Private and Confidential

Gentlemen:

This refers to your request for our opinion on the Philippine tax implications of the proposed share for
share transaction of Company “SJ” and Company “SS”.

Background

We understand that Company “SJ”, a company duly organized and existing under the laws of Japan
holds an 18% equity investment in a Philippine Company (PhilCo.) Company “SJ” is contemplating to
transfer its 18% shareholding in PhilCo. to Company “SS”, a 100% wholly-owned subsidiary of Company
“SJ” in Singapore. Company “SS” operates its business in Singapore and manages other companies of
Company “SS” in Asia. In consideration of the transfer of the PhilCo shares, Company “SS” will issue new
classified shares to Company “SJ”.

In this regard, our assistance is being requested to provide the corresponding Philippine tax implications
due on the share swap transaction. In particular, you request that the advice include:

1. Taxation on the transfer of shares through contribution in kind from Company “SJ” to Company
“SS” under corporate law and under the tax treaty between Japan and the Philippines; and

2. Update the report previously provided regarding Company “SJ” in case of any changes due to
tax reform, etc.

Discussion

A. Tax Free-Exchange under Section 40 (C)(2) of the Tax Code (OPTION 1)

We believe that the transfer of the shares in PhilCo. by Company “SJ” to Company “SS” in exchange for
the issuance of new classified shares in Company “SS” will not be subject to income taxes provided it
qualifies as a tax-free exchange. Section 40 (C) (2) of the Philippine Tax Code of 1997 which provides
that:

No gain or loss shall also be recognized if property is transferred to a corporation by a person in

exchange for stock or unit of participation in such a corporation of which as a result of such exchange
said person, alone or together with others, not exceeding four (4) persons, gains control of said
corporation. Provided, that stocks issued for services shall not be considered as issued in return for
property. (Emphasis supplied)

In BIR Ruling 149-94 dated September 29, 1994, the BIR already affirmed that the above provision on
tax-free exchanges is likewise applicable to transfers of Philippine shares by non-resident foreign
corporation / transferors to a nonresident foreign corporation /transferee. This is similar to your case.

The term “control” when used in this Section, shall mean ownership of stocks in a corporation
possessing at least 51% of the total voting power of all classes of stocks entitled to vote. The term
“property” includes shares.

The requirement of “control” will be met in your case since as represented, Company “SS” is already a
100% wholly-owned subsidiary of Company “SJ” and with the issuance by Company “SS” of its shares in
exchange for the PhilCo. shares, Company “SJ” will just be gaining further control of Company “SS”. The
term “further control” whereby an existing controlling stockholder transfers property and receives
shares from the transferee corporation in exchange thereof, thereby gaining further (or additional)
control, is sanctioned by Revenue Memorandum Ruling No. 01-01 dated 29 November 2001,

In BIR Ruling No. DA 459-06 dated 27 July 2006, the BIR held that the subsequent transfer of a PhilCo. of
shares to its wholly-owned subsidiary qualifies for a tax free exchange transaction since PhilCo. merely
gains further control of its subsidiary. There is no effective change of beneficial ownership in this case.
Through this wholly-owned subsidiary, PhilCo. will still own, albeit indirectly, the shares previously
received in a tax free transaction.

Note that the foregoing provision merely defers the recognition of the gain or the loss insofar
as the transferor and transferee is concerned and that upon the subsequent sale or disposition of the
property covered by the tax-free exchange by the transferor or the transferee, the historical cost or
basis shall be used for purposes of determining the gain or loss from the subsequent sale or transfer.

Thus, if the transferor later sells or exchanges the shares of stock it acquired in the exchange, it shall be
subject to income tax on gains derived from such sale or exchange, taking into consideration that the
cost basis of the sales shall be the same as the original acquisition cost or adjusted cost basis to the
transferor of the property exchanged therefore; and that the cost basis to the transferee of the property
exchanged for stocks shall be the same as it would be in the hands of the transferor. To prevent
instances where watered stocks are used in a tax-free exchange transaction, the Securities and Exchange
Commission requires that a proper valuation of the foreign shares of stock be made (i.e. that the value
of the foreign shares of stock should be fairly valued and equal to the par or issued value of the
Philippine shares).

Where the exchange falls under Section 40(C) (2) above, no gain or loss is recognized; no income tax is
due. No donor’s tax is due as there is no donative intent. Neither will the same be subject to value-
added tax as the exchange is not done in the ordinary course of business.

Section 4.106.8 (b) of Revenue Regulations No. 16-2005 provides that:

(b) Not subject to output tax. – The VAT shall not apply to goods or properties existing as of the
occurrence of the following:

(1) Change of control of a corporation by the acquisition of the controlling interest of such corporation
by another stockholder or group of stockholders. The goods or properties used in business, or those
comprising the stock-in-trade of the corporation, having a change in corporate control, will not be
considered sold, bartered, or exchanged despite the change in ownership interest in the said
corporation.

The deed of assignment outlining the exchange of shares of stock will not be subject to a

Documentary Stamp Tax (DST) pursuant to Section 199 (m) of the Tax Code of 1997 which states that
the transfer of property pursuant to Section 40 (C) (2) of the Tax Code is exempt from DST.
Finally, a BIR ruling confirming the tax-free nature of the transaction is required otherwise the

BIR will treat this is a taxable transaction.

B. RP- Japan tax treaty (OPTION 2)

In the alternative, we believe Company “SJ” may also invoke the DTA provisions of RP-Japan on the
contemplated transaction to avail of the exemption from capital gains tax.

Capital Gains Tax (CGT)

As a general rule, the gains if any, on the acquisition of Company “SS” of PhilCo shares held by Company
“SJ” are considered Philippine-source income and are thus taxable in the Philippines regardless of the
place of sale. Capital gains tax is imposed on both domestic and foreign sellers.

Net capital gains represent the difference between the selling price and fair market value (book value of
the shares at the time of sale as shown in the audited financial statements at/nearest the time of sale)
of the shares, whichever is higher, less the cost basis plus selling expenses, if any.

Thus for tax purposes, it is advisable that the selling price should not be lower than the fair

market value. Gains for unlisted shares (shares not listed in the Philippine stock exchange) are taxed at:

• 5% (for amounts up to Php 100,000) and 10% (for amounts in excess of Php 100,000.00) for
sales of unlisted share

However, pursuant to the provisions of the RP-Japan tax treaty, the transfer of PhilCo. shares by
Company “SJ” to Company “SS” may not be subject to Philippine taxes if not more than 50% of the total
assets of PhilCo. is real or immovable property.
Sections 4 and 5 of Article 13 of RP-Japan tax treaty provides that:

(4) Gains from the alienation of shares of a company partnership or trust the property of which consist
principally of immovable property situated in the Contracting State may be taxable in that Contracting
State.

(5) Gains from the alienation of any property other than those referred to in paragraphs (1), (2), (3) and
(4) shall be taxable only in the Contracting State of which the alienator is a resident.

Section 2 of Revenue Regulations No. 4-86 clarifies that the term “principally" means more than 50% of
the entire assets in terms of value whereas immovable property is properly defined by Philippine Civil
Code. Hence, if the total assets of the PhilCo. is not more than 50%, then it follows that the transfer of
Company ”SJ” to Company “SS” of the PhilCo.shares is taxable only in Japan, where Company “SJ” is a
resident.

The BIR had occasion to rule on the tax-free nature of this type of transaction applying the tax treaty
provisions rather than Section 40© (2) above.

In ITAD Ruling No.024-99 dated 10 September 1999, the BIR held that the transfer by X Japan to Y
Singapore of its shares in Z PhilCo. in payment for its subscription to Y Singapore’s shares, is not subject
to capital gains tax pursuant to the RP-Japan tax treaty.

In such case, X Japan transferred and assigned to Y Singapore its shares in Z PhilCo. as payment for its
subscription to a number of shares of stock of Y Singapore. The BIR ruled that the gains which will be
realized by X Japan from the transfer of its shares of stock in Z PhilCo. to Y Singapore shall be taxable
only in Japan since the audited financial statements of Z PhilCo. disclosed that its real property interest
is less than the 50% threshold as required by Revenue Regulations No.4-86.
In a similar ruling, PMIFCO transferred to FTR-H all of PMIFCO’s right, title and interest in the shares of
several corporations in exchange solely for newly issued shares of voting common stock of FTR-H, the
BIR confirmed that “gains, if any, which may be realized by your client from the transfer of PMIFCO
shares of stock in PM Philippines to FTR-H shall be taxable only in the United States pursuant to Article
14 (2) of the RP – US Tax Treaty.” (ITAD Ruling No.111-00 dated 28 August 2000).

The RP-US Tax Treaty has provisions on capital gains similar to that of the RP-Japan tax treaty.

Please note however that a Tax Treaty Relief Application (TTRA) must be filed with the International Tax
Affairs Division (ITAD) of the BIR. The requirements of a TTRA will be discussed on a separate item. Note
further that since the issuance of ITAD Ruling No. 111-00 on 28 August 2000, where the BIR applied a
treaty’s exemption provisions on CGT for a share-for share exchange, and while we believe there is legal
basis to invoke the same rationale (see footnote 2 ) there have been no further BIR rulings reiterating
this principle. Thus, we suggest a no-name basis informal query be made to get the BIR’s current views
on this should you decide to avail of this avenue.

C. Corporate Worldwide Re-organization (OPTION 3)

Finally, we may also argue that the BIR is inclined to exempt the transfer of shares if pursuant to a
legitimate worldwide reorganization. Our basis finds support in a number` of rulings issued by the BIR.

Several rulings have been issued adopting the previous position of the BIR i.e. as long as the transfer of
shares of stock in a Philippine company by a non-resident foreign corporation to another non-resident
foreign corporation belongs to the same group of companies and such transaction is made pursuant to a
legitimate worldwide reorganization, the transaction is exempt from CGT since there is no effective
transfer of beneficial ownership of the Philippine shares. Consequently, no gain will be realized by both
the transferor and the transferee from the transfer of the said shares. {BIR Ruling Nos. [DA-(C-252) 646-
09] , dated 4 November 2009; [DA-(C-097) 311-09, dated 22 June 2009; [DA-(C-066) 228-09], dated 15
May 2009; [DA-(C-062) 214-09]; dated 27 April 2009; [DA-(C-057) 205-09], dated 21 April 2009; [DA-(C-
172) 532-08], dated 16 December 2008; BIR Ruling [DA-(C-027) 114-08] , dated 6 August 2008; DA209-
08, dated 28 March 2008}
Under this option however, it is crucial that the transfer of shares is done within the same group of
companies; hence the reorganization of operations. Also, the reorganization and the transfer of shares
pursuant thereto must be done for a legitimate / bona fide business purpose and not purely for tax
benefits alone; i.e. not purely tax-driven.

Applying this to your case, we believe that the transfer of PhilCo shares held by Company “SJ” to
Company “SS” would qualify as pursuant to a world-wide company reorganization inasmuch as this is
done for more effective control of the shareholdings in various Asian companies, including the
Philippines. As represented, this is done “to effectively (en)able Company “SJ” to manage and control
the shares.”

Again, a TTRA must be filed with the BIR. The requirements for the TTRA will be discussed on

D. Other issues Common to the Options

d.1 Value- added Tax (VAT)

Similarly, as discussed above, we believe no VAT is due on the transfer of shares for both Options. In BIR
Rulings DA(C-015) 048-09 dated 27 January 2009 andDA-209-08 dated 28 March 2008, the BIR held that
the assignment of shares in a Philippine corporation to another corporation is not subject to VAT.

However, we advise Company “SJ” to procure a ruling before the BIR to confirm the VAT exemption on
the proposed transaction.

d.2. Donor’s Tax

Similar to above discussion, no donor’s tax is due under the 2 Options as there is no intent to donate.
Rather, the exchange is done for a business purpose.

d.3. Documentary Stamp Tax (DST)

In all of the above Options, the transfer of shares is subject to DST of Php 0.75 on each Two Hundred
Pesos (Php 200.00) of the par value of the shares .

As a general rule, if the parties (seller and buyer) to the transactions are both non-resident foreign
corporations, they cannot be made liable for the DST since they are outside the reach of our taxing
authority .

However, in BIR Ruling No. DA-008-01 dated 30 January 2001, the BIR required the payment of DST on
the transfer of the shares in a Phil.Co held by a non-resident foreign corporation to another non-
resident foreign corporation. In the said ruling, it is only upon presentment of proof of payment of DST
that the respective corporate secretaries of the Philippine companies can register the transfer of the
shares from BVI CO.1 to BVI Co.2 and from BVICo.2 to the parent company in the stock and transfer
books of the respective corporations and cancel and issue new stock certificates in the name of the
transferee (Emphasis supplied).

While the Ruling did not state who should pay the DST, in practice, where there is a Philippine
company / shares involved, the DST is paid so as to avoid issues in the registration of the shares in the
name of the new shareholder. It is among the parties to decide who shoulders the cost.

d.4 Procurement of the Certificate Authorizing Registration (CAR)

Generally, in a transfer of shares of stocks in a domestic corporation, a CAR following payment of the
CGT and DST and filing of the returns, is secured from the BIR where the CGT and DST returns are filed.
The application for the issuance of the CAR can be filed by the buyer or the seller, depending on the
agreement by the parties. However, the CAR will be issued in the name of the seller even if the CGT and
DST are assumed by the buyer. The CAR is then presented to the Corporate Secretary to cancel the
stock certificates in the name of the seller and register the shares in the name of the buyer.

Section 11 of the RR 006-08 provides that: “No sale, exchange, transfer or similar transaction intended
to convey ownership of, or title to any share of stock shall be registered in the books of the corporation
unless the receipt of payment of the tax imposed is filed with and recorded by the stock transfer agent
or secretary of the corporation. It shall be the duty of the stock transfer agent or secretary of the
corporation to inform the Bureau of Internal Revenue in case of non-payment of tax.

Any stock transfer agent or secretary of the corporation or the stockbroker, who caused the registration
of transfer of ownership or title on any share of stock in violation of the requirements, shall be punished
in accordance with the provisions of the Tax Code, as amended.”

Considering that there are three (3) Options available for Company “SJ” to exempt the transfer from
Philippine tax, either Option may be availed. One advantage of Option 2 (subject to our caveat above) is
that it is relatively faster to secure the tax treaty relief as compared to the other Options. Also, a tax-free
exchange ruling under Section 40© (2) above merely defers the recognition of gains or loss while Option
2 is a straight-forward exemption.

d.5 Dividends

At present and prior to the transfer of Company “SJ” of PhilCo. shares to Company “SS”, dividends are
tax at 10% pursuant to the RP-Japan tax treaty as amended by Article III of the Protocol which took
effect last 01 January 2009. This is because Company “SJ” is the stockholder of the Philippine company.

The preferential tax rate of 10% of the gross amount of the dividends may be availed of if the recipient
is a company the capital of which is wholly or partially divided into shares and which holds directly at
least 10 per cent of the capital of the company paying the dividends.

However, the transfer of PhilCo. shares to Company “SS” will subject the dividends to tax at the rate of
15% pursuant to the RP-Singapore tax treaty provided that Company “SS” is the beneficial owner of
dividends and it owns at least 15% of the outstanding shares of the voting stock of PhilCo.during the
Philco.’s taxable year immediately preceding the date of the payment of the dividends and the whole of
its prior taxable year.

There is therefore an increase in the Philippine withholding tax rate on dividends following the transfer
of PhilCo shares to Company “SS”.
We advise Company “SJ” to secure a TTRA before the BIR to avail the prefential tax rate under the RP-
Japan or RP-Singapore tax treaties. Otherwise, the final withholding tax is at 30%.

E. Application for Tax Treaty Relief

Any claim for exemption or a preferential tax rate requires the filing of a TTRA before the International
Tax Affairs Division (ITAD) of the BIR. Such filing must be made before the occurrence of the taxable
event.

E.1For the preferential rate on dividends, the taxable event would be the dividend distribution; i.e.
before the Phil.Co. will withhold the corresponding withholding tax (when the dividends are paid or
payable or have been accrued or recorded as an expense in the books whichever comes earlier).

The following are the documentary requirements needed for the TTRA application on dividends:

1. Proof of Residency (original copy)

2. Articles of Incorporation (for income earners other than an individual) (certified photocopy)

3. Special Power of Attorney (“SPA”)

a. Applicant/filer is the withholding agent of the income earner or the local

representative in the Philippines of the income earner - Original copy of the SPA or written
authorization executed by the income earner authorizing its withholding agent or
local representative to file the TTRA.

b. Applicant/filer is the local representative of the withholding agent of the income earner –
• Original copy of the SPA or written authorization executed by the income earner authorizing its
withholding agent or local representative to file the TTRA; and

• Original copy of the Letter of Authorization from the withholding agent authorizing the local
representative to file the appropriate tax treaty relief application.

4. Certification of Business Presence in the Philippines:

a. For Corporation or Partnership – Original copy of a certification from the Philippine Securities and
Exchange Commission (“SEC”) that the income earner is or is not registered to engage in business in the
Philippines.

b. For an Individual – Original copy of a certification from the Department of Trade and Industry
(“DTI”) that the income earner is or is not registered to engage in business in the Philippines.

5. Certificate of No Pending Case (original copy)

6. Duly notarized corporate secretary’s certificate showing details of dividend declaration (with
attached board resolution), number, value and type of shares of the non-resident income earner as of
the date of record/transaction, and as of date of payment of the subject dividends, percentage of
ownership of the non-resident income earner as of the date of record/transaction, and as of date of
payment of the subject dividends, acquisition date and mode of acquisition of the subject shares
(original copy)

7. Copy of the Board of Investments (“BOI”) registration of the payor of the dividends including a
sworn statement if such registration has not been cancelled at the time of the transaction (certified
copy).
E.2 For capital gains tax, the first taxable event would be prior to the transfer of shares in Phil.Co. by
Company “SJ” to Company “SS”. The documentary requirements needed for the TTRA application are as
follows:

1. Same as Items 1 to 5 of required documents for Dividends.

2. Notarized deed of absolute sale or deed of contract e.g. deed of assignment, which actually
transfers ownership of the subject shares of stock (original or certified copy).

3. Copy of the stock certificate/s or subscription contract covering the subject shares of stock
(certified copy).

4. Copy of the General Information Sheet (“GIS”) filed with the SEC, showing the name of the
subscriber (when shares are not yet fully paid and as a consequence, stock certificates have not been
issued) (certified copy).

5. Copy of the duly notarized certificate issued by the corporate secretary of the Philippine
corporation whose shares of stocks of sold with the number and value of the subject shares of the seller
as of the date of sale, seller’s percentage of ownership as of the date of sale, acquisition date(s) of the
subject shares, mode of acquisition of the subject shares, including dates of previous transfers and
parties involved in the said transfers and buyer’s percentage of ownership after the transfer (original
copy).

6. Copy of the comparative schedule, duly certified by the Chief Financial Officer, comptroller or any
officer in charge of preparing financial statements for the Philippine corporation, reflecting the
necessary adjustment for the period from the last audited financial statement.

7. Copy of the audited financial statements of the corporation for the year prior to the sale or
transfer of the shares and original copy of the financial statements as of deed of sale. Should the latter
be unavailable, the most recent unaudited or interim financial statements as of the date of sale may be
used. Necessary adjustments therein must be indicated in a comparative schedule of property, plant and
equipment (certified copy).
8. Copy of BIR Form No. 0605 and the official receipt reflecting the payment of the processing and
certification fee with an authorized bank under the jurisdiction of Revenue District Office (“RDO”) No. 39
(certified copy).

9. Copy of BIR Form No. 2000-OT and the official receipt reflecting the payment of the Documentary
Stamp Tax (“DST”) on the subject sale or transfer of the shares of stock.

For all transactions not considered as a straight sale, the applicant, in addition to the foregoing
documents shall submit contracts/agreements or any other document evidencing the entire transaction.
A long form ruling in lieu of the certification prescribed under RMO 30-2002 shall be issued for
applications involving shares of stock that are not considered as a straight sale.

F. Confirmation of the previous opinion sent last 30 March 2009

We confirm that the tax rates discussed in the 2009 opinion still applies. Please take note however of
the filing of the TTRA which is now required when claiming an exemption or preferential tax treatment
under a tax treaty. The requirements for a TTRA for CGT and dividends are discussed under item E
above.

We trust this is sufficient for your purposes.