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February 17, 2009 BIR RULING [DA-(DT-006) 089-09] 100; # 033-02; DA-398-95; DA-652-2006; #16-2005 Dominion Equities, Inc.

17th Floor, The Enterprise Center Tower 1 6766 Ayala Avenue, Makati City Attention: Ms. Josephine A. Manalo Gentleman : This refers to your letter dated June 28, 2008 which was indorsed by Revenue Reg ion No. 8, Makati City on January 6, 2009, requesting for confirmation of your o pinion that the assignment and sale by Dominion Equities, Inc. and Ms. Josephine Manalo (the "Sellers") of their PH Communications Holdings Corporation ("PH Com m" for brevity) shares, including the interests and investments therein, to Smar t Communications, Inc. (the "Buyer") for less than adequate and full considerati on in money or money's worth shall not be subject to donor's tax as provided und er Section 100 of the National Internal Revenue Code, as amended. cCAIaD Background On April 25, 2008, the Sellers agreed to assign to the Buyer its entire interest s and investments in PH Comm for the total consideration of P405,145,401.40. The Sellers' interests and investments in PH Comm include advances to PH Comm amoun ting to P392,561,917.17 and subscriptions of 25,000,000 shares of stock of PH Co mm at P1.00 per share. The Sellers already paid P21,971,030.00 of the total subs criptions and hence, the Sellers total investment in PH Comm amounted to P414,53 2,947.17. Thus, when the Sellers assigned its investments in PH Comm to the Buyer for P405 ,145,401.40, it incurred a net loss of P9,387,545.77. The aforesaid loss of the Sellers pertains to the net capital loss it sustained arising from the assignmen t of the PH Comm shares to the Buyer. This is because the net consideration rece ived for the assignment of the PH Comm shares was only P12,583,474.23 as the tot al consideration received should be applied first against the advances to PH Com m. The advances, being a loan, have preference over the investment in the form o f shares of stock. aEHADT Meanwhile, PH Comm is a holding company and holds 97% of the shares of stock of Connectivity Unlimited Resource Enterprise, Inc. (CURE). CURE, on the other hand , is a grantee of a legislative franchise under Republic Act No. 9130 to engage in telecommunications, business anywhere in the Philippines. The primary asset o f PH Comm is its investments in CURE amounting to P379,721,029.00. However, base d on the Audited Financial Statements of CURE as of December 31, 2008, the said investment has become worthless at the time of the assignment and sale of PH Com m shares, as CURE has a net capital deficit of P44,214,094.00. Stated differentl y, when the sale transaction was completed on April 25, 2008, the PH Comm shares have no value as PH Comm's obligations exceeded its total assets. In reply thereto, please be informed that under Section 100 of the Tax Code of 1 997, as amended, it is provided that: Where pr "SEC. 100. Transfer for Less Than Adequate and Full Consideration. operty, other than real property referred to in Section 24(D), is transferred fo r less than an adequate and full consideration in money or money's worth, then t he amount by which the fair market value of the property exceeded the value of t he consideration shall, for the purpose of the tax imposed by this Chapter, be d eemed a gift, and shall be included in computing the amount of gifts made during the calendar year." TSacCH However, this Office has previously confirmed that the aforementioned Section 10 0 of the Tax Code is not absolute. In BIR Ruling DA-652-2006 dated November 6, 2006, citing also BIR Ruling No. 033 -2002 dated August 16, 2002, this Office held: "In reply thereto, please be informed that under Section 100 of the Tax Code of 1997, it is provided that: "Section 100. Transfer for Less Than Adequate and Full Consideration. Where pr operty, other than real property referred to in Section 24(D), is transferred fo r less than an adequate and full consideration in money or money's worth, then t

he amount by which the fair market value of the property exceeded the value of t he consideration shall, for the purpose of the tax imposed by this Chapter, be d eemed a gift, and shall be included in computing the amount of gifts made during the calendar year." Section 100 of the same Tax Code imposes donor's tax on transfers made for less than an adequate and full consideration. This "adequate and full consideration" is deemed to be the fair market value of the property, such that donor's tax is imposed on the amount by which the fair market value of the property exceeded th e value of the consideration. cSATEH In BIR Ruling No. 033-02, dated 16 August 2002, this Office, citing the decision of the Supreme Court in Commissioner of Internal Revenue vs. BF Goodrich Phils. , Inc. (now Sime Darby International Tire Co., Inc.) and the Court of Appeals (G .R. No. 104171, 24 February 1999), held that the rule provided for in Section 10 0 of the Tax Code is not absolute, viz.: "In the case of Commissioner of Internal Revenue vs. B.F. Goodrich Phils., Inc. [now Sime Darby International Tire Co., Inc.] and the Court of Appeals, G.R. No. 104171, February 24, 1999, the Supreme Court ruled that: 'It is possible that real property may be sold for less than adequate considerat ion for a bona fide business purpose; in such event, the sale remains as "arm's length" transaction. In the present case, the private respondent was compelled t o sell the property even of a price less than its market value, because it would have lost all ownership rights over it upon the expiration of the parity amendm ent. In other words, private respondent was attempting to minimize its losses. A t the same time, it was able to lease the property for 25 years, renewable for a nother 25. IASEca This can be regarded as another consideration on the price.' Judging from the facts, there is no showing of donative intent on the part of th e York . . . jurisprudence recognizes those instances where there is no gratuity intended these are dealings done in the 'ordinary course of business'. Although it is true that these dealings per se is not sufficient to rule out existence o f donative intent, it is equally true that donative intent is not synonymous wit h a disparity in consideration. (PAUL, Federal Estate and Gift Taxation). Therefore, considering that York's transaction with GNQ is an arm's length trans action and a bona fide business arrangement, he same negates the 'fiction' which treats the effect as a donation. Accordingly, it is not subject to donor's tax ordinarily imposed on gift or donation under Section 98 in relation to Section 1 00 of the Tax Code of 1997." (Emphasis supplied) From the foregoing ruling, this Office also concluded that as long as the transa ction is conducted at arm's length, such that a bona fide business arrangement o r the dealings are done in the ordinary course of business, a sale for less than an adequate consideration is not subject to donor's tax. ACSaHc In BIR Ruling No. 16-2005 dated August 24, 2005, this Office explained as to whe n the donor's tax is being imposed. This Office ruled as follows: "In reply thereto, please be informed that the term "donation" is an act of libe rality whereby a person disposes gratuitously of a thing or right in favor of an other who accepts it and pursuant to Section 98 of the Tax Code of 1997, a gift tax computed as provided in Section 99 of the said Code shall be levied, assesse d, collected and paid upon the transfer, whether director indirect, in trust or otherwise, by any person, resident or non-resident of the property by gift. A donor's tax shall be imposed whether the transfer is in trust or otherwise, wh ether the gift is direct or indirect, and whether the property is real or person al, tangible or intangible. In the instant case, considering that the transfer o f the gas pipeline by FGP Corporation to SPEX is business consideration, i.e., t o transfer all risks ownership to SPEX as required by FGP Corporation's lenders and to obligate SPEX to use the gas pipelines to deliver the gas to FGP Corporat ion, the transfer cannot be deemed as a transfer for less than adequate and full consideration. Thus, the transfer is not subject to donor's tax imposed under S ection 98 of the Tax Code of 1997, since there is a clear absence of donative in tent. . . ." aATCDI Based on the foregoing BIR Rulings, the sale of an asset below its fair market v

alue does not automatically trigger the imposition of the donor's tax. If there is no intention to donate, there should be no donor's tax. From the foregoing rulings, this Office also concluded that as long as the trans action is conducted at arm's length, such that a bona fide business arrangement or the dealings are done in the ordinary course of business, and there is no don ative intent on the part of the seller, a sale for less than an adequate conside ration as contemplated under Section 100 of the Tax Code of 1997, as amended, sh all not apply. Considering the surrounding circumstances on the sale of the PH Comm shares of s tock by Dominion Equities, Inc. and Josephine A. Manalo to Smart Communications, Inc. for less than adequate consideration, the said transaction is not subject to donor's tax. AEcTCD Premises being considered, it is the opinion of this Office that the sale of sha res of stock in PH Comm and assignment of interests and investments therein, by Dominion Equities, Inc. and Ms. Josephine A. Manalo for less than adequate consi deration shall not be subject to donor's tax as provided under Section 100 of th e National Internal Revenue Code, for the following reasons: (1) There is no donative intent on the part of the sellers when they sold th e shares of stock in PH Comm to Smart Communications, Inc.; and (2) The transfer of the shares of stock is conducted at arm's length and it is done in the ordinary course of business. 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 differen t, then this ruling shall be considered null and void. ADcHES Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service