By: Euney Marie Mata-Perez on June 14, 2018

In the corporate world, mergers are effective means to forge alliances and achieve economies of scale. Because resources are combined, mergers help companies grow and diversify as well as boost their market penetration. They can also simplify complex group structures.

Under our Corporation Code, the terms “merger” and “consolidation” can mean ordinary merger or consolidation or a de facto merger. An ordinary merger or consolidation is when two or more companies consolidate into one company or become one new consolidated company. By operation of law, all assets and liabilities of the absorbed companies are transferred to the surviving or new company.

A de facto merger, on the other hand, is where one corporation acquires all or substantially all the properties of another corporation solely in exchange for stock.

Generally, in a merger, the surviving or new corporation will issue shares to the shareholders of the absorbed corporation.

A merger is exempt from income tax. Our Tax Code provides that an exchange by a party to the merger or consolidation, solely for stock of another corporation also a party to the merger or consolidation, is exempt from tax. Mergers are also not subject to VAT, a rule which is proposed to be codified into the Tax Code by the proposed TRAIN 2 amendments. Further, no documentary stamp tax (DST) is due on the transfer of assets (although it is due on the issuance of shares by the surviving company to the stockholders of the absorbed company). In addition, the excess minimum corporate income tax (MCIT) and unutilized creditable withholding tax of the absorbed corporations form part of the properties transferred to, and can be used by the surviving corporation. It’s an underlying requirement though that for a merger to be income tax-exempt, it must be undertaken for a bonafide business purpose and not solely for the purpose of escaping the burden of taxation.

Despite the clear tax and corporate principles behind mergers, there have been some controversial tax issuances which hamper them.

In its ruling No. 508-2012, the BIR, reversing prior rulings, held that an upstream merger is subject to income tax. In an upstream merger, a wholly-owned subsidiary merges into its parent company. Since the surviving company is the parent, it does not issue shares to itself anymore. Because of this non-issuance, the BIR reasoned that no“exchange”of assets for stock is involved, and thus, the requirement for income tax exemption is not met. Strangely, the BIR also held that the upstream merger is subject to donor’s tax. With the TRAIN 1(RA 10963) amendment to Section 100 of the Tax Code, which says that donation cannot be due if the transfer is bonafide, at arm’s length, and free from donative intent, the donor’s tax imposition under this ruling should no longer apply. Also, the non-issuance of shares can be addressed when the parent-surviving company issues shares to itself, a step which is apparently allowed by the SEC.

In it’s ruling No. 214-2012 dated March 28, 2012, the BIR, deviating again from its previous positions, held that the NOLCO (net operating loss carry-over) of the absorbed corporation cannot be transferred to the surviving corporation even if both the surviving and absorbed corporations become owned by substantially the same shareholders. Prior to this ruling, BIR issuances were clear that the NOLCO of the absorbed entity could be carried over and used by the surviving entity if the shareholders of the absorbed entity will own not less than 75 percent of the outstanding issued shares or paid up capital of the surviving company.

Unfortunately, the 2012 position has been affirmed in recent rulings issued by the BIR (Ruling Nos. 100-17 and 75-2018).

Our Tax Code allows a corporation to “carry over” its losses of a current year as a tax deduction for the next three consecutive years. This carry-forward privilege is subject to the condition that there is no substantial change in ownership in the company incurring the loss. Not less than 75 percent of the outstanding shares of the company is held by the same persons or stockholders. If a merger results in no substantial change in ownership in the absorbed companies, there’s no reason why it should be treated differently and why NOLCO shouldn’t be transferred to the surviving company.

Its about time that the BIR reviews its position on the foregoing issuances. While mergers or business combinations shouldn’t be made solely for tax purposes, it doesn’t also mean that valid mergers or those undertaken for bonafide business reasons cannot be granted the tax benefits that the involved corporations are entitled to. As mentioned, mergers are also drivers for growth. In the long run, they can bring higher revenues, and of course, higher tax collections.

#merger #consolidation #BIRruling508-2012 #carryover #NOLCO

Euney Marie J. Mata-Perez is a CPA-Lawyer and the Managing Partner of Mata-Perez, Tamayo & Francisco (MTF Counsel). She is a corporate, deal and tax lawyer. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. If you have any question or comment regarding this article, you may email the author at info@mtfcounsel.com or visit MTF website at www.mtfcounsel.com

From the The Manila Times Website  June 14, 2018

http://www.manilatimes.net/merger-tax-issues-revisited/407944/