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This country-specific Q&A gives an overview of mergers and acquisition law, the transaction
environment and process as well as any special situations that may occur in the Philippines. It
also covers market sectors, regulatory authorities, due diligence, deal protection, public
disclosure, governing law, director duties and key influencing factors influencing M&A activity
over the next two years.

1. What are the key rules/laws relevant to M&A and who are the key regulatory authorities?

M&A activity is governed primarily by the Corporation Code of the Philippines (Batas
Pambansa Blg. 68). In M&A transactions where any of the parties is a “public company”
(i.e., a corporation with a class of equity securities listed on an exchange, or a
corporation with assets in excess of Php50 Million and which has 200 or more holders
each holding at least hundred 100 shares of a class of its equity securities), the
Securities Regulation Code (Republic Act No. 8799), and its Implementing Rules and
Regulations, also becomes relevant (for example, the SRC sets out, among others,
reporting obligations for public companies, tender offers, proxy statements and
shareholder obligations to disclose ownership and transactions with respect to shares of
public companies). The key regulatory authority is the Securities and Exchange
Commission (SEC). In case of high-value mergers and acquisitions, the Philippine
Competition Act (Republic Act No. 10667) and its Implement Rules and Regulations may
also become relevant as it provides for a merger control regime in respect of mergers
and acquisitions which meet the thresholds provided under the implement rules. The
Philippine Competition Commission is the regulatory body tasked with the
implementation of this law. In respect of the tax aspects of M&A activity, the principal law
is the Tax Reform for Acceleration and Inclusion (Train) Law (Republic Act No. 10963). If
the M&A involves entities in regulated sectors, there may be special laws applicable to
them. For example, in case of banks, the General Banking Law (Republic Act No. 8791)
and the New Central Bank Act (Republic Act No. 7653); and in case of insurance
companies, the Insurance Code.
 2. What is the current state of the market?

M&A activity in the Philippines have been robust over the past couple of years.

3. Which market sectors have been particularly active recently?

Traditional sectors like power and energy continue to have robust M&A activities. Over
the past year, we have seen increased M&A activity in: financial technology, logistics
and healthcare industries.

4. What do you believe will be the three most significant factors influencing M&A activity
over the next 2 years?

First, we believe that the state of the Philippine economy will continue to have a significant
influence over the level of M&A activity. Periods of economic upturn has typically been
accompanied by an increase in M&A activity, while period of economic downturn (recession,
economic or financial crises) see and significant decrease in M&A activity. Second, there
have been proposals to lift the nationality restrictions in certain key industries (e.g., public
utilities), with the current President himself expressing support for such proposals. If these
proposals come into fruition, we might see increased M&A activity in the pertinent sectors,
especially ones involving foreign investors who are currently restricted to holding only a
minority stake. Third, and from a regulatory perspective, we expect the newly-instituted and
stilldeveloping merger control regime to continue to have a significant influence in M&A
activity. High-value M&A deals now have to comply with a merger notification requirement
within 30 days from the signing of the definitive agreements, and closing subject to antitrust
clearance being obtained. We have already seen one deal voided for failure to comply with
the notification requirement, and several deals having to agree to commitments in order to
secure antitrust clearance.

5. What are the key means of effecting the acquisition of a publicly traded company?

Acquisitions of publicly traded companies are typically effected through a stock purchase, with
the consideration being in cash. Acquisition through a statutory merger is also possible, but this
is subject to a higher degree of regulatory control, as mergers have to be approved by the SEC.
6. What information relating to a target company will be publicly available and to what extent is a
target company obliged to disclose diligence related information to a potential acquirer?

For privately-held companies, their constitute documents and audited financial statements are
available to the public and copies thereof may be obtained from the SEC. In addition, they are
required to annually file a General Information Sheet with the SEC, which contains information
on, among others, the corporation’s directors, officers, shareholders and their shareholdings.
The GIS is likewise available to the public. For public corporations, an even greater amount of
information is available to the public. They are required to, among others, file annual and
quarterly reports with the SEC and the Philippine Stock Exchange. These reports provide,
among others, a description of the company’s business, summaries of material events and
transactions, management discussions and analysis of the results of the company’s operations.
These companies are also required to immediately disclose material events to the PSE. Copies
of these corporation’s filings with the PSE are available for viewing and downloading at the
PSE’s website. A target company has no general obligation to disclose diligence information to
a potential acquirer.

7. To what level of detail is due diligence customarily undertaken?

Acquirers of public or private companies in the Philippines typically conduct due diligence at a
high level of detail.

8. What are the key decision-making organs of a target company and what approval rights do
shareholders have?

The key decision-making organ is the Board of Directors, which, by provision of law, exercises
all corporate powers, conducts all corporate businesses, and controls all corporate properties.
Even as the Board can, and typically does, delegate day-to-day management of the corporation
to the corporate officers, the Board is expected to supervise the corporate officers in their
conduct of corporate officers. In some instances, the corporation may, through its by-laws,
provide for the creation of an executive committee composed of not less than three members of
the board, to be appointed by the board. The executive committee may act on such specific
matters within the competence of the board, as may be delegated to it in the by-laws or on a
majority vote of the board, subject to certain exceptions specified in the Corporation Code. In
respect of shareholder rights, the directors are elected by the shareholders. In terms of
approving corporate acts, as general rule, board approval is sufficient to approve corporate acts
and shareholder approval is not necessary. However, the ratification or concurrence of
shareholders representing at 2/3 of the outstanding capital stock is necessary in respect of
extraordinary corporate acts, such as amendment of the articles of incorporation, disposition of
all or substantially all of the corporate assets, mergers and consolidations, and liquidation.

9. What are the duties of the directors and controlling shareholders of a target company?

In the Philippines, the fiduciary duties of the members of the board of directors translate to a
three-fold duty: duty of obedience, duty of diligence, and duty of loyalty. Duty of obedience. The
directors elected are mandated to perform the duties enjoined on them by law and the by-laws
of the corporation. They have the duty to act within the scope of their authority. In this regard,
the directors are required to direct the affairs of the corporation only in accordance with the
purposes for which it was organized. Duty of diligence. The directors are required to exercise
due care in the performance of their functions. Consequently, they shall be held liable if they
willfully and knowingly vote or assent to patently unlawful acts of the corporation, or if they are
guilty of gross negligence or bad faith in directing the affairs of the corporation. Duty of loyalty.
Directors owe fiduciary duty to the corporation and to the shareholders. Hence, the directors
cannot serve themselves first and their cestuis, second. Because of this duty, the Corporation
Code provides for different rules on self-dealing directors (Section 32), contracts between
corporations with interlocking directors (Section 30), usurpation of corporate business
opportunity (Section 34), and conflict of interest. In this jurisdiction, controlling shareholders
have statutory no duty towards the target corporation.

10. Do employees/other stakeholders have any specific approval, consultation or other rights?

Under Philippine laws, employees or other stakeholders generally have no any specific
approval, consultation or other rights.

11. To what degree is conditionality an accepted market feature on acquisitions?

Most M&As contain some degree of conditionality where consummation is subject to the
occurrence or non-occurrence of certain events. M&As which trigger the merger control regime
are by law, subject to the condition of antitrust clearance being obtained.

12. What other deal protection and costs coverage mechanisms are most frequently used by
acquirers?

Dear protection and cost coverage mechanisms are not very usual in Philippine M&As though
we are seeing an increased use of break-up fee provisions, where if the deal does not push
through the one responsible for the failure of the deal becomes liable to the other for a specified
amount.

13. Which forms of consideration are most commonly used?

The law allows cash and non-cash (e.g., shares of stock, other types of property) to be used as
consideration. However, in practice, the most common form of consideration in the Philippines is
cash. The use of cash as consideration has practical benefits. For example, for primary
subscriptions, if the consideration is non-cash, the consideration must undergo a valuation or
appraisal process with the SEC to ensure that the prohibition against issuance of watered stock
is not violated.

14. At what ownership levels by an acquirer is public disclosure required (whether acquiring a
target company as a whole or a minority stake)?

For public companies, any person who acquires directly or indirectly the beneficial ownership of
more than 5% of class of securities of such company is required to make a disclosure with the
SEC, the PSE and the company itself, through the submission of a form prescribed by the SEC.
Disclosures by the acquirer, through the filing of the prescribed form, are also required where
the acquisition will result into ownership in excess of 10%, as well as changes in such 10%
ownership. Both public and private companies, however, are required to submit a GIS, which
sets out information on the shareholders and their shareholdings, regardless of ownership
percentage.

15. At what stage of negotiation is public disclosure required or customary?

For public companies, disclosure is usually done at the signing of the term sheet or at the
signing of the definitive agreement. However, in the event that during the course of the
negotiations, news or rumors of the potential acquisitions leak into the market, the PSE would
typically ask the public company to comment on those reports.

16. Is there any maximum time period for negotiations or due diligence? None.

17. Are there any circumstances where a minimum price may be set for the shares in a target
company?

If the acquisition will be through a subscription of primary shares, the minimum subscription
price will have to be the par value of the shares of stock, since the issuance of watered stock is
prohibited by law.
18. Is it possible for target companies to provide financial assistance? There is no general
prohibition on the target companies providing financial assistance.

19. Which governing law is customarily used on acquisitions?

Under Philippine law, the contracting parties are free to agree and stipulate on the governing
law of their contract, subject to certain exceptions, such as that the choice of law must have a
substantial connection to the parties or to the transaction. We have thus seen acquisitions
agreements governed by foreign laws and by Philippine laws in equal number. However, in
respect of agreements relating to the governance of Philippine companies (e.g., shareholders
agreements), it has been more usual for such agreements to be governed by Philippine law
since, regardless of the governing law of such agreements, corporate governance of Philippine
companies remain to be principally governed by Philippine law.

20. What public-facing documentation must a buyer produce in connection with the acquisition
of a listed company?

Where a mandatory or compulsory offer is required, the buyer is required to prepare, submit to
the SEC, PSE and the company, and publish, a tender offer report which sets out, among
others, the terms of the acquisition and the plans of the buyer for the target. Copies of the
pertinent agreements between the buyer, the company and the other shareholders are required
to be annexed to the tender offer report. Where the acquired shares will breach the thresholds
provided by law, the buyer will have to submit to the SEC, the PSE and the company, reports in
the forms prescribed by the SEC, disclosing, among others, the buyer’s percentage ownership
in the company.

21. What formalities are required in order to document a transfer of shares, including any local
transfer taxes or duties?

A simple deed of sale is typically executed to document the transfer, which can be submitted to
government authorities where necessary. AT closing, the stock certificates in the name of the
seller would have to be cancelled and new ones issued to the buyer. They buyer would also
have to be registered as the owner of the acquired shares in the company’s stock and transfer
book or in the records of the company’s stock transfer agent. Sales of shares trigger
documentary stamp taxes and capital gains taxes, unless the shares are listed and are sold in
the PSE, in which case, the relevant transfer tax is the stock transaction tax.
22. Are hostile acquisitions a common feature? Hostile acquisitions are not common in the
Philippines.

23. What protections do directors of a target company have against a hostile approach?

As noted in Question No. 22 above, hostile takeovers are not common in the Philippines and
consequently, there is no significant history regarding protections available to directors and the
principal shareholders. That said, available defenses can be: (i) white knight defense; (ii)
issuance of shares to a friendly third party, etc.

24. Are there circumstances where a buyer may have to make a mandatory or compulsory offer
for a target company?

Mandatory or compulsory offers are required only if the target company is a “public company” –
i.e., it has a class of equity securities listed on an exchange, or it has assets in excess of Php50
Million and has 200 or more holders each holding at least 100 shares of a class of its equity
securities. A mandatory or compulsory offer is required if: (a) the buyer, alone or with others
acting in concert intends to acquire 35% of the outstanding voting shares or such outstanding
voting shares that are sufficient to gain control of the board in a public company in one or more
transactions within a period of 12 months; (b) the acquisition would result in ownership of over
50% of the total outstanding equity securities of a public company.

25. If an acquirer does not obtain full control of a target company, what rights do minority
shareholders enjoy?

Under the Corporation Code, the members of the board of directors are elected among the
holders of shares of stocks every year. To ensure representation in the board, minority
shareholders may vote by cumulative voting for one candidate, i.e. give one candidate as many
votes as the number of directors to be elected multiplied by the number of his shares shall
equal. A director elected because of the vote of minority stockholders who united in cumulative
voting cannot be removed without cause. As noted in Question No. 8, the ratification or
concurrence of shareholders representing at 2/3 of the outstanding capital stock is necessary in
respect of extraordinary corporate acts, such as amendment of the articles of incorporation,
disposition of all or substantially all of the corporate assets, mergers and consolidations, and
liquidation. Thus, where the minority constitutes at least 2/3 of the corporation’s outstanding
capital stock, they have a negative veto in respect of such corporate actions. Minority
shareholders also have an appraisal right in certain cases. The appraisal right is the right of a
shareholder to demand payment of the fair value of their shares after dissenting from a
proposed corporate action involving a fundamental change in the charter or articles of
incorporation. The appraisal right exists in the following cases: (a) in case any amendment to
the articles of incorporation has the effect of changing or restricting the rights of any stockholder
or class of shares, or of authorizing preferences in any respect superior to those of outstanding
shares of any class, or of extending or shortening the term of corporate existence; (b) in case of
sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or substantially all of
the corporate property and assets as provided in the Corporation Code; (c) in case of merger or
consolidation; and (d) in case corporation decides to invest its fund in another corporation or
business for any purpose other than its primary purposes. Furthermore, minority shareholders
have a right to institute individual suit, representative suit, and derivative suit. Individual suit is
available when a wrong is directly inflicted against a shareholder, the latter can maintain an
individual or direct suit in his own name against the corporation. Representative suit may be
resorted to when a wrong is committed against a group of shareholders, in which case a
shareholder may bring a suit in behalf of himself and all other shareholders who are similarly
situated. Lastly, an action is derivative, i.e. in the corporate right, if the gravamen of the
complaint is injury to the corporation or to the whole body of its stock or property without any
severance or distribution among individual holders, or if it seeks to recover assets for the
corporation or to prevent the dissipation of its assets.

26. Is a mechanism available to compulsorily acquire minority stakes? There is none. The
Philippines has no squeezed-out mechanisms as they are known in other jurisdictions.

The Difference Between Merger and Consolidation and their Effects

Merger or consolidation may be resorted to by corporations because of economic reasons.

When times are tough, companies ought to merge or consolidate depending on their plan for
survival and/or economic growth. Also, this is to create a more competitive, cost-efficient
company and to increase value. The following are some basic information regarding merger and
consolidation.

Merger Defined
            Section 76 of the Corporation Code of the Philippines provides that there
is Merger when two or more corporations may merge into a single corporation which shall be
one of the constituent corporations.

            In a merger, a corporation absorbs another corporation and remains in existence while
the other is dissolved. It signifies the absorption of one corporation by another which retains its
name and corporate identity with the added capital, franchises and powers of a merged
corporation (Aquino, The Philippine Corporate Law Compendium, 2014 Edition).

Consolidation Defined

            Consolidation is also defined in Section 76 of the Corporation Code of the Philippines as

two or more corporations may consolidate into a new single corporation which shall be the
consolidated corporation.

            In consolidation, a new corporation is created, and the consolidating corporations are
extinguished (Aquino, The Philippine Corporate Law Compendium, 2014 Edition).

Effects of Merger or Consolidation

            For merger or consolidation to take effect, the approval of the Securities and Exchange
Commission (SEC) is required as stated in Section 79 of the of the Corporation Code of the
Philippines. Further, the merger or consolidation shall be effective only upon issuance of a
Certificate of Merger or Consolidation by SEC if the Commission is satisfied that the merger or
consolidation of the corporations concerned is not inconsistent with the provisions of the
Corporation Code of the Philippines and any existing laws thereof.

            Section 80 of the Corporation Code of the Philippines provides for the effects of Merger
or Consolidation to wit:

     Sec. 80. Effects or merger or consolidation. – The merger or consolidation shall have the
following effects:

1. The constituent corporations shall become a single corporation which, in case of merger,
shall be the surviving corporation designated in the plan of merger; and, in case of
consolidation, shall be the consolidated corporation designated in the plan of
consolidation;
  The separate existence of the constituent corporations shall cease, except that of the
surviving or the consolidated corporation;

 The surviving or the consolidated corporation shall possess all the rights, privileges,
immunities and powers and shall be subject to all the duties and liabilities of a
corporation organized under this Code;

 The surviving or the consolidated corporation shall thereupon and thereafter possess all
the rights, privileges, immunities and franchises of each of the constituent corporations;
and all property, real or personal, and all receivables due on whatever account, including
subscriptions to shares and other choses in action, and all and every other interest of, or
belonging to, or due to each constituent corporation, shall be deemed transferred to and
vested in such surviving or consolidated corporation without further act or deed; and

 The surviving or consolidated corporation shall be responsible and liable for all the
liabilities and obligations of each of the constituent corporations in the same manner as if
such surviving or consolidated corporation had itself incurred such liabilities or
obligations; and any pending claim, action or proceeding brought by or against any of
such constituent corporations may be prosecuted by or against the surviving or
consolidated corporation. The rights of creditors or liens upon the property of any of such
constituent corporations shall not be impaired by such merger or consolidation.

In a merger, there is no liquidation or distribution of assets to the stockholders because the

assets and liabilities of the absorbed corporation are transferred to and assumed by the
surviving corporation.

What is the remedy of a Stockholder if he/she does not agree to the plan of merger or
consolidation?

            Article 81 of the Corporation Code of the Philippines provides for appraisal right of a

stockholder or the right to dissent and demand payment of the fair value of his shares in case of
merger or consolidation. However, in order to exercise this right, the stockholder dissenting
must be present in the stockholders’ meeting in which the plan of merger was taken up.

Effect on Employees

            In case of merger, the employees of the absorbed corporations are assumed by the
surviving corporation. It is further discussed in the case of Bank of the Philippine Islands (BPI)
v. BPI Employees’ Union-Davao Chapter-Federation of Unions in BPI Unibank, G.R. No.
164301, October 19, 2011, wherein the Supreme Court resolved that:

” Not to be forgotten is that the affected employees managed, operated and worked on the
transferred assets and properties as their means of livelihood; they constituted a basic
component of their corporation during its existence. In a merger and consolidation situation,
they cannot be treated without consideration of the applicable constitutional declarations and
directives, or, worse, be simply disregarded. If they are so treated, it is up to this Court to read
and interpret the law so that they are treated in accordance with the legal requirements of
mergers and consolidation, read in light of the social justice, economic and social provisions of
our Constitution. Hence, there is a need for the surviving corporation to take responsibility for
the affected employees and to absorb them into its workforce where no appropriate provision
for the merged corporation’s human resources component is made in the Merger Plan.

By upholding the automatic assumption of the non-surviving corporation’s existing employment

contracts by the surviving corporation in a merger, the Court strengthens judicial protection of
the right to security of tenure of employees affected by a merger and avoids confusion regarding
the status of their various benefits which were among the chief objections of our dissenting
colleagues. However, nothing in this Resolution shall impair the right of an employer to
terminate the employment of the absorbed employees for a lawful or authorized cause or the
right of such an employee to resign, retire or otherwise sever his employment, whether before
or after the merger, subject to existing contractual obligations. “ In case of consolidation, the
employees of the constituent corporations become the employees of the new corporation.

In case of consolidation, the employees of the constituent corporations become the employees
of the new corporation.
Philippines - Taxation of cross-border
mergers and acquisitions
Taxation of cross-border mergers and acquisitions for Philippines.
Introduction
In recent years, corporate acquisitions, business reorganizations, combinations and
mergers have become more common in the Philippines. Corporate acquisitions can
be effected through a variety of methods and techniques, and the structure of a
deal can have material tax consequences. Although reorganizations are generally
taxable transactions, tax-efficient strategies and structures are available to the
acquiring entity.

Recent developments
Republic Act 10963
On 19 December 2017, Republic Act No. 10963, also known as the Tax Reform for
Acceleration and Inclusion (TRAIN) bill, was signed into law and the bill took effect
on 1 January 2018. The TRAIN law affects merger and acquisition transactions in the
areas of donor’s tax, Value Added Tax (VAT) and stamp duty (or documentary stamp
tax) as discussed below.

Republic Act 10667

In 2015, one major law was enacted affecting mergers and acquisitions (M&A) in the
Philippines. Republic Act No. 10667, also known as the Philippine Competition Act,
was signed into law on 21 July 2015. It provides for the creation of an independent,
quasi-judicial body called the Philippine Competition Commission.

The law grants the commission the power to review M&A based on factors the
commission deems relevant. Merger and acquisition agreements that substantially
prevent, restrict or lessen competition in the relevant market or in the market for
goods or services, as the commission may determine, are prohibited, subject to
certain exemptions.

Effective 1 March 2020, parties to a merger or acquisition agreement with a

transaction value exceeding 2.4 billion Philippine pesos (PHP) and the aggregate
annual gross revenues in, into or from Philippines, or value of the assets in the
Philippines of the ultimate parent entity of at least one of the acquiring or acquired
entities, including that of all entities that the ultimate parent entity controls, directly
or indirectly exceeding PHP6 billion are barred from entering their agreement until
30 days after providing notification to the commission in the form and containing
the information specified in the commission’s regulations. An agreement entered
into in violation of this notification requirement would be considered void and
subject the parties to an administrative fine of 1 to 5 percent of the transaction’s
value.

In relation to this, Republic Act No. 11494, also known as Bayanihan to Recover As
One, was signed into law and took effect on 15 September 2020. Pursuant to
Section 4 (eee) of said Act, the Commission issued Memorandum Circular 20-003
which exempts all M&A with transaction values below PHP50 billion from
compulsory notification if entered into within a period of 2 years from the
effectivity of the Act. This is in response to the COVID-19 pandemic

The Philippine Competition Act also provides that the commission shall promulgate
other criteria, such as increased market share in the relevant market in excess of
minimum thresholds, which may be applied specifically to a sector or across some
or all sectors in determining whether parties to a merger or acquisition should
notify the commission.
If the commission determines that such agreement is prohibited and does not
qualify for exemption, the commission may:

 prohibit the agreement’s implementation

 prohibit the agreement’s implementation until changes specified by
the commission are made
 prohibit the agreement’s implementation unless and until the
relevant party or parties enter into legally enforceable agreements
specified by the commission.
The Commission published Memorandum Circulars (MC) Nos. 16-001 and 16-002
on 22 February 2016, and they took effect on 8 March 2016. MC 16-001 provides
transitional rules for M&A executed and implemented after the effective date of the
Philippine Competition Law and before the effective date of its Implementing Rules
and Regulations (IRR). Similarly, MC 16-002 provides transitional rules for M&A of
companies listed with the Philippine Stock Exchange.

Application for tax treaty relief

On 28 March 2017, the Bureau of Internal Revenue (BIR) issued Revenue
Memorandum Order (RMO) No. 08-2017 effective 26 June 2017 regarding the
procedures for claiming tax treaty benefits for dividend, interest and royalty income
of non-resident income earners. The RMO dispensed with the mandatory tax treaty
relief application (TTRA) for dividends, interests and royalties. Instead, preferential
treaty rates for dividends, interests and royalties may now be applied by Philippine
withholding tax agents on submission of a Certificate of Residence for Tax Treaty
Relief (CORTT) form.

RMO No. 08-2017 does not apply to other types of income such as business profits
and gains from alienation of property. In these cases, RMO No. 72-2010, as
discussed below, applies and obtaining a ruling is still required.

On 25 August 2010, the BIR issued RMO No. 72-2010, which mandates the filing of a
TTRA for entitlement to preferred tax treaty rates or exemptions. Under current
regulations, this is now limited to income other than dividends, interests and
royalties as covered by RMO No. 08-2017. The TTRA must be filed before the
occurrence of the first taxable event (i.e. the activity that triggers the imposition of
the tax).

The BIR relaxed the TTRA filing deadline after a Philippine Supreme Court ruling in
August 2013. In that case, the BIR denied a TTRA because the taxpayer failed to file
their TTRAs before the occurrence of the first taxable event. The court held that the
obligation to comply with a tax treaty takes precedence over a BIR revenue
memorandum.

Asset purchase or share purchase

An acquisition in the Philippines may be achieved through a purchase of a target’s
shares, assets or entire business (assets and liabilities). Share acquisitions have
become more common, but acquisitions of assets only still occur. A brief discussion
of each acquisition method follows.

Purchase of assets
Income from an asset acquisition is taxed in the Philippines where the transfer of
title or ownership takes place in the Philippines. This is an important consideration
for planning and structuring an asset acquisition. Generally, the value of an asset is
its selling price at the time of acquisition. For purposes of determining gain or loss,
the gain is the amount realized from the sale over the asset’s historical or
acquisition cost or, for a depreciable asset, its net book value.

Purchase price
To help avoid questions from the tax authorities on the valuation of an asset, the
selling price should be at least equivalent to the book value or fair market value
(FMV) of the asset, whichever is higher. In a purchase of assets in a business, it is
advisable that each asset be allocated a specific purchase price in the purchase
agreement, or the tax authorities might arbitrarily make a specific allocation for the
purchase price of those assets. In addition, in an acquisition of assets, a sale comes
within the purview of the Bulk Sales Law if it is a sale of all or substantially all of the
trade or business or of the fixtures and equipment used in the business. The seller
must comply with certain regulatory requirements; if not, the sale is considered
fraudulent and void.

Goodwill
Goodwill is not subject to depreciation. The tax authorities have consistently held
that no amount of goodwill paid may be deducted or amortized for tax purposes
unless the same business or the assets related to the goodwill are sold. Thus, for
tax purposes, since goodwill is not deductible or recoverable over time in the form
of depreciation or amortization allowances, the taxpayer can only recover goodwill
on a disposal of the asset, or a part of it, to which the goodwill attaches. In this case,
the gain or loss is determined by comparing the sale price with the cost or other
basis of the assets, including goodwill.
In the sale of a business or asset, payment for goodwill is normally included as part
of the purchase price without identifying the portion of the purchase price allocated
to it. Therefore, goodwill could form part of the purchase price for purposes of
determining gain or loss from the subsequent sale of the business or assets, or for
depreciation of depreciable assets.

Intangibles, such as patents, copyrights and franchises used in a trade or business

for a limited duration, may be subject to a depreciation allowance. Intangibles used
in a business or trade for an unlimited duration are not subject to depreciation.
However, an intangible asset acquired through capital outlay that is known, from
experience, to be of value to the business for only a limited period may be
depreciated over that period.

On the sale of a business, a non-competition payment is a capital expenditure that

may be amortized over the period mentioned in the agreement, provided the non-
competition is for a definite and limited term. Any loss incurred on the sale may be
claimed as a deduction from gross income, except for capital losses, which can only
be used to offset capital gains.

Depreciation
Depreciation allowances for assets used in trade and business are allowed as tax
deductions. Any method, such as straight-line, declining-balance, sum-of-the-years’
digit and rate of depreciation, may be adopted as long as the method is reasonable
and has due regard to the operating conditions under which it was chosen.

An asset purchase does not generally affect the depreciation. Usually, the buyer
revalues the life of the asset purchased for the purposes of claiming the tax-
deductible allowance.

Tax attributes
An acquisition of assets may be structured tax-free (non-recognition of gain or loss)
when property is transferred to a corporation in exchange for stock or units of
participation, resulting in the transferor, alone or with no more than four others,
gaining control (at least 51 percent of voting power) of the corporation. However, if
money or other property (boot) is received along with the shares in the exchange,
any gain is recognized up to the value of the boot and FMV of other property where
the transferor does not distribute the boot. Gains should also be recognized if, in
the exchange, a party assumes liabilities in excess of the cost of assets transferred.
Losses cannot be deducted.
The provisions for tax-free exchanges merely defer the recognition of gain or loss.
In any event, the original or historical cost of the properties or shares is used to
determine gain or loss in subsequent transfers of these properties.

In later transfers, the cost basis of the shares received in a tax-free exchange is the
same as the original acquisition cost or adjusted cost basis to the transferor of the
property exchanged. Similarly, the cost basis to the transferee of the property
exchanged for the shares is the same as it would be to the transferor.

The formula for determining substituted basis is provided in BIR Revenue

Memorandum Ruling No. 2-2002. ‘Substituted basis’ is defined as the value of the
property to the transferee after its transfer and the shares received by the
transferor from the transferee. The substituted bases of the shares or property are
important in determining the tax base to be used in a tax-free exchange when
calculating any gain or loss on later transfers.

Value Added Tax

In asset acquisitions, a 12 percent VAT is imposed on the gross selling price of the
assets purchased in the ordinary course of business or of assets originally intended
for use in the ordinary course of business.

The TRAIN law amended the enumeration of VAT-exempt transactions, expressly

providing that transfers of property pursuant to Section 40 (C)(2) of the Tax Code
(such as mergers and tax-free exchanges) are VAT-exempt.

Transfer taxes
An ordinary taxable acquisition of real property assets is subject to stamp duty. In
tax-free exchanges, no stamp duty is due on the deed transferring the property.
However, the shares of stock issued in exchange for the property is subject to
stamp duty if they are an original issue of shares. Under the TRAIN law, as of 1
January 2018, the stamp duty on the originally issued shares of stock with par value
was adjusted to PHP2.00 from PHP1.00 on every PHP200 par value. If the originally
issued shares of stock was without par value, the amount of the documentary
stamp tax shall be based upon the actual consideration for the issuance of the
shares of stock. All transfers of personal property are exempt from stamp duty.
Purchase of shares
The shares of a target Philippine company may be acquired through a direct
purchase. Gains from the sale are considered Philippine-source income and are
thus taxable in the Philippines regardless of the place of sale. Capital gains tax
(CGT) is imposed on both domestic and foreign sellers. Net capital gain is the
difference between the selling price and the FMV of the shares, whichever is higher,
less the shares’ cost basis, plus any selling expenses

In determining the shares’ FMV, the book value based on the latest available
financial statements duly certified by an independent certified public accountant
prior to the date of sale, but not earlier than the immediately preceding taxable
year, shall be the basis for FMV of common shares of stock. For preferred shares of
stock, the liquidation value, which is equal to the redemption price of the preferred
shares as of balance sheet date nearest to the transaction date, including any
premium and cumulative preferred dividends in arrears, shall be considered as fair
market value. In case there are both common and preferred shares, the book value
per common share is computed by deducting the liquidation value of the preferred
shares from the total equity of the corporation and dividing the result by the
number of outstanding common shares as of balance sheet date nearest to the
transaction date. [Revenue Regulations (RR) No. 20-20]. This is the most recent
pronouncement on this issue.

Accordingly, for CGT purposes, it is advisable that the selling price not be lower
than the FMV. Capital gains are usually taxed at:

 for sales of unlisted shares: 5 percent for amounts up to

PHP100,000, and 10 percent for amounts over PHP100,000
 for sales of publicly listed/traded shares: six-tenths of 1 percent of
the gross selling price or gross value in money.
A capital loss from a sale of shares is allowed as a tax deduction only to the extent
of the gains from other sales. In other words, capital losses may only be deducted
from capital gains.

Most acquisitions are made for a consideration that is readily determined and
specified, so for share purchases, it is imperative that shares not be issued for a
consideration less than the par or issued price.

Consideration other than cash is valued subject to the approval of the Philippine
Securities and Exchange Commission (SEC).

Tax indemnities and warranties

When the transaction is a share acquisition, the buyer acquires the entire business
of the company, including existing and contingent liabilities. It is best practice to
conduct a due diligence review of the target business. A due diligence review report
generally covers:
  any significant undisclosed tax liability of the target that could
significantly affect the acquiring company’s decision
 the target’s degree of compliance with tax regulations, status of tax
filings and associated payment obligations
 the material tax issues arising in the target and the technical
correctness of the tax treatment adopted for significant transactions.
Following the results of the due diligence review, the parties execute an agreement
containing the indemnities and warranties for the protection of the buyer. As an
alternative, it is possible to spin off the target business into a new company,
thereby limiting the liabilities to those of the target.

Tax losses
The change in control or ownership of a corporation following the purchase of its
shares has no effect on any net operating loss (NOL) of the company. The NOL that
was not offset previously as a deduction from gross income of the business or
enterprise for any taxable year immediately preceding the taxable year in question
is carried over as a deduction from gross income for the 3 years immediately
following the year of such loss. The NOL is allowed as a deduction from the gross
income of the same taxpayer that sustained and accumulated the NOL, regardless
of any change in ownership. Thus, a purchase of shares of the target corporation
should not prevent the corporation from offsetting its NOL against its income.

Crystallization of tax charges

As a share acquisition is a purchase of the entire business, any and all tax charges
are assumed by the buyer. This is one of the areas covered by the indemnities from
the seller, for which a hold-harmless agreement is usually drawn up.

Pre-sale dividend
While not a common practice, dividends may be issued prior to a share purchase.
However, dividends are subject to tax, except for stock dividends received by a
Philippine company from another Philippine company.

Transfer taxes
Transfers of shares of stock, whether taxable or as part of a tax-free exchange, are
subject to stamp duty. Only sales of shares listed and traded on the Philippine stock
exchange are exempt from stamp duty. As of 20 March 2009, the Republic Act 9648
permanently exempts such sales from stamp duty.

Choice of acquisition vehicle

In structuring an acquisition or reorganization, an acquiring entity or investor can
use one of the entities described below. Since the tax implications for different
income streams vary from one acquisition vehicle to another, it is best to examine
each option in the context of the circumstances of each transaction.

Local holding company

A Philippine holding company may be used to hold the shares of a local target
company directly. The main advantage of this structure is that dividends from the
target company to the holding company are exempt from tax. Although distributing
the dividends further upstream to the foreign parent company will attract the
dividend tax, tax-efficiency may still be achieved through the use of jurisdictions
where such foreign parent company is located. It is common to use a jurisdiction
with which the Philippines has an effective tax treaty to optimize tax benefits.

One disadvantage of a Philippine holding company is that it attracts an improperly

accumulated earnings tax (IAET). Under current law, the fact that a corporation is a
mere holding company or investment company is prima facie evidence of a
purpose to avoid the tax on the part of its shareholders or members. Thus, if the
earnings of the Philippine holding company are allowed to accumulate beyond the
reasonable needs of the business, the holding company may be subject to the 10
percent IAET.

Foreign parent company

Where a foreign company opts to hold Philippine assets or shares directly, it is
taxed as a non-resident foreign corporation. A final withholding tax (WHT) of 15
percent is imposed on the cash or property dividends it receives from a Philippine
corporation, provided the country in which the non-resident corporation is
domiciled allows a credit against the tax due from the non-resident corporation
taxes deemed paid in the Philippines equivalent to 15 percent. This is referred to as
the tax sparing provision under the Tax Code. In this case, a provision under the
Tax Code, and not a tax treaty, provides for the preferential tax rate on dividends.

Similarly, the tax rate for dividends, interests and royalties may be reduced where a
tax treaty applies without the need for a confirmatory ruling under RMO No. 08-
2017. As noted earlier, preferential rates and exemptions for income other than
dividends, interest and royalties under a treaty are allowed only if a prior ruling has
been secured.

Philippine corporation law does not permit a foreign company to merge with a
Philippine company under Philippine jurisdiction. However, they may elect to merge
abroad.
Non-resident intermediate holding company
Certain tax treaties provide exemption from CGT on the disposal of Philippine
shares. Gains from sales of Philippine shares owned by a resident of a treaty
country are exempt from CGT, provided the assets of the Philippine company
whose shares are being sold do not consist principally (more than 50 percent) of
real property interests in the Philippines. Also, some treaties (e.g. Philippines-
Netherlands tax treaty) grant a full exemption on alienation of shares without
condition (i.e. without the real property interest component). This is a potential
area for planning, and specific treaties should be consulted.

Local branch
In certain cases, foreign companies may opt to hold Philippine assets or shares
through a branch office. As with a domestic corporation, the Philippine-source
income of a resident foreign corporation, such as a branch, is taxed at the rate of
30 percent (from 1 January 2009). Through the attribution principle implemented
under Revenue Audit Memorandum Order No. 1-95, a portion of the income
derived from Philippine sources by the foreign head office of the branch is
attributed to the branch, following the formula in the order. The income is
apportioned through the branch or liaison office that was not party to the
transaction that generated the income. The branch or liaison office then becomes
liable to pay tax on the income attributed to it. Profit remitted to a foreign head
office is subject to a 15 percent WHT, unless reduced by a tax treaty.

In establishing a branch office in the Philippines, the SEC requires that the foreign
head office comply with certain financial ratios (i.e. 3:1 debt-to-equity ratio, 1:1
solvency ratio and 1:1 currency ratio).

Joint venture
Joint ventures may be either incorporated (registered with the SEC as a corporation)
or unincorporated. Both forms are subject to the same tax as ordinary
corporations. Unincorporated joint ventures formed to undertake construction
projects, or those engaged in petroleum, coal, geothermal or other energy
operations under a government service contract, are not taxable entities. Profits
distributed by the joint venture or consortium members are taxable.

Choice of acquisition funding

Corporate acquisitions may be funded through equity, debt or a combination of the
two.

Debt
Companies tend to favor debt over equity as a form of financing mainly because of
the tax-favored treatment of interest payments vis-à-vis dividends (see this report’s
information on deductibility of interest). The tax advantage of interest payments, in
contrast to dividends, is an outright savings of 30 percent in the form of deductible
expense against the taxable base. Since interest payments are subject to a 20
percent final tax under the Tax Code, financing through debt still has an advantage
over financing with equity equivalent to 15 percent.

Currently, there are no specific rules for determining what constitutes excessively
thin capitalization, so a reasonable ratio of debt to equity must be determined case-
by-case.

Deductibility of interest
Under current law, interest payments incurred in a business are deductible against
gross income. The allowable deduction for interest expense is reduced by 33
percent of the company’s interest income, if any, subjected to final tax.

Withholding tax on debt and methods to reduce or eliminate it

Generally, interest income received by a Philippine corporation from another
Philippine corporation is subject to the regular corporate income tax of 30 percent.
However, interest income received by a non-resident foreign corporation from the
Philippines is subject to a final withholding tax of 20 percent. The rate of WHT may
be reduced under a tax treaty with no need for a confirmatory ruling under RMO
No. 08-2017.

Checklist for debt funding

As no specific rules determine what constitutes excessively thin capitalization, a
reasonable ratio of debt-to-equity should be determined case-by-case.

Equity
A buyer may use equity to fund its acquisition by issuing shares to the seller as
consideration.

A tax-free acquisition of shares can be accomplished through a share-for-share

exchange between the acquiring company and the target company. In such an
exchange, one party transfers either its own shares or the shares it owns in a
domestic corporation solely in exchange for shares of stock in the other company,
and the transferor gains control of the transferee company. In the same manner,
the transferee company becomes the controlling stockholder of the transferor
company since the shares received are the domestic shares of the transferee
company.
This is considered a tax-free exchange within the scope of Section 40(C)(2) of the
Tax Code. No gain or loss is recognized if property (including shares of stock) is
transferred to a corporation by a person in exchange for stock or units of
participation in such a corporation such that the person, alone or with no more
than four others, gains control (stock ownership of at least 51 percent of the total
voting power) of the corporation.

Hybrids
The current laws contain no guidelines on whether to classify hybrid financial
instruments as equity infusions or debt instruments. The question is whether a
loan is a bona fide loan or a disguised infusion of capital.

If it is the latter, there is a risk that the BIR may:

 disallow the interest expense

 impute interest income to the lender and assess additional income
tax thereon, where the loan carries an interest rate that is less than
the prevailing market rate.
Certain court decisions may provide some guidance on whether a transaction
should be considered a bona fide loan or a dividend distribution. To date, no
authoritative or definitive rulings have been issued.

Discounted securities
Under Philippine laws, the discount on discounted securities is treated as interest
income rather than a taxable gain. For discounted instruments, a trading gain
arises only where the instrument is sold above par.

Other considerations
Concerns of the seller
In an acquisition of assets, a sale comes within the purview of the Bulk Sales Law
where it is a sale of all or substantially all of the trade or business, or of the fixtures
and equipment used in the business. The seller must comply with certain
regulatory requirements; if not, the sale is considered fraudulent and void.

VAT applies to sales of goods in the ordinary course of trade or business (i.e. the
regular conduct or pursuit of a commercial or an economic activity, including
incidental transactions).

Thus, isolated transactions generally are not subject to VAT.

However, decisions of the Philippine Court of Tax Appeals in 2013 consistently hold
that an isolated transaction may be considered an incidental business transaction
for VAT purposes. Hence, VAT may be imposed on isolated transactions such as
sales of assets, shares or the whole business enterprise.

Company law and accounting

The Revised Corporation Code of the Philippines governs the formation,
organization and regulation of private companies, unless they are owned or
controlled by the government or its agencies. The Revised Corporation Code also
governs mergers and other business combinations.

The Revised Corporation Code allows two or more corporations to merge into
either of the constituent corporations or a new consolidated corporation. Under
the Philippine Tax Code, the terms ‘merger’ and ‘consolidation’ are understood to
mean:

 an ordinary merger or consolidation

 the acquisition by one corporation of all or substantially all the
properties of another corporation solely for stock, undertaken for a
bona fide business purpose and not solely for the purpose of
escaping the burden of taxation.
Mergers in the Philippines require a transfer of all the assets and liabilities of the
absorbed corporation to the surviving corporation. This step is followed by the
dissolution of the absorbed corporation. In return for the transfer of all the assets
and liabilities of the absorbed corporation, the surviving entity issues a block of
shares equal to the net asset value transferred. These shares are in turn distributed
to the stockholders of the absorbed corporation.

A de facto merger is the acquisition by one corporation of all or substantially all of

the properties of another corporation solely for stock, usually undertaken for a
bona fide business purpose and not solely to escape taxation. For the acquisition to
be considered substantial, at least 80 percent of the assets acquired must have an
element of permanence, that is, not acquired for immediate disposal. Unlike a
statutory merger, where the absorbed corporation is automatically dissolved as a
consequence of the merger, in a de facto merger, the corporation, the assets of
which were acquired, survives after the transfer until it is later dissolved by another
act.

The tax consequences of a de facto merger are similar to those of a statutory

merger. However, in a de facto merger, the acquisition of assets does not
automatically result in the dissolution of the corporation, the assets of which are
acquired, and so the net operating loss carryover (NOLCO) of the absorbed
corporation is not transferred to the acquiring corporation.

A legitimate business purpose for the merger is essential. Without it, the merger
could be treated as a mere arrangement to avoid the payment of taxes, and the BIR
could disregard the tax-free nature of the transaction. In determining the existence
of a bona fide business purpose for the merger, each step of the transaction is
usually considered, and the entire transaction or series of transactions could be
treated as a single unit.

Applying the step transaction test is recommended. Under this test, it is advisable
to implement each successive step in a merger after the lapse of a certain period of
time, say, a year or so. This prevents an examination by the BIR on whether or not a
business purpose exists. However, the BIR has not issued a ruling on the acceptable
timeframe for each transaction.

Group relief/consolidation
Group tax relief is not applicable under Philippine law. For tax purposes, each legal
entity is registered as a separate taxpayer and subject to separate tax filings, and
tax consolidations are not possible.

Transfer pricing
The Philippine Tax Code grants the Commissioner of Internal Revenue the power to
reallocate income and deductions between and among related entities. The
Secretary of Finance’s transfer pricing regulations (Revenue Regulations No. 02-
2013) provide guidelines for applying the arm’s length principle for transfer pricing.

These guidelines state that the most appropriate of the transfer pricing methods
under the Organisation for Economic Co-operation and Development’s (OECD)
transfer pricing guidelines may be used in determining the arm’s length result.
These methods are:

 comparable uncontrolled price method

 resale price method
 cost plus method
 profit split method
 transactional net margin method.
The guidelines do not prescribe a preference for any one method. Instead, the
method that produces the most reliable results, taking into account the quality of
available data and the degree of accuracy of adjustments, should be utilized.
The guidelines recognize the authority of the Commissioner of Internal Revenue to
make transfer pricing adjustments to ensure that taxpayers clearly reflect income
attributable to related-party transactions and to prevent the avoidance of taxes
through such transactions.

The documentation supporting the transfer pricing analysis is not required to be

submitted upon filing of tax returns. The taxpayer should retain the documentation
for the period provided under the Tax Code and be prepared to submit to the BIR
when required or requested to do so.

Further, the documentation should be contemporaneous (i.e. existing, prepared at

the time the related parties develop or implement any arrangement that might
raise transfer pricing issues or prepared when the parties review these
arrangements when preparing tax returns).

Dual residency
The Philippines follows the incorporation/domestication rule: a corporation is
considered a resident of the country where it is incorporated. Certificates of
incorporation or registration and articles of incorporation or association are
considered sufficient proof of residency.

Foreign investments of a local target company

Philippine domestic corporations are taxed on their worldwide income at the rate
of 30 percent, subject to foreign tax credits in compliance with applicable rules.

Related Party Disclosures

On 8 July 2020, the BIR issued RR 19-2020 which requires the attachment of BIR
Form No. 1709 to its Annual Income Tax Returns. On 21 December 2020, RR 34-
2020 was issued providing the guidelines and procedures for the submission of BIR
Form No.1709.

Under this regulation, large taxpayers, taxpayers enjoying tax incentives, taxpayers
reporting net operating losses for the current taxable year and the immediately
preceding 2 consecutive taxable years, and a related party are required to disclose
its related party transactions by submitting BIR Form 1709 which replaces BIR Form
No. 1702H. Taxpayers who are not covered are required to disclose in their Notes
to the Financial Statements that they are not covered by the requirements and
procedures for related party transactions provided under said RR.

Comparison of asset and share purchases

Advantages of asset purchase
  The transferee corporation does not automatically assume liabilities
of the transferor corporation.
 The transferor corporation does not automatically dissolve and may
continue its separate existence.
 The transferor and transferee corporations may select which assets
to transfer or purchase.
 The transfer of all or substantially all of the assets solely for stock is
not subject to donor’s tax. Under the TRAIN law, as of 1 January 2018,
a sale, exchange or other transfer of property made in the ordinary
course of business (i.e. a transaction that is bona fide, at arm’s length
and free from any donative intent) is considered as made for an
adequate and full consideration in money or money’s worth), so it is
not subject to donor’s tax.
 The transfer of all or substantially all of the assets solely for stock is
not subject to stamp duty unless the assets transferred involve real
property.
 No loss or gain is recognized, provided the conditions in Section
40(C)(2) of the Tax Code are met.
 An asset purchase does not normally need SEC approval, unless the
assets are payments for subscription to the capital stock and there is
a need to increase the authorized capital stock of the transferee
corporation.
 The property purchased by the buyer is subject to depreciation. The
buyer may use a different method and rate of depreciation based on
the acquisition cost of the property acquired.
Disadvantages of asset purchases
 Unless specifically provided for in the agreement, the transferee
corporation does not acquire the rights, privileges and franchises of
the transferor corporation.
 The transferee corporation cannot claim any NOLCO of the
transferor corporation since the transferor corporation continues to
exist as a legal entity.
 The transferor’s unused input VAT cannot be absorbed by or
transferred to the transferee corporation.
 A transfer of all or substantially all of the assets must comply with
the requirements of the Bulk Sales Law.
 A higher purchase price arises in the event of any additional
premium or goodwill imputation.
  Acquisition is subject to VAT where the transaction is deemed to be a
sale.
 Any real property purchased is subject to stamp duty and VAT.
Advantages of stock purchase
 The buyer may benefit from an automatic transfer of the rights,
privileges and franchises by the transferor corporation to the
transferee corporation.
 The transferee corporation may claim the NOLCO of the transferor
corporation, subject to the provisions of the Tax Code and its
regulations. However, in 2012, the BIR ruled that in a statutory
merger the NOLCO of the absorbed corporation is not one of the
assets that can be transferred and absorbed by the surviving
corporation, as this privilege or deduction is only available to the
absorbed corporation. Accordingly, the tax-free merger does not
cover the NOLCO of the absorbed corporation that can be
transferred and absorbed by the surviving corporation.
 The transferor’s unused input VAT may be absorbed by or
transferred to the transferee corporation.
 A merger or tax-free exchange may not be subject to donor’s tax.
Under the TRAIN law, as of 1 January 2018, a sale, exchange or other
transfer of property made in the ordinary course of business (i.e. a
transaction that is bona fide, at arm’s length and free from any
donative intent) is considered as made for an adequate and full
consideration in money or money’s worth), so it is not subject to
donor’s tax.
 A merger or tax-free exchange may not be subject to VAT. Under the
TRAIN law, as of 1 January 2018, a transfer of property pursuant to
Section 40(C)(2) of the Tax Code (e.g. merger, tax-free exchange) is
VAT-exempt.
 No loss or gain is recognized, provided the conditions in Section
40(C)(2) of the Tax Code are met.
 A stock purchase may involve a lower purchase price and lower
taxes.
Disadvantages of stock purchase
 The transferee corporation may be responsible for all the liabilities
and obligations of the transferor corporation as if the transferee
corporation had incurred them directly. Any claim, action or pending
 proceeding by or against the transferor corporation may be
prosecuted by or against the transferee corporation. 
  It may be necessary to increase the authorized capital stock of the
transferee corporation to accommodate the issue of new shares;
therefore, SEC approval is required. 
 The issue of new shares is subject to stamp duty. 
 Regulatory compliance is required before the shares are registered
in the buyer’s name.

MERGER TAX ISSUES REVISITED

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.
   
360p geselecteerd als afspeelkwaliteit

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.

KUWTT: BBM paid taxes, documents show | Dec. 6, 2021

2:28/4:28

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.

close
volume_off

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.

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

Is there taxable liquidation in an upstream merger?

21 Apr 2020

At a time when all hope seems lost, witnessing people coming together to help each
other in the battle against COVID-19 may be what’s needed to have one’s faith in
humanity restored. Frontliners, from health care workers and emergency response teams
to grocery workers and food delivery riders, are being lauded as heroes, and rightfully
so. Whether it is our lives or dinners that are on the line, these frontliners work hand in
hand and with the rest of the world, despite the risk to their personal safety every time.
The Bayanihan spirit we have been seeing these past few weeks is a show of solidarity
that is definitely one for the ages.

As tempting as it is to dig deeper into how frontliners have integrated themselves into
our daily lives, this article will tackle a different kind of union: one that existed long
before this pandemic challenged business leaders to think on their feet. To the business-
savvy, these unions are known as mergers or consolidations.

In the Philippines, companies resort to mergers and consolidations because of the

demands of their business strategy. Corporations combine into a single unit to pool their
resources for greater efficiency. In fact, mergers and consolidations are an option that
businesses might consider after the enhanced community quarantine (ECQ) ends.

Our laws actually recognize and provide incentives for such transactions. For instance,
our current tax laws exempt corporations that enter into a tax-free merger from income
tax and other forms of taxes. Under this scheme, a corporation that absorbs another
corporation through a merger and exchanges its shares for the property of the latter is
exempt from income tax, value-added tax (VAT), and other forms of tax.

However, in Bureau of Internal Revenue (BIR) Ruling No. 508-2012, the BIR held that an
upstream merger where no shares were issued to the absorbed corporation in exchange
for its assets is a taxable donation and does not qualify as a tax-free exchange under
Section 40 (C) (2) of the Tax Code, as amended. In the same manner, the intended merger
has the effect of dissolving and liquidating the subsidiary without paying the
corresponding taxes.

Upon the review of the Secretary of Finance in Department of Finance (DoF) Opinion No.
012-2018, the DoF emphasized that tax exemptions are to be construed in strictissimi
juris (strictly) against the taxpayer and liberally in favor of the taxing authority. Without
complying with the requirement to issue shares in exchange for the property of the
absorbed corporation, the upstream merger failed to qualify as a tax-free exchange. The
DoF clarified, however, that the upstream merger is not a donation made by a subsidiary
to its parent company, as there is no intent to donate on the part of the subsidiary.
Finally, the DoF held that, since the upstream merger is not a tax-free merger, proper
taxes on dissolution and liquidation must be imposed.
But what is a merger, and what does the process involve? The Supreme Court (SC) has
defined a merger as “a union between two or more corporations, whereby one or more
existing corporation is absorbed by another.” The parties to a merger, or constituent
corporations, are dissolved, leaving only the surviving corporation. For this transaction
to be tax-exempt, jurisprudence requires the following conditions: (1) there must be a
legal merger or consolidation, or transfer of all or substantially all of the properties of a
corporation for the stock of another corporation; and (2) such business restructuring or
reorganization must be for a bona fide business purpose.

In an upstream merger, the parties are the parent company (the surviving corporation)
and its wholly-owned subsidiary (the absorbed corporation). Since the surviving
corporation is the sole stockholder of the subsidiary, the merger does not result in the
issuance of shares, as issuing shares to the stockholders of the absorbed corporation
would result in the issuance of treasury shares.

As a result of the merger, all of the absorbed subsidiary’s assets and liabilities are
transferred to the surviving corporation by operation of law. The DoF has stated that,
since the upstream merger failed to qualify as tax-free, the dissolution of the absorbed
corporation brought about by the merger amounts to taxable dissolution and liquidation.
Hence, it is subject to pertinent taxes under the Tax Code. However, in a long line of
cases decided not only by the Court of Tax Appeals, but also by the SC, the consistent
doctrinal pronouncement is that there is no winding up of the affairs or liquidation of the
assets of the dissolving corporation in a merger, because the surviving corporation
automatically acquires all its rights, privileges, and powers, as well as its liabilities, by
operation of law.

In a merger, the surviving corporation can achieve a continuous life of the juridical
personalities and business enterprises of the dissolving corporation. As ruled by the SC
in several cases, there is no legal break in such juridical personalities and business
enterprises, as they end up combined in the surviving or consolidated corporation. Since
there is no legal break in the juridical personality of the absorbed corporation, then there
is no liquidation to speak of. While there is a dissolution of the absorbed corporation by
operation of law, there is no winding up of its affairs or liquidation of its assets, since the
surviving corporation would continue the combined business. Liquidation contemplates
the death of a corporation, one that amounts to the winding up of the affairs of a
corporation. Such is not present in a merger.
The future of our people and our economy has been greatly affected as the COVID-19
pandemic continues to claim lives and opportunities. We have been reading news about
mass layoffs by several corporations around the world due to community lockdowns and
the onset of a global recession. Many businesses have been paralyzed, with several
companies implementing a no-work-no-pay scheme to counter the effects of the
pandemic.

At this point, the private sector has been thinking of ways to ease the serious
consequences of the ECQ. In order to continue business operations, an option would be
to enter into mergers. With the efficiencies and scale achieved through mergers,
businesses may be able to prevent serious losses and laying off workers. The
government should consider supporting this kind of union, especially among
corporations bearing the brunt of the economic impact resulting from the global
pandemic. For this to work, however, the government must review its existing policies,
particularly those concerning upstream mergers, in order to provide a stable future.

Let’s Talk Tax is a weekly newspaper column of P&A Grant Thornton that aims to keep
the public informed of various developments in taxation. This article is not intended to
be a substitute for competent professional advice.

Dabuimar Burgos is a tax associate of Tax Advisory & Compliance division of P&A Grant
Thornton, the Philippine member firm of Grant Thornton International Ltd.
Under the CREATE Act, sec 40 (C) (2) of the NIRC of 1997, as amended, is hereby further
amended to read as follows:

"SEC. 40. Determination of Amount and Recognition of Gain or Loss. -

"(A) x x x

"(B) x x x

"(C) Exchange of Property. - x x x

"(1) General Rule. - x x x

"(2) Exception. - No gain or loss shall be recognized on a corporation or on it stocks or

securities if such corporation is a party to a reorganization and exchanges property in
pursuance of a plan of reorganization solely for stock or securities in another
corporation that is a party to the reorganization. A reorganization is defined as:

"(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) The acquisition by one corporation, in exchange solely for all or a part of its voting
stock, or in exchange solely for all or part of the voting stock of a corporation which is in
control of the acquiring corporation, of stock of another corporation if, immediately after
the acquisition, the acquiring corporation has control of such other corporation whether
or not such acquiring corporation had control immediately before the acquisition; or
"(c) The acquisition by one corporation, in exchange solely for all or a part of its voting
stock or in exchange solely for all or part of the voting stock of a corporation which is in
control of the acquiring corporation, of substantially all of the properties of another
corporation. In determining whether the exchange is solely for stock, the assumption by
the acquiring corporation of a liability of the others shall be disregarded; or

"(d) A recapitalization, which shall mean an arrangement whereby the stock and bonds of
a corporation are readjusted as to amount, income, or priority or an arrangement of all
stockholders and creditors to change and increase or decrease the capitalization or
debts of the corporation or both; or

"(e) A reincorporation, which shall mean the formation of the same corporate business
with the same assets and the same stakeholders surviving under a new charter.

"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: Provided, That stocks issued for services shall not be considered as issued
in return for property.

"Sale or exchange of property used for business for shares of stock covered under this
Subsection shall not be subject to value-added tax.

"In all of the foregoing instances of exchange of property, prior Bureau of Internal
Revenue confirmation or tax ruling shall not be required for purposes of availing the tax
exemption.