BIR Ruling No. 319-2022

REPUBLICOF THE PHILIPPL

BUREAU OF INTERNAL REVENUE DEPARTMENT OF FINANCE

Quezon City

Sec.40(C2&6(b) of the Tax Code, as amended BIR Ruling No. 214-2012 BIR Ruling No.100-2017; BIR Ruling No.75-2018 S40M-319-2022

JUN 2 9 2022

BDB LAW

20th Floor, Chatham House, Rufino cor. Valero - treets Du-Baladad and Associates

Salcedo Village, Makati City

Attention: Atty. Benedicta Du-Baladad

Managing Pariner

Gentlemen: T

This refers to your request on behalf of your cl.ent?, Innodata Knowledge Services.

Inc.IKSIand Content Online Services, Inc.COSIfer confirmation that the merger of

COSI, as the absorbed corporation,with IKSI, as the surviving corporation, qualifies as a tax-

free merger under Section 40 (C)(2) and (6(b) of the National Internal Revenue Code of

1997Tax Code,as amended.

IKSI (formerly: Innodata XML Content Factory.Inc.) is a corporation duly registered

with the Securities_and Exchange Commission (SEC under SEC Registration No. with TIN located`at HVG Arcade I.T.Park Brgy.

Subangaaku,Mandaue CityCebu. IKs is engaged in the export of all forms of electronic

information processing, particularly in lue areas of data capture, conversion and imaging. utilizing state of the art technology, including without lirnitation extendible mark-up language as a device for extracting information. It has an authorized capital sto of share, of which N shares have been duly subscribed and fully paid. C divided into C shares with pa. value of P1.00 per ( Pesos

COSI, on the other hand, is likewise a domestic corporation with SEC Registration

I.T. Center, Alternate Road, Legaspi City, Albay. It is engaged in the business of electronic No. with its principal place of business is at G.narine

information processing services particularly in the areas of data capture, conversion and

imaging and the development of software and other tools to assist in the efficient and

effective discharoing of its services. COSI has an authorized capital stock of Pesos (P value of P10.00 per share, of hich divided into m1( And snares have been duly shares with a par

subscribed and fully paid.

The management of both corporations agreed and deemed it wise and prudent to

merge the operations of the two (2) corporations, with IKSI as the surviving corporation. The

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merger is desirable and advantageous to the two (2 corporations and their respective

stockholders considering their husiness objectives, including, without limitation, the

following:

1 as the constituent corporations are engaged in the same or related type of business, the merger will consolidate their related usinesses

2. the integration of the administrative facilities of the constituent corporations

will result in economies of scale and efficiency in management, operations and rendition of services to customers; and

3.the merger will make possible the more productive use of the properties of

the constituent corporaticns.

Pursuant to the articles and plan of merger, which was approved by the SEC on

December 8,2011 and with effective d.e on January 1,2012,all the rights, business

powers, p.vileges, immunities, franchises and assets of the absorbed corporation (COSD

such as real or personal, tangible or intangible, and all receivables due on whatever account

including subscription to shares and choses in action, and all and every other interest of

belongir to or due to the absorbed corporation shall be deemed transferrei to the surviving

corporation without further act or deed.Likewise, the surviving corporation shall assume all

obligations, debts, loans,payables and liabiliti s. The total amount of assets transferred from

COSI to IKSI exceed the total amount of liabilitie transferred and assumed by IKSI

On the effective date of merger (January 1, 2012, the stockholders of the ab:.rbed

corporation shall surrender their shares in the absorbed cooration, and in exchange thereof,

the surviving corporation shall issue its own shares.

Based on the foregoing rer resentations, you now request confirmation of your opinion

that --

1.Income Tax. The merger between IKSI and COSI is a statutory and tax-free merger

under Section 40C2 and(6b) of the Tax Code,as amended.Accordingly,no gain

or loss shall be recognized on the transfer of assets and liabilities of COSI to IKSI.

The basis of the transferred assets and liabilities in the hands of IKSI shall be the

same as it would be in the hands of COSI.

Value-added Tax. The transfer of assets of COSI to IKSI is not subject to VAT

pursuant to Section 4.106-8b3 of RevenueRegulations RR No.16-2005.

otherwise known as the Consolidated Value-Added Tax Regulations of 2005.

3. Documentary Stamp Tax. The transfer of assets and liabilities of COSI to IKSI

pursuant to the merger is not subj et to DST in 2ccordance with Section 199(m) of

Reublic Act (RA) No.9243,otherwise known as un Act Rationalizing the Provisions

on the Documentary StampTax (DST of the Tax Code of 1097,as amended, as

implemented by Revenue Regulations No. 13-2004.

In reply thereto, please be iniformed as follows:

1. The foregoing merger of COSI and IKSI is a nerger within the contemplation of

Section 40(C2 in relation to Section 40(C6b of the Tax Code, as amended,or the

following business reasons: (1) the constituent corporatior s are engaged in the same or telated

type of business,the merger will consolidate their related businesses;(2) the integration of the

administrative facilities of the constituent corporations will result in economies of scale and

efficiency in management, operations and rendition of services to customers; and (3) the

merger will make possible the more productive use of the properties of the constituent

Innodata Knowledge Services, Inc. S0M-3 19 -202 u 3 3 2c22 Page 3 of 6

corporations. Hence, the merger of COSI and IKSI i being undertaken for a bona fide

business purpose and not for the purpose of escaping the-burden of taxation.

The merger of COSI and IKSI qualifies for non-recognition of gain or loss for income

tax purposes in accordance with Section 40(C)(2) of the.Tax Code,as amended,that no gain

or loss shall be recognized by COSI, as the transferor of all assets and liabilities. to IKSI

pursuant to the Articles and Plan of Merger.

Accordingly,no gain or loss shall be recognized by IKSI. as the transferee, on its

receipt of the assets and liabilities of COSI pursuant to anc as a consequence of the merger.

On the other hand. the bases of the shares of stocks to be received by the shareholders

of COSI upon the exchange shall be the same as the bases of the properties. stocks or

securities exchanged, decreased by1 the money received,and2 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. +0

(C) (5) (a) of the Tax Code, as amended)

The basis of the properties transferred in the hands of the transferee (IKSI) shall be

the same as it would be in the hands of the transferor (COSI increased by the amount of the

gain, if any.recognized to the transferor (COSI on the transfer.Sec.40 (C5b,supra

Finally, 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 properties

transferred pursuant to such exchange,then such excess shall be considered as a gain,on the

part of the transferor, from the sale or exchange of a capital asset or of property which is not a

capital asset,as the case may be.Sec.40C4b,supra

The substituted basis of the properties transferred by COSI to IKSI shall comply with

the rule that cash and other cash items will be excluded from the computation of the adjusted

basis of the properties transferred for purposes of determining whether liabilities assumed and

to which the property is subject do not exceed the adjus:ed basis of the property transferred

pursuant to No. IV(A(2) of Revenue Memorandum R..ing (RMR) No.2-2002 dated June

10.2002

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

transferred by COSI to IKSI,based on COSI's audited financial statements as of December

31, 2011 shail be as follows:

Amouat (in Php) Allocated Liabilities Allocated Shares Basis (in Php) Substituted

Cash

receivables Other current Property and Trade and other assets equipment-net Deferred tax assets -net Other non-current assets-net TOTAL

Innodata Knowledge Services. Inc. Page4 of6 c40M-

Trade and other pavables Liability Amount (in Php)

(current) Post-employment benefit obligation TOTAI Microsoft license obligations (non current) Microsoft license obligations

corporation pursuant to Section 4.106-8(b)(3) of RR No. 16-005. as amended by RR Nos. 4 not be subject to any output tax.purstiant to Section 4.106-8b3 of Revenue Regulations RR No.i6-2005.as amended bRR No.4-2007.as further amended by RR No.10-2011. 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 IKSI.as the surviving 2007: 10-2011 and 4-2021. and last amended by RR No.4-2021. The conveyance of properties to effectuate a merger is 2. The transfer of proper:ies of COSI to IKSI as a consequence of the merger shall

3.No DST is due on the transfer of assets made pursuant to the Plan of Merger under Section 199(mof the Tax Code.as amended bv Repubic Act (RA)No.9243.in relation to Section 40 (C) 2) of the Tax Code. as amended.(BIR Ruling No.S40-0+27-2020 dated.Jul 30.2020

However.a DST at the rate of Pi.00on each P200 par value.or fractional part thereof. shall be imposed on the original issuance of shares hy IKSI to the stockholders of COSI as a consequence of the merger as provided under Section 1-ofhe Tax Code.as amended.

4. The retained earnings of COSI are subject to the terpercent (10%) final withholding tax on dividends constructively received by its individual shareholders pursuant to Section 2 B2of the Tax Code.as amended.BIR Ruling No.12-3 dated December2018

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

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

thereto. the adoption being shown by the acts of ts duly constituted responsible officers and appearing upon the official records of th 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 cor nection with the reorganization. including:

1. A copy of the plan of reorganization.together with a statement executed under the penalties of perjury. showing in full the p arposes thereof and in detail all transactions incident to. or pursuant to the plan:

2.A complete statement cf all cost or other basis oi all property.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 staterrent of all distribution of other

1 The Plan of Merger was approved by SEC on December 8. 2011 D

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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 ex change:

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

exchange. and the anount and nature of any liabilities to which any of the property acquired in the exchange is subject.

B. Every taxpayer, other than a corporation. 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 stok or securities transferred in the

exchange: and

2. A statement in full cf the amount of stock or securities and other property or

money received from the exchange. including any liabilities assumed upon the exchange. and any liabilities to which properry 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 the exchange.

C 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 liabilities assumed on the exchange,or any liabilities to which anv of the properties received were subject, in order to facilitate the determination of gain or loss from subsequent disposition of such stock cf securities and other proserty received from the exchange

In addition to the foregoing requirements. the parties shall enclose with their respective income tax returns for theitaxable 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 stamp-recei ed by the appropriate office of the Bureau of Internal Revenue.

Such parties shall include as a note to their respect ve audited financial statements for the taxable year in which the merger occurred a statemen 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.

Moreover. the shareholders of the absorbed tissolving corporation and the surviving/transferee corporation shall record in their iespective books of accounts the mandatoryaccountingentries statedin AnnexA hereof. pursuant to Revenue Memorandum Order (RMO) No. 172016.

The parties shall cause to arnotate at the back of the Transfer Certificates of Title and/or Certificates of Stock. the date the merger was execured. the original/historical/adjusted costs of acquisition of the properties or shares of stock inolved. 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 Tax Code. as amended. It is further required that within ninety90days from receipt of this ruling.the parties to the transaction must submi to the Law and Legislative Division Bureau of Internal Revenue.proof of annotation of the original/historical/adj listed bases of the properties and/or real properties involved in the trarsfer and certified true copies by the Corporate Secretary. of

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duly annotated Certificates of Stock. in respect of the shares of stock of the transferee corporation, including the revised allocation of shares anc 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 disclosed that the facts are different. then this ruling shall be considered null and void.

Very truly yours.

Commissioner of Internal Revenue CAESAR R. DULAY

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