no exchange of property solely for
stock in another corporation. Although a reorganization may be deemed valid, but
this alone is not sufficient to afford non-recognition to the gain or loss obtained in the
transaction. Therefore, Section 40(CX2) is inapplicable.

It is noteworthy that tax exemptions are to be construed in sfncfisslmi juris

against the taxpayer and liberally in favor of the taxing authority, that he who claims
an exemption must be able to justify his claim by the clearest grant of statute.3 A
person claiming an exemption has the burden of justifying the exemption by words
too plain to be mistaken and too categorical to be misinterpreted. Tax exemptions
are never presumed and the burden lies with the taxpayer to clearly establish his
right to exemption.a

1 Bank of C-ommere u. Radio Philippines Neftaork, Inc., G.R. No. 195615. 21 April n't4.733 PHII, 491-581. See
Title IX. Merger and Consolidation. Corporation Code of the Philippine+ Batas PambansaBlg. 68
2 A constituealt corporation pertairu to a corporation who is a party to a proposed merger or consolidate.
Section 75. Corporation Code of the Philippines.
a CompagrrieFinanciere.Sucres et Denrees v. Comnissioner of Intemal Revenue. G.R No. 1338Y,28 August
20{x.,499sc,RAffi
4 Digital Tekcommunia*ions Philippines, lnc. a. City Gotmntment of Batangas. G.R. No. 156040. December 11,
2008.594 PHIL 269-M.

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 Furthdf, rt is a cardinal rule in statutory construction that when the law is clear
and free from any doubt or ambiguity, there is no room for construction or
interpretation. There is only room for application. According to the plain-meaning rule
or verbalegis, when the statute is clear, plain, and free from ambiguity, it must be
given its literal meaning and applied without attempted interpretation. lt is expressed
in the maxims index animi sermo or "speech is the index of intention," and verbalegis
non estrecedendum or "from the words of a statute there should be no departure."s

In the case at bar, the law granting exemption from taxation of any gain or loss
incurred pursuant to a plan of merger is clear. There is no justification for us to
liberally construe that law. In this jurisdiction, it has been the constant and uniform
holding that exemption from taxation is not favored and is never presumed.6

In claiming exemption from taxation, NAI must discharge the burden of

establishing the existence of such exemption, for which, in this case, NAI failed.
Hence, the merger between NAI and NPRC does not qualify under Section (40) (C)
(2) of the Tax Code.

Moreover, the agreement that NPRC (subsidiary) and NAI (parent) entered into
provided, in substance, for the parent corporation's assumption of all of the wholly-
owned subsidiary's debts and liabilities, for the surrender for cancellation of all of the
subsidiary's stocks, and that all of subsidiary's assets will be transferred to the
parent corporation, which verily, has the effect of winding up of the affairs of
NPRCTwhich consequently necessitates the payment of corresponding taxes.

In which instance, even if NAI wholly owns NPRC, both corporations possess
separate juridical personalities and are different taxable entities. Therefore, as
Section 40(CX2) is inapplicable, the imposition of proper taxes must follow.

However, NPRC's transfer of assets to NAI does not give rise to a donation
made by a subsidiary to its parent company.

Jurisprudence elucidates that animus donandi (the intent to do an act of

liberality) is an indispensable element of a valid donation, along with the reduction of
the donor's patrimony and the corresponding increase in the donee's patrimony.
However, not all elements of a donation are present in the case at bar. The
consideration of gratuity is wanting as there is no intent to do an act of liberality on
the part of the NPRC upon the transfer of its assets to NAl.

Further, such transfer of assets of a wholly-owned subsidiary to its parent

corporation, having the effect of a taxable liquidation, negates the transaction from
being a donation.

s Padilla u. C-ongress of the Philippines. G.R. Nos. 23'1,671 & ?31694. July ?5, fr17 citiilgBolos a. Bolos, 648 Phil. 630,
63.2010.
6Commissiorer of lntennl Reoeutcas. A.D. Guerrero. G.R. No. I-2W42,22ieptember 1962
7 Black's Law Dictionary. Liquidation is the comprehensive process of gathering in the assets, converting them
into cash and distributing them according to the legal rights of the parties interested; or to put it simply,
liquidation pertains to the winding up of the affairs of a business.

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 In vievi'of the foregoing, we partially approve the request for review and hold
that in the transfer of the assets of NPRC to NAl, no donor's tax shall be imposed.
However, the merger of NPRC into NAI does not qualify as a tax-free merger under
Section 40(CX2) of the Tax Code and proper taxes should be imposed for its
dissolution and liquidation.

Respectfully yours,

CARLOS G. DOMING
Secretary
f{0'd I I ?318

CC: CAESAR R. DULAY

commissioner l-a"?
Bureau of Internal Revenue
BIR Road, Diliman, Quezon
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7th Floor JY Campos Centre
9th Ave, Taguig, 1634 Metro Manila

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