November 16, 2009

BIR RULING [DA-(C-267) 672-09]

RR No. 2; DA-444-05

Atlantic, Gulf & Pacific Company of Manila, Inc.

San Roque, Bauan
Batangas

Attention: Mr. Marcial P. Morales, Jr.

Vice President for Finance & Administration

Gentlemen :

This refers to your undated letter requesting for a confirmatory ruling on

the following opinions, viz.:
1. Debt-to-equity conversion through creation of additional paid-in capital
(APIC) without issuance of shares is a capital transaction which is
not subject to income tax on the part of the company-grantee and
to donor's tax on the part of the stockholder-grantor in the absence
of donative intent.
2. The corresponding documentary stamps tax (DST) on original issue
of shares imposed under the 1997 Tax Code will not apply since
no shares will be issued.
It is represented that Atlantic, Gulf & Pacific Company of Manila,
Incorporated (AG&P), with principal office at the AG&P Special Economic Zone
Authority (PEZA) registered enterprise since August 2008 and a subsidiary of
DMCI Holdings, Inc. (DMCIHI); that it is engaged in design, detailing, fabrication
and pre-assembly works of heavy steel structurals, and allied services
associated with commercial and industrial construction; that AG&P has been
declared rehabilitated by the Rehab Court in its Order of April 30, 2009 and can
now resume normal business operations; that on January 31, 2002, AG&P filed
a Petition for Rehabilitation and Suspension of Actions and Proceedings with
the Regional Trial Court-Fourth Judicial Region 2, Batangas City, wherein it
prayed, among others, that upon accomplishment of the objectives of the
approved Rehabilitation plan, this court issue an Order declaring AG&P as fully
rehabilitated; that AG&P was forced to suspend all operation for a period of two
(2) years after it has been saddled with severe cash flow problems, heavy
interests load and reduced income; that this culminated in its ability to cope with
maturing financial obligations; that this was brought about by the 1) slowdown
of activities in the construction industry, both locally and abroad 2) unfavourable
developments in the country, such as the decreased investors' confidence in
the economy among others 3) the illegal strike at AG&P's Batangas Heavy
Fabrication Yard (BHFY) in November 2000; that the payments of AG&P loans
to its creditors by its parent company, DMCIHI, cleared the remaining hurdle
and paved the way to AG&P's exit from rehabilitation; that the other facts of the
case are summarized as follows: TSHIDa

1. DMCIHI offered to pay AG&P's aggregate loan of approximately P948

million, which payments were charged to advances or loan
receivables;
2. DM Consunji Holdings, Inc. had agreed with PNB and Cameron
Granville for the settlement of AG&P's loan obligations of P783
million and P165 million respectively;
3. As a result, DMCIHI is now the new creditor of AG&P in place of OPNB
and Cameron Granville;
4. Past due loan obligation to PNB is stated in AG&P's books as January
31, 2009 at approximately P783 million of which P492 million is
principal and approximately P291 million is accrued interest;
5. Past due loan obligation to Cameron Granville is approximately P165
million, of which P141 million is principal and approximately P24
million is accrued interest;
6. DMCIHI, 98% owner of AG&P, intends to convert approximately P298
million of its approximately P948 million loan receivable arising
from the advances and/or loans to equity in AG&P;
7. The conversion of debt-to-equity will be through an assignment by
DMCIHI of the P298 million receivable as additional paid-in capital
(APIC) to AG&P without the corresponding issuance of AG&P
shares of stock; and
8. The remainder of P650 million as of January 31, 2009 (P948 million
minus P298 million) remains in AG&Ps books as advances from
DMCIHI.
In reply, please be informed that the contribution of paid-in surplus in the
form of money or property without the issuance of additional shares by AG&P
is not subject to any income tax. Capital contributions generally, does not give
rise to a taxable event pursuant to Section 56 of Revenue Regulations No. 2,
otherwise known as the Income Tax Regulations, which provides that — CAaDSI

"Section 56. Contributions by shareholders. — Where a

corporation requires additional funds for conducting its business and
 obtains such needed money through voluntary process payments by its
shareholders, the amount so received being credited to its surplus
account or to a special capital account, will not be considered income,
although there is no increase in the outstanding shares of stock of the
corporation. The payments in such circumstances are in the nature of
voluntary assessments upon, and represent an additional price paid for,
in shares of stock held by the individual shareholders, and will be treated
as an addition to and as part of the operating capital of the company."
Thus, in BIR Ruling Nos. DA-117-03 dated 14 April 2003 and DA-221-
02 dated 25 November 2002 citing earlier ruling, as follows:
- BIR Ruling No. 586-88 dated 19 December 1988 — Additional
contribution in the form of donated surplus without the necessity of
issuing additional shares of stock is deemed capital investment
which is not within the purview of the term "taxable income" and is
not subject to income tax.
- BIR Ruling Nos. 270-87 dated 8 September 1987 and 129-89 dated
June 13, 1989 — additional capital contribution without necessarily
issuing additional shares of stock, which merely increase the basis
of the stockholders' stock but not their proportionate equity in the
corporation, is a transaction not subject to income of gift taxes.
Such being the case, this Office holds that the Debt-to-equity conversion
through creation of additional paid-in capital (APIC) without issuance of shares
is a capital transaction which is not subject to income tax on the part of the
company-grantee and to donor's tax on the part of the stockholder-grantor in
the absence of donative intent.
Likewise, the documentary stamps tax (DST) on original issue of shares
imposed under the 1997 Tax Code will not apply since no shares will be issued.
This ruling is being issued on the basis of the foregoing facts as
represented. However, if upon investigation, it will be disclosed that the facts
are different, then this ruling shall be considered null and void. STEacI

Very truly yours,

Commissioner of Internal Revenue

By:

(SGD.) JAMES H. ROLDAN

Assistant Commissioner
Legal Service