BIR Ruling No. 001-2023

REPUBLICOF THE PHILIPPINES

BUREAU OF INTERNAL REVENUE DEPARTMENT OF FINANCE

National Office Building Quezon City

Republic Act No.10142 DOF Opinion No.012-2020 BIR.Ruling No.OT-312-2022 OT-001-2023 JAN-0 6--2023

8F PNB Financial Center CCP ComplexPasay City PHILIPPINE AIRLINES, INC. Pres. Diosdado Macapagal Avenue

Attention: MR.ALVIN KENDRICH O.LIMQUECO OIC-Chief Financial Officer

Gentlemen:

confirmation of your opinion that the mandatory exchange of PAL equity into PAL Holdings bankruptcy proceeding does not give rise to any taxat.on event, specifically capital gains tax CGTand donor's tax. Inc.(PHI equity which resulted from a financial restructuring under a court supervised This refers to your request on behalf of Philippine Airlines, Inc.PAL for

Background:

by Trustmark Holdings Corporation, which in turn is cargo within the Philippines and between the Philippines and several international destinations. Inc.and It is PAL is a domestic corporation primarily engaged in air transport of passengers and wned by PHI as of December 31,2021.On the other hand,PHI is owned by Horizon Global Investments, Ltd. owned by Buona Sorte Holdings. owned

reshaping of its operations, permanent restructuring of its obligations and broad possession pursuant to Sections 1107 and 1108 of the Us Bankruptcy Code and pursue confirmation of the pre-arranged plan of reorganization to effect the contemplated resizing and the global aviation industry, PAL embarked on a comprehensive business and financial restructuring by filing a voluntary petition for relief under Chapter lI of the U.S.Bankruptcy Code with the United States Bankruptcy Court for the Southern District of New York US Courtdocketed as Case No.21-115669Chapter 11 Case.The Petition is for PAL to be authorized to continue to operate its business and manage its operations as a debtor-in- recapitalization. On September 3, 2021, due to the devastating impact of the COVID-19 pandemic on

otherwise known as the Financial Rehabilitation and Insolvency Act (FRIA)`of 2010before the Regional Trial Court,National Capital Judicial Region,Branch l11,Pasay City RTC- Pasay, seeking recognition of the Chapter 11 Case. On September 24,2021,PAL also filed a petition under Republic Act (RA) No.10142

the Plan) and a Disclosure Statement' before the US Court. The Plan includes, among others: On October 13,2021,PAL filed the Plan of Reorganization of Philippine Airlines,Inc.

2 Per Note 2 of the AFS. Dated November 9,2021.

OT-001-2023 JAN 0 6 2023

a. claims of impaired unsecured creditors under the category of General Unsecured Claims Class 3)3 will be cancelled and each holder of an of the conversion option, such creditors have agreed to waive and, thereby receive no recovery on account of their General Unsecured Claims against Allowed General Unsecured Claim on account thereof will receive its Pro Rata share of the Unsecured New Equity Allocation. Also, in the exercise PAL.

b. PAL is obligated to provide for a mechanism whereby the impaired unsecured share is within the acceptable range. creditors will be abie to exchange their PAL equity into its parents interests based on the valuation of an independent third-party valuation by the valuation expert accredited by the Philippine Stock'Exchange PSE and the Securities and Exchange Commission SEC".For this purpose,PAL engaged the services of FTI Consulting,Inc. and based on the valuation report and fairness opinion provided, the conversion ratio is 1 PAL share with par value of PhP1.00 per share to 15.57 PHI share with par value of PhP1.00 per or, for the avoidance of doubt,PHI equity within one year from the effective date of the Plan. The conversion percentage ratio of equity shall be

reduction of losses incurred by the impaired unsecured creditors but not a total elimination of their losses. The above arrangements (collectively, the "Mandated Arrangements") resulted to a

recognizing the Chapter 11 Case;and (ii giving force and effect to the Chapter11 Case and all court orders issued or may be issued by the Us Court relating thereto. On October 22, 2021, RTC-Pasay granted PAL's petition and rendered judgment (i)

into new equity in PAL. On December 31,2021, PAL filed with the US Court a Notice of for the conversion of all unsecured creditor loans/claims amounting to USD 1,261,751,747.58 Effective Date and Entry Order (a) confirming PAL's Plan; and (b) Granting Related Relief before the US Court. On December 17,2021,the US Court confirmed its approval of the Plan which calls

implementation of the Mandated Arrangements which resulted from a financial restructuring under a court supervised bankruptcy proceeding does not give rise to any taxation event. In view thereof, you now request for confirmation of your opinion that the

In reply, please be informed as follows:

Income taxcGT

imposed upon the issuance of the commencement order and until the approval of the rehabilitation plan or dismissal of the petition,whichever is earlier, shall be considered waived, to wit: Section 19 of RA No. 10142 states that taxes and fees due to the national government

Sections 1.71 and 5.14 of the PlanArticle VC14of the Disclosure Statement on Post-Emergence Exchange Offer 3 Means any claim against PAL as of the petition date that is neither secured by a lien on collateral nor entitled to priority 5The New Common Stock to be issued on the Effective Date to holders of Allowed General Unsecured Claims, which shall The proportion that an Allowed Claim or Interest in a particular Class bears to the aggregate amount of Allowed Claims or under the Bankruptcy Code or any order of the Bankruptcy Court (other than an Intercompany Claim, an Employee Claim a Customer Claim and a General Unsecured Trade Claim.Section l.6 of the Plan be in an amount equal to 20.5% of the New Common Stock. For this purpose, "New Common Stock " refers to the shares of common stock, par value of $0.001 per share, of PAL authorized pursuant to its certificate of incorporation, as included in the Plan Supplement.Section 1.67 and 1.110 of the Plan Article VC)3 of the Disclosure Statement Interests in that Class,or the proportion that Allowed Claims or Interests in a particular Class bear to the aggregate amount of Allowed Claims and Disputed Claims or Allowed Interests and Disputed Interests in a particular Class and other Classes entitled to share in the same recovery as such Class under the Plan.(Section 1.8 of the Plan)

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penalties, interests and charges thereof, due to the national government or to LGUs shall be considered waived in furtherance of the objectives of rehabilitation." (Emphasis and underscoring supplied) by the court, and until the approval of the Rehabilitation Plan or dismissal of the petition, whichever is earlier. the imposition of all taxes and fees, including Local Government Units (LGUs). - Upon issuance of the Commencement Order "Section 19. Waiver of Taxes and Fees due to the National Government and to

Section 4 (gg) of RA No. 10142 defines rehabilitation as follows:

"Section 4. Definition of Terms. - As used in this Act, the term:

xxxxxx XXX (gg) Rehabilitation shall refer to the restoration of the debtor to a condition of continues as a going concern than if it is immediately liquidated." operation is economically feasible and its creditors can recover by way of the present value of payments projected in the plan, more if the debtor (Emphasis and underscoring supplied) successful operation and solvency, if it is shown that its continuance of

Misajon, Group Supervisor Rolando M. Balbido and Examiner Reynante DP. Martinez vs. Lepanto Ceramics,Inc., the Supreme Court held that: In the case of Bureau of Internal Revenue, Assistant Commissioner Alfredo V.

from its earnings. Thus, rehabilitation shall be undertaken when it is shown in the plan, more, if the corporation continues as a going concern than if it is immediately liguidated. that the continued operation of the corporation is economically more feasible and its creditors can recover.by way of the present value of payments projected period by providing the best possible framework for the corporation to gradually regain or achieve a sustainable operating form. [It] enable[s] the company to gain a new lease in life and thereby allow creditors to be paid [i]heir claims to its former position of successful operation and liquidity. Verily, the inherent purpose of rehabilitation is to find ways and means to minimize the expenses of the distressed corporation during the rehabilitation administer the assets of an insolvent corporation in the hope of its eventual return from financial stress to solvency."It contemplates the continuance of corporate life and activities in an effort to restore and reinstate the corporation "[C]ase law has defined corporate rehabilitation as an attempt to conserve and

7 GR No. 224764, April 24, 2017 or third parties from filing cases against the directors and officers acting in their personal capacities. " (Emphasis and underscoring supplied) arising from acts done in the discharge of their functions falling within the scope of their authority: Provided, That, this inclusion does not prohibit the creditors customs duties; and (2) claims against directors and officers of the debtor unmatured, disputed or undisputed, including, but not limited to; () all claims of the government, whether national or local, including taxes, tariffs and enforcement of "claims" against the distressed company shall be suspended. nature or character against the debtor or its property, whether for money or otherwise. In order to achieve such objectives, Section 16 of RA 10142 provides, inter alia that upon the issuance of a Commencement Order - which includes a Stay or Suspension Order - Under the same law, claim "shall refer to all claims or demands of whatever liquidated or unliquidated, fixed or contingent, matured or all actions or proceedings, in court or otherwise, for the

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OT-001-2023 JAN 0 6 2023

commencement order and until the approval of the rehabilitation plan shall be considered 24, 2021 before RTC-Pasay seeking recognition of the Chapter 11 Case, which was granted on October 22,2021 i recognizing the Chapter 11 Case; and ii giving force and effect to the Chapter 11 Case and all court orders issued or may be issued by the US Court relating thereto. waived.8 Thus, all taxes and fees due to the national government imposed upon the issuance of the In this case,it is undisputed that PAL filed a petition under RA No. 10142 on September

mandated restructuring plan is not taxable for income tax purposes, citing the following: received/gained from acts and/or transactions in compliance with a court order is not novel in the Philippines. In BIR Ruling No.OT-312-2022,9 it was ruled that any gain resulting from a Moreover, exemption from income tax of income actually or presumptively

1. BIR Ruling No. [DA-028-05]1o

consideration. " (Emphasis and underscoring supplied) creditors shall not be subject to income tax nor to gift tax since there is no donative intent on the part of its various creditors but is solely for business action that the debt rehabilitation plan was approved and is now being implemented. In other words, the restructuring was not a result of the mutual agreement of the debtors and creditors, but of judicial action. Accordingly the gain resulting from condonation of the Bayantel's debt to its various "Considering that in the case of your client, Bayantel, it was through court

2. BIR Ruling No. DA-260-0711

it being in the nature of capital transactict."(Emphasis and underscoring for income tax purposes; and that any conversion of debt into equity as a result of the debt restructuring plan is likewise not subject to income tax. supplied) . ...any gain resulting from the condonation of RCPI's debt is not taxable

pro rata share of the PAL shares based on the said Plan. impaired unsecured creditors are to be converted into new PAL equity. Such claims under the category of General Unsecured Claims (Class 3are cancelled and each creditor received its In the instant case, it is undisputed that under the court-approved Plan, the claims of

Consulting, Inc., is 1 PAL share with par value of Php 1.00 per share to 15.57 PHI'share with par value of Php 1.00 per share. the impaired unsecured creditors will be able to exchange their PAL shares into PHI shares within one(l year from the effective date of the Plan. In the said mandatory exchange process. the conversion percentage ratio of equity per the Fairness Opinion and Valuation Report of FTi Also, in the same Plan,we note that PAL is obligated to provide a mechanism whereby

compliance with the Plan approved by the US Court and recognized by RTC-Pasay pursuant to RA No. 10142. which is after the approval of the Plan by the court, is not subject to income tax and/or CGT result of the mutual agreement/s of PAL and its creditors,but of judicial action(c being made in furtherance of the objectives of the rehabilitation plan; and (d being implemented in shares; even if they are to be effected within one (1 year from the effective date of the Plan considering that (a these acts are in the nature of capital transactions;(b being done not as a claims of impaired unsecured creditors to PAL equity;and(2)swapping of PAL shares to PHI Thus, in view of the foregoing, this Office hereby rules that: (1 the conversion of

8 DOF Opinion No. 012-2020 dated October 21, 2020; BIR Ruling No. OT-312-2022 dated June 24, 2022 9 Dated June 24, 2022 10 Dated January 24, 2005 11 Dated April 25, 2007

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Donor's Tax M001 - 2 02 3 JAN 0 6 2023

of the donee; (3) the intent on the part of the donor to do an act of liberality (animus donandi) and (4) the donee accepts the gift. thing or right in favor of another, who accepts it. Hence, to be a valid donation, it is essential that:(1) there is reduction of the patrimony of the donor;(2) there is increase in the patrimony donor's tax shall be imposed upon the transfer by any person, resident or non-resident, of a property by gift or donation. Article 725 of the New Civil Code of the Philippines (Civil Code" defines donation as an act of liberality whereby a person disposes gratuitously of a Section 98 of the National Internal Revenue Code of 1997, as amended, provides that

null and void. Mandated Arrangements are likewise not subject to donor's tax. investigation it shall be disclosed that the facts are different, then this ruling shall be considered of the impaired unsecured creditors' debts into PAL shares and its subsequent mandatory exchange to PHI shares were made pursuant to the court-approved Plan. Therefore, the This ruling is issued on the basis of the foregoing facts as represented. However, if upon In this case, there was no act of liberality or donative intent present since the conversion

Very truly yours.

K-1 Compfssioner of Internal Revenue ROMEOD.LUMA9UT,JR. 001231

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