June 30, 2022

BIR RULING NO. OT-338-2022

Sec. 28 (B) (5) (c), 40 (C) & (6) (c), Tax Code of 1997, as amended;
BIR Ruling No. 377-19; BIR Ruling No. DA-150-00
Quisumbing Torres
12th Floor, Net One Center
26th Street corner 3rd Avenue
Crescent Park West, Bonifacio Global City
1634 Taguig City
Attention: AAA
BBB
Gentlemen :
This refers to your letter dated March 19, 2020 requesting on behalf of
your client, Infinera International Corporation ("Infinera") for
confirmation that the transfer of the shares of capital stock of Coriant
Philippines, Inc. [formerly Tellabs Philippines, Inc.] (" Coriant Ph") from
Coriant International, Inc. [formerly Tellabs International, Inc.] (" Coriant
US") to Infinera, pursuant to an offshore merger between Coriant US and
Infinera, is not subject to the capital gains tax (CGT) imposed under Section
28 (B) (5) (c) of the National Internal Revenue Code of 1997 (Tax Code), as
amended.
Background
Infinera is a corporation duly organized and registered under the laws
of the State of Delaware, United States of America (USA), with principal office
at 160 Greentree Drive, Suite 101 Dover Delaware 19904, United States.
Coriant US was a corporation duly organized and registered under the
laws of the State of Illinois, United States of America. Coriant US was the
legal and beneficial owner of 106,955 shares and beneficial owner of five (5)
shares in Coriant Ph, which represent 100% of the total subscribed capital
stock of Coriant Ph.
Effective December 31, 2019, Infinera and Coriant US merged, with
Infinera as the surviving corporation. As a consequence of the merger, the
shares of the capital stock of Coriant Ph were transferred from Coriant US to
Infinera by operation of law.
In reply thereto, please be informed as follows:
Income Tax/CGT
Sections 40 (C) (2) and 6 (b) of the Tax Code, as amended, does not
make any qualification or distinction as to its application to a corporation.
Thus, its application to non-resident foreign corporation is well-settled. 1 It
provides:
"SEC. 40. Determination of Amount and Recognition of Gain or
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 Loss. —
xxx xxx xxx
(C) Exchange of Property. —
xxx xxx 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, exchanges property solely for stock in a
corporation, which is a party to the merger or
consolidation; or
(b) A shareholder exchanges stock in a corporation, which is
a party to the merger or consolidation, solely for the stock
of another corporation also a party to the merger or
consolidation; or
(c) A security holder of a corporation, which is a party to the
merger or consolidation, exchanges his securities in such
corporation, solely for stock or securities in such
corporation, a party to the merger or consolidation.
xxx xxx xxx
(6) Definitions. —
xxx xxx xxx
(b) The term 'merger' or 'consolidation,' when used in this
Section, shall be understood to mean: (i) the ordinary
merger or consolidation; or (ii) the acquisition by one
corporation of all or substantially all the properties of
another corporation solely for stock: Provided, That for a
transaction to be regarded as a merger or consolidation
within the purview of this Section, it must be undertaken
for a bona fide business purpose and not solely for the
purpose of escaping the burden of taxation: Provided,
further, That in determining whether a bona fide business
purpose exists, each and every step of the transaction shall
be considered and the whole transaction or series of
transactions shall be treated as a single unit: Provided,
finally, That in determining whether the property
transferred constitutes a substantial portion of the property
of the transferor, the term 'property' shall be taken to
include the cash assets of the transferor."
The application of Section 40 (C) (2) of the Tax Code, as amended, to
nonresident foreign corporation is well-settled. Section 40 (C) (2) of the Tax
Code, as amended, does not make any qualification or distinction as to its
application to a corporation. It provides that:
"No gain or loss shall also be recognized if property is transferred to a
corporation by a person, alone or together with others, not exceeding
four (4) persons, in exchange for stock or unit of participation in such a
corporation of which as a result of such exchange the transferor or
transferors, collectively, gains or maintains control of said corporation:
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 Provided, That stocks issued for services shall not be considered as
issued in return for property."
In a merger, the surviving/absorbing corporation succeeds to the rights and
liabilities of the absorbed corporation and merely carries on the identity of the
latter. 2 The underlying assumption of tax-free exchange provisions generally is
that the new property received is substantially a continuation of the old
investment still unliquidated. 3 Hence, a merger does not involve a sale,
exchange or disposition of shares. Therefore, the transfer of the shares of
capital stock of Coriant Ph from Coriant US (absorbed corporation) to Infinera
(surviving corporation) pursuant to a merger effected in accordance with the
laws of the State of Delaware, USA is not subject to the CGT imposed under
Section 28 (B) (5) (c) of the Tax Code, as amended.
Applying the above-quoted provisions in this case, the merger of
Infinera and Coriant US is a merger within the contemplation of Section 40
(C) (2), in relation to 40 (C) (6) (b) of the Tax Code, as amended, because
upon the effective date of the merger, all property, assets, rights and
interests owned by Coriant US shall, in accordance with the Delaware
General Corporation Law, immediately vest in Infinera subject to any
liabilities, charges, debts and provisos attached thereto. Such merger is
being undertaken for a bona fide business purpose as a matter of strategic
management to consolidate ownership in the companies' assets and
liabilities and not for the purpose of escaping the burden of taxation. Thus, it
qualifies for non-recognition of gain or loss for income tax purposes in
accordance with Section 40 (C) (2) of the Tax Code, as amended, and that no
gain or loss shall be recognized by Coriant US, as the transferor of all its
assets and liabilities, to Infinera pursuant to the merger. Likewise, no gain or
loss shall be recognized by Infinera, on its receipt of the Coriant US shares
pursuant to and as a consequence of the merger.
Cost Basis
Section 40 (C) (5) (a) and (b) of the Tax Code, as amended, states:
"SEC. 40. Determination of Amount and Recognition of Gain or
Loss. —
xxx xxx xxx
(C) Exchange of Property. —
xxx xxx xxx
(5) Basis. —
(a) The basis of the stock or securities received by the
transferor upon the exchange specified in the above
exception shall be the same as the basis of the property,
stock or securities exchanged, decreased by (1) the money
received and (2) the fair market value of the other property
received, and increased by (a) the amount treated as
dividend of the shareholder and (b) the amount of any gain
that was recognized on the exchange: Provided, That the
property received as 'boot' shall have as basis its fair
market value: Provided, further, That if as part of the
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 consideration to the transferor, the transferee of property
assumes a liability of the transferor or acquires from the
latter property subject to a liability, such assumption or
acquisition (in the amount of the liability) shall, for
purposes of this paragraph, be treated as money received
by the transferor on the exchange: Provided, finally, That if
the transferor receives several kinds of stock or securities,
the Commissioner is hereby authorized to allocate the
basis among the several classes of stocks or securities.
(b) The basis of the property transferred in the hands of the
transferee shall be the same as it would be in the hands of
the transferor increased by the amount of the gain
recognized to the transferor on the transfer."
Indubitably, the basis of the Coriant Ph shares in the hands of the
transferee (Infinera) shall be the same as it would be in the hands of the
transferor (Coriant US) increased by the amount of the gain, if any,
recognized to the transferor on the transfer.
Value-Added Tax (VAT)
Section 105 of the Tax Code, as amended, reads:
"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.
xxx xxx xxx
The phrase 'in the course of trade or business' means the regular
conduct or pursuit of a commercial or an economic activity, including
transactions incidental thereto, by any person regardless of whether or
not the person engaged therein is a non-stock, non-profit private
organization (irrespective of the disposition of its net income and
whether or not it sells exclusively to members or their guests), or
government entity."
In view thereof, the transfer of the Coriant Ph shares as a consequence
of the merger is not subject to VAT pursuant to Section 105 of the Tax Code,
as amended. The transfer of the Coriant Ph shares to effectuate a merger is
not made in the course of business but by operation of law pursuant to the
merger.
Donor's Tax
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 — Coriant US to donate to Infinera its Coriant Ph shares since the
transaction is purely for a legitimate business purpose. Thus, the merger will
not be subject to donor's tax since there is no intention to donate and the
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 transaction is a bona fide merger effected solely for business reasons.
Documentary Stamp Tax
Section 199 (m) of the Tax Code, as amended by Republic Act (RA) No.
9243 and as implemented by Revenue Regulations (RR) No. 13-2004, states
as follows:
"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
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."
Thus, no DST is due on the surrender by Coriant US shareholders of
their Coriant Ph shares for cancellation pursuant to the merger.
Also, while Section 9 of RR No. 13-2004 states that the shares of stocks
issued in exchange of property is subject to DST due under Section 174 of
the Tax Code, as amended, if they are original issues, still, the shares of
stock issued by Infinera is not subject to DST on original issuance of shares
under Section 174 of the Tax Code, as amended, because Infinera is a
corporation organized and existing under the laws of Delaware, USA,
therefore, not within the Philippine taxing jurisdiction. Section 173 of the Tax
Code, as amended, only imposes DST on obligations or rights arising from
Philippine sources or property situated in the Philippines.
Strict compliance of requirements
to avail non-recognition of gains
provided for in Section 40 (C) (2)
and (6) (c) of the Tax Code
In order that the parties to the exchange can avail of the non-
recognition of gains provided for in Section 40 (C) (2) of the Tax Code, as
amended, they should comply with the requirements hereunder mentioned.
The parties shall cause the Corporate Secretary of Coriant Ph to
annotate at the back of the Certificates of Stock the date the merger was
executed, the original or historical cost of acquisition of the shares of stock
involved, and the fact that no gain or loss was recognized as a result of such
merger; provided however, that any violation by the Corporate Secretary of
this condition shall be penalized under Section 275 of the Tax Code, as
amended.
It is further required that the Certificate of Stock that bears the
annotation of substituted bases of the shares of stock transferred/received in
connection with this transaction, as duly certified by the Corporate
Secretary, should be submitted to the Law and Legislative Division, Bureau
of Internal Revenue, 7/F National Office Building, Diliman, Quezon City within
ninety (90) days from the date of the receipt of this Ruling, by any of the
parties to the transaction. Otherwise, this ruling shall be void and without
effect, and the Chief, Law and Legislative Division shall refer the docket of
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 the case to the Prosecution Division for appropriate action.
This ruling is being issued on the basis of the foregoing facts as
represented. However, if upon investigation, it will be ascertained that the
facts are different, then this ruling shall be considered null and void.
Very truly yours,

(SGD.) CAESAR R. DULAY

Commissioner of Internal Revenue
Footnotes

1. BIR Ruling No. 377-2019 dated July 5, 2019.

2. BIR Ruling No. UN-397-95 dated October 14, 1995 citing Cashman vs. Brownlee,
27 N.E. 560.
3. BIR Ruling No. 024-05 dated December 23, 2005.

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