BIR Ruling No. 342-2021

REPUBLIC OF THE PHY! IPPINES

DEPARTMENT OF FINANCE BUREAU OF INTERNAL REVENUE

Quezon City

BIR Ruling No. 214-12 Section 40(C)(2)&(6)(b), BIR Ruling No. 075-18 Tax Code of 1997, as amended SEP 3 1 2021 S40M-342 - 20 2

SYCIP GORRES VELAYO & CO

1226 Makati City 6760 Ayala Avenue

Attention: Lucil Q. Vicerra Principal, Indirect Tax Services

Gentlemen:

This refers to your letter dated May 29, 2015 requesting for confirmation of your Opinion that the merger of Star Recording, Inc. and Star Songs, Inc. (SRI and SSI, respectively. or the "Absorbed Corporations"), and"ABS-CBN Film Productions, Inc. ("AFPI" or the "Surviving Corporation"), is a tax-free transfer/exchange pursuant to Section 40(C)(2) in relation to Section 40(C)(6)(b) of the National Internal Revenue Code of 1997, as amended (Tax Code).

BACKGROUND

the Securities and Exchange Commission (SEC) on March 25, 2003. Its registered address is AFPI (TIN No. is a domestic corporation that was duly incorporated with

at 2nd Floor, Eugenio Lopez Jr. Communications Center, Eugenio Lopez Drive, Quezon City. 1 103. Its primary purpose is to produce, manufacture, sell, distribute, lease or otherwise trade in motion pictures or films of every kind and description. It acts as an agent or representative of corporations, firms and individuals in carrying on, conducting or engaging in the business of buying or selling films of any and all kinds for television, theaters and show business. It acts as an agent or representative of any firm or entity, foreign or local, in the distribution, sales. promotion or booking of films of any and all kinds ard allied or necessary products.

the SEC on February 2, 1995. Its 'registered address' is also at 2nd Floor, Eugenio Lopez Jr. Communications Center, Eugenio Lopez Drive, Quezon City, 1103. Its primary purpose is to SRI (TIN No. - .) is a domestic corporation that was duly incorporated with

otherwise deal in music records, musical compositions and scores of every kind and nature by apply, manufacture, produce, distribute, purchase, sell, export, import, lease, license, or

any method now in use hereafter developed.

the SEC on August 7, 1996. Its registered address is aiso at 2nd Floor, Eugenio Lopez Jr. Communications Center, Eugenio Lopez Drive, Quezon City, 1103. Its primary purpose is to SSI (TIN No. is a domestic corporation that was duiy incorporated with

musical compositions, whether secured under the copyright law of the Philippines or any apply, obtain acquire or otherwise dispose of, any and all copyrights on songs, lyrics and

2

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foreign country. It also files for or registers both Philippine and International copyrights of the

songs, lyrics and musical compositions.

Below is a summary of the capital structures of AFPI, SRI, SSI:

SSS AFPI SRI Corporations Constitutent Number of (common) Shares Value Par 1,000 100 100 Capital Stock Authorized Subscribed Capital Paid-up Capital

The Respective Board of Directors and stockholders of AFPI, SRI and SSI deemed it advisable to merge into a single corporation to achieve economies of scale and efficiency of

management and operations through the integration of their administrative facilities, pursuant

to the provisions of Section 40(C)(2) of the Tax Code, as amended, and Sections 76 to 80 of the Corporation Code of the Philippines.

Pursuant to the Plan of Merger, the Surviving Corporation shall increase its authorized

capital stock from Fifty Million Pesos (P50,000,000.00), consisting of 50,000 common shares

of stock with par value of One Thousand Pesos (P1.000.00) per share, to Three Hundred Fifty

Million Pesos (P350,000,000.00), consisting of 350,000 common shares with par value of One Thousand Pesos (P1,000.00) per share, equivalent to an effective increase of Three Hundred Million Pesos (P300,000,000.00) consisting of 300,000 common shares of stock with par value of One thousand Pesos (P1,000.00) per share.

Upon the effective date of the merger, the Surviving Corporation shall hold and enjoy and be vested with the rights, privileges, assets, business, franchise, powers, and other properties of the Absorbed Corporations including, but not limited to, all real and personal properties, contractual rights, licenses, privileges, property rights, claims, bank deposits, stocks, account receivables, credit lines, supplies, equipment and such other assets as they may own as of December 31, 2013 ("Cut-Off Date").

in exchange for the Net Asset Value transeferred as of the cut-off date, issue As determined by the respective Boards of Directors, the surviving Corporation shall, shares of stock to the stockholders of the Absorbed Corporations.

Based on the foregoing representations, you now request for a ruling that:

1. The statutory merger of the Absorbed Corporations and AFPI qualifies for non-

recognition of gain or loss for income tax purposes in accordance with Section 40(C)(2) in relation to Section 40(C)(6)(b) of the Tax Code, and as such, neither the Absorbed Corporations nor AFPI will be subject to income tax, withholding tax, or capital gains tax on the transfer.

2. The transfer of the assets of the Absorbed Corporations to AFPI pursuant to the merger and the surrender by the Shareholders of their shares in the Absorbed Corporations in exchange for AFPI's shares are not transfers of property for less than an adequate and

full consideration, hence, do not give rise to a liability for donor's tax.

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3.No documentary stamp tax (DST) shall be dut on the transfer of properties by SRI and

SSI to AFPI pursuant to Section 199(m) of the 1997 Tax Code, as amended by Republic Act (RA) No. 9243.

4. The original issuance of shares by AFPI to the stockholders of SRI and SSI in

proportion to their current respective shareholdings shall be subject to the DST at the rate of P1.00 per P200, or fractional part thereof, of the par value of such shares of

stock.

5. The transfer of net assets of the Absorbed Corporations to AFPI pursuant to the merger

is not subject to value-added tax (VAT) pursuant to Section 4.106-8 (b)(3) of Revenue Regulations (RR) No. 16-2005, otherwise known as the Consolidated Value-Added Tax Regulations of 2005.

6. Any excess and unutilized creditable withholding tax (CWT) of the Absorbed

Corporations as of the effective date of merger which form part of the assets to be transferred by SRI and SSI to AFPI as consequence of the merger, may be applied as tax credit by AFPI against its income tax due for the taxable year in which the merger takes effect and in the succeeding taxable years, or may be subject of a claim for refund or issuance of a tax credit certificate.

In reply, please be informed as follows:

1. The foregoing merger of the Absorbed Corporations and AFPI is a merger within the contemplation of Section 40 (C)(2) in relation to Section 40 (C)(6)(b) of the Tax Code because AFPI's acquisition/assumption of all the assets and liabilities of the Absorbed Corporations is being undertaken for a bona fide business purpose and not for the purpose of escaping the burden of taxation.

The merger of the Absorbed Corporations and AFPI qualifies for non-recognition of gain or loss for income tax purposes in accordance with Section 40(C)(2) of the Tax Code. No gain or loss shall be recognized by SRI and SSI, as the transferors, of all the assets and liabilities, pursuant to the Plan of Merger. Likewise, no gain or loss shall be recognized by AFPI, as the transferee, on its receipt of the asset and liabilities of the Absorbed Corporations pursuant to and as a consequence of the merger.

The basis of the shares of stocks to be received by Shareholders of the Absorbed Corporations upon the exchange shall be the same as the basis of the properties, stocks or securities exchanged, decreased by (1) the money received, and (2) the fair market value of the other property/ies received and increased by (a) the amount treated as dividend of the shareholders and (b) the amount of any gain that was recognized in the exchange. (Sec. 40 (C)(5)(a) of the Tax Code)

The basis of the property transferred in the hands of the transferee (AFPI) shall be the same as it would be in the hands of the transferors (Absorbed Corporations) increased by the amount of the gain, if any, recognized to the transferors (Absorbed Corporations) on the transfer. (Sec. 40 (C)(5)(b), supra)

If the amount of the liabilities assumed plus the amount of the liabilities to which the property is subject exceed the total of the adjusted basis of the property transferred pursuant to

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such exchange, then such excess shall be considered as a gain from the sale or exchange of a

capital asset or of property which is not a capital asset, as the case may be. (Sec. 40 (C)(4)(b),

supra)

The substituted bases of the properties transferred by the Absorbed Corporations to

AFPI should strictly comply with the rule that cash and other cash items will be excluded from

the computation of the adjusted bases of the properties transferred for purposes of determining

whether liabilities assumed and to which the property is subject do not exceed the adjusted

basis of the property transferred, pursuant to No. IV(A)(2) of Revenue Memorandum Ruling

(RMR) No. 2-2002 dated June 10, 2002

Accordingly, the allocated shares, liabilities and the substituted basis of the properties

transferred by the Absorbed Corporations based on Audited Financial Statement as of

December 31, 2013, shall be as follows:

STAR SONGS, INC.

Assets Amount Allocated Liabilities Allocated Shares Substituted Basis

equivalents receivables Cash & cash Trade & other

Assets Other Current

Intangible assets

assets Deferred tax

Other non-. current assets TOTAL

Liabilities Amount

Total Trade and other payables

STAR RECORDING, INC.

*Assets Amount Liabilities Allocated Allocated Shares Substituted Basis

equivalents Cash & cash

receivables Trade & other

Star Songs, Inc., while 1 Based on the Certificate of Increase of Authorized Capital Stock, a total of 3 shares shall be issued to Star Recording, Inc. tares shall be issued to

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Inventories

Intangible assets

Other current assets Property & equipment Deferred tax assets Other assets noncurrent TOTAL

Trade & other payables employee benefits Total Accrued pension Liabilities obligation & other Amount

SUMMARY

Name of Company assets transferred Total value of Total number of shares allocated Substituted Basis

Total Inc. Star Recording, Star Songs, Inc.

2. Well-settled in our jurisprudence is the fact that the essential elements of a valid donation are: (1) the reduction of the patrimony of the donor, (2) the increase in the patrimony of the donee, and (3) the intent to do any act of liberality (animus donandi).

Clearly, there is no intention on the part of the Absorbed Corporations to donate to AFPI their assets since the transaction is purely for legitimate business purpose. Thus the aforesaid merger will not be subject to gift tax since there is no intention to donate, and the transaction is a bona fide merger effected solely for business reasons.

3 & 4. No DST is due on the transfer made pursuant to the Plan of Merger under Section 199 (m) of the Tax Code, as amended by Republic Act (R.A.) No. 9243, in relation to Section 40 (C)(2) of the Tax Code. However, DST at the rate of P1.002 on each P200.00 par value, or fractional part thereof, shall be imposed on the original issuance of shares by AFPI to the stockholders as a consequence of the merger as provided under Section 1 74 of the Tax Code.

2 Old DST rate is used since the transaction took place prior to the effectivity of Republic Act No. 10963 or the TRAIN Law.

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5. The transfer of properties of the Absorbed Corporations to AFPI as a consequence

of merger wili not be subject to any output tax, pursuant to Section 4.106-8 (b)(3) of Revenue

Regulations (RR) No. 16-2005, as amended by RR No. 4-2007 and as further amended by RR

No. 10-2011. The conveyance of properties to effectuate a merger is not made in the course of business but by operation of law pursuant to the merger. Thus, any unused input tax as of the effective date of merger will be absorbed by AFPI, as the surviving corporation, pursuant to Section 4.106-8 (b)(3) of RR No. 16-2005, as amended.

6. The excess and unutilized CWT of the Absorbed Corporations, as of the effective date of the merger, which form part of the assets to be transferred by the Absorbed Corporations to AFPI as a consequence of the merger, may be applied as a tax credit by AFPI against its income tax due for the taxable year 2014, the effective date of the merger being June 30, 2014, and in the succeeding taxable years, or may be the subject of a claim for refund or issuance of a tax credit certificate (TCC).

7. It is to be emphasized, however, that the net operating loss carry-over (NOLCO):

under Section 34 (D)(3) of the Tax Code, and as implemented by RR No. 14-2001, of the Tax Code, of the Absorbed Corporations, if any, is not one of the assets of the latter that can be transferred and absorbed by the surviving corporation, AFPI, as this privilege or deduction can be availed of by the absorbed corporations only. Accordingly, the tax-free merger between the Absorbed Corporations and AFPI does not cover the NOLCO of the former.

8. The unrestricted retained earnings of the absorbed corporations are subject to the ten percent (10%) final withholding tax on dividends constructively received by its individual shareholders pursuant to Section 24 (B)(2) of the Tax Code.

9. Any excess and unexpired MCIT of the absorbed corporations as of the Effective Date of the Merger shall be carried forward and credited against the normal income tax of the surviving corporation for the three (3) immediately succeeding taxable years pursuant to Section 27(E)(2) of the Tax Code. Since the excess and unexpired MCIT of TCI is among the rights, privileges, property and/or interest of the absorbed corporations, the excess and unexpired MCIT of the latter shall be transferred and vested in AFPI on the Effective Date of the Merger. Thus, SRI and SSI's excess and unexpired MCIT shall be carried forward and credited against the normal corporate income tax of AFPI subject to the three-year-carry- forward period reckoned from the date of payment of SRI and SSI of their MCIT.

In order that the above-described reorganization can be considered as merger under Section 40 (C) (2) and (6) (b) of the 'Tax Code, the parties to the merger should comply with the following requirements set forth under RR No. 18-2001:

A. The plan of reorganization should be adopted by each of the corporations, parties

thereto, the adoption being shown by the acts of its duly constituted responsible officers and appearing upon the official records of the corporation. Each corporation. which is a party to the reorganization, shall file, as part of its return for the taxable year within which the reorganization occurred, a complete statement of all facts pertinent to the non-recognition of gain or loss in connection with the reorganization, including:

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(1) A copy of the plan of reorganization, together with a statement, executed under

the penalties of perjury, showing in full the purposes thereof and in detail all

transactions incident to, or pursuant to the plan;

(2) A complete statement of the cost or other basis of all properties, including all

stocks or securities, transferred incident to the plan;

(3) A statement of the amount of stock or securities and other property or money

received from the exchange including a statement of all distribution or other

disposition made thereof. The amount of each kind of stock or securities and

other property received shall be stated on the basis of the fair market value

thereof at the date of the exchange; and

(4) A statement of the amount and nature of any liabilities assumed upon the

exchange, and the amount and nature of any liabilities to which any of the

property acquired in the exchange is subject.

B. Every taxpayer, other than a corporation, who is a party to the reorganization, who

received stock or securities and other property or money upon a tax-free exchange

in connection with a corporate reorganization shall incorporate in his income tax

return for the taxable year in which the exchange takes place a complete statement

of all facts pertinent to the non-recognition of gain or loss upon such exchange including:

(1) A statement of the cost or other basis of the stock or securities transferred in the

exchange; and

(2) A statement in full of the amount of the stock or securities and other property or

money received from the exchange, including any liability assumed upon the exchange, and any liability to which property received is subject. The amount of each kind of stock or securities and other property (other liabilities assumed upon the exchange) received shall be set forth upon the basis of the fair market value thereof at the date of cxchange.

C. Permanent records in substantial form shall be kept by every taxpayer who

participates in a tax-free exchange in connection with a corporate reorganization showing the cost or other basis of the transferred property or money received (including any liability assumed on the exchange, or any liability to which any of the properties received were subject). in order to facilitate the determination of gain or ioss from a subsequent disposition of such stock or securities and other property received from the exchange.

In addition to the foregoing requirements, the parties shall enclose with their respective income tax returns for the taxable year in which the merger occurred a copy of the request for ruling filed with, and the corresponding ruling issued by, the Bureau of Internal Revenue, both duly stamped received by the appropriate office of the Bureau of Internal Revenue. Such parties shall include as a note to their respective audited financial statements for the taxable year in which the merger occurred a statement to the effect that they hold such assets/shares acquired in a merger and the year in which such merger occurred, and in the taxable years until the subject properties are subsequently transferred to another transferee.

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Moreover, the shareholders of SSI, SRI and AFPI shall record in their respective books

of accounts the mandatory accounting entries stated in Annex "A" hereof, pursuant to Revenue

Memorandum Order No. 17-2016.

The parties shall cause to annotate at the back of the Transfer Certificates of Titie and

Certificates of Stock, the date the merger was executed, the original or historical cost of

acquisition of the properties or shares of stock involved, and the fact that no gain or loss was

recognized as a result of such merger; provided however, that any violation by the Corporate

Secretary of this condition shall be penalized under Section 275 of the same Code. It is further

required that within ninety (90) days from receipt of this ruling, the parties to the transaction

must submit to the Legal and Legislative Division, Bureau of Internal Revenue, certified true

copies by the Corporate Secretary, of duly annotated Certificates of Stock, in respect of the

shares of stock of the transferee corporation, including the revised allocation of shares and re-

computation of the substituted bases of the properties which shall be in accordance with RMR

No. 2-2002.

This ruling is being issued on the basis of the foregoing facts as represented. However.

if upon investigation, it will be ascertained that the facts are different, then this ruling shall be

considered null and void.

Very truly yours. 1aesaMyau

CAESAR R. DULAY

K1 Commissioner of Internal Revenue m! 045890 2

C

PROFORMA ENTRIES - MERGER Annex "A"

Particulars t H he entry ies shall be per individual sharehotuer of the absorbed Individual Sharehoiders' Book Tuiratinn, Transferee's Book.

jkeeord the [lntt t t whange Is ire Jui Investnent m tiame.ot transteree Ins estment m (pame of dissply ng corporatton. Dividenu Income (net of' FW'T on Jivdend, II N *[PPI - Land & tmprosement (for real props) W <(t hhers Assets (as applicahie) Investment in tissune corp. for shares of stuck! L.abilues Capital Sack Additional Paid-In (apital H W W w

ippe arnu sf shareiol tngmg a transteree} with par Hegregate tanr market value of p Najue ot' F (share typei shares of (name issumg corporation) wih. Irecord te Tas-tree k vchunge tIFE of nsestment ir per shate -- in exchange Jor insestment in (share b pe) shares of (name issumng corp s). Imerger. in exchange for (ype and no of share) of (name of and other assets whh aggregate far market value of transferee> with par value of p To record tne I av-Free Exchange (TFF of real properties including liabilities assuined resulimng irom per share

Sheet Note. I nr B.ncc Yalue ot P Stock Certiticate Mo Investment ineludes (no and tpe.yt share s) with par MPe ot shure >) of +ssuing corporaton st covered hs acquired for the tolal cost of (subslituted hasts) and evchange amouning to p trom the I ax-lree I xchange ot investnient n (ro ang which have fair market value as of the dale of in (name of transtereet resulting which were approved hy the Secunties and Exchange Conimisston on (dute)The total acquisition cost substtuted cost to) Real propertes. investment in (no and ty pe ot share s) of (ssung corporation st and other assets were acqured through merger as evidenced by Pian ot Merger and Investiments and other assets were pres iously covered by presentiy covered hs Stock Certificate No s const:tuting (no and type of share/s) [total] shares in the Artcles of Merger. imeluding the inerease of the Authorized Capital Stock of iname of transteree). (name of transteree } of the investment's ainounts to (+MV at the. time ot exchange:The real properties Transfer Certticate of Title and Stock Ceruicate No s name ot (name of transteree) issued hy (issuing corporation's) and are now

[Kccyrd Ih as Protoma t ntries fo uhsequen ranster [To record subsequent saietranster ot investment acqured Cash or Accounts recervables investment n cnume_of transferee: Guin on Sale of Investment Y X x [Cash or Accounts receivahles To record subsequent sale - transfer of real propertes. investment s and of other assets acquired thru Tax-Frer Investment in (name of issung corporation)PPE -Land & Improvement Other Assets Guin on Sale of Investment X tx xx]

thru Tax-Iree Fxchange Jcuren {u\ Pavabie X Y C`ufrent la Pavahle XXA X XXX

Provston to Tav as toliows Proviston for tax as follows

ta Transucton Ta NeuUpiGaL T a Yy nc SULPIINIJOS Ioon extes Tax Rate Icit* the ime of I++ IM\ ol m, > +i Mutiph, B Gans fealied Di tf Am bnt OR Net ( apilal Gsins Tas Stonch transaction Tas Tax Ty pc (I(+Dl 1*e Tax Rate * I Multpl, B Investment al the] Gains realized Selling Pncr ot suhse juent >ale sin subsequent emer time ot bale s AR

h Net (. spital (ins I.r's Stnk TratisdInn: Jas the tuxrates useJin the compulatior ot vet apital ins Iand Iotal Tan Payabl Iransactron iu> at the time ot tav-Irec sxchunge shall apply I yh wt ntesttem wd. were niude beifc Jain I 2a T w? Invesiment at dhr Selling Prtee n! (ains reaitzed on subsequent >ubyeuueni slt investmeni- Lnve ot sa t 01 F A (0wfDr0T ONET [ alue-Added Ta Dons umentan Siamf INAT Tolal tas Pay able Whtholding Tas. TaDST lotal Ta Payable T ax 1 ; pe 00to6 per RR Nin] sutne I 5%a for ever Pl.c0 and tractionai pan thereof 20 12 Rate Dorale In subsequent sale Value(FMY} of the property tes at the lime of Multply By Fair Market transfer me 1ax (NCIT Amoun Ww A W HAY

*pulJumn Real SellnPer Less t Qst 1Subsllutej Basr NetapilalGur u:teo uninlehut o Suhseyueu Saie ultnvestnien A h Yy j M\ al the lime ot sutisesjue Salue or the value reflected in the tax decte transterreterslot he selin price 2on whicherer is highe?

Per RAI2heubstatuled Kseuri toltows(I, The onganal hasts ot th pioperty.stock or secuntie tu the (ransterred Less {a money terised. I an and h+ tins fa:r markel satue ol the nther piopens resered if ans i Ph th, the anount ot als gatn that wds teeanired un dl.e exchd. lecersed by the Iransferor on a tux-lec evchange shall t-e . the arouns treled asdadend ol inesharehoider it nv,ati I