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    BIR Ruling DA-141-99

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    racheltanuy6557
    The document discusses the tax implications of a mining company converting its preferred shares to common shares. Specifically, the conversion of preferred to common shares is not subject to capital gains tax. However, issuing common shares for accrued dividends and interest is taxable.

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    BIR Ruling DA-141-99

    Uploaded by

    racheltanuy6557
    467 views3 pages
    The document discusses the tax implications of a mining company converting its preferred shares to common shares. Specifically, the conversion of preferred to common shares is not subject to capital gains tax. However, issuing common shares for accrued dividends and interest is taxable.

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    Nontaxability of share conversion

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    The document discusses the tax implications of a mining company converting its preferred shares to common shares. Specifically, the conversion of preferred to common shares is not subject to capital gains tax. However, issuing common shares for accrued dividends and interest is taxable.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    467 views3 pages

    BIR Ruling DA-141-99

    Uploaded by

    racheltanuy6557
    The document discusses the tax implications of a mining company converting its preferred shares to common shares. Specifically, the conversion of preferred to common shares is not subject to capital gains tax. However, issuing common shares for accrued dividends and interest is taxable.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
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    March 9, 1999

    BIR RULING [DA-141-99]


    SGV & Co.
    6760 Ayala Avenue
    1226 Makati City
    Attention: Atty. E.C . Alcantara
    Tax Division
    Gentlemen :
    This refers to your letter dated September 21, 1998 requesting clarification, on
    behalf of your client, United Paragon Mining Corporation (UPMC), as to the capital
    gains tax and documentary stamp tax (DST) implications, if any, of the proposed
    conversion of UPMC's convertible preferred stock to common stock.
    Cdpr

    It is represented that UPMC is a domestic mining corporation with present


    authorized capital stock of P3,027,000,000 consisting of the following:
    Class/Series of Shares
    Common
    Preferred A
    Preferred B

    Number of Shares

    Par Value per Share

    2,500,000,000
    2,700,000,000
    5,000,000

    P1.00
    P0.01
    P100.00

    that UPMC's common shares (C/S) are registered and listed with the Philippine Stock
    Exchange (PSE) while the preferred shares (P/S) are neither registered nor traded;
    that in 1997, UPMC amended its Articles of Incorporation to provide, among others,
    that its P/S shall be non-participating but shall be convertible into any other stock or
    security of UPMC if authorized by the Board of Directors; that accordingly, UPMC
    now proposes to allow the conversion of the outstanding convertible P/S, together
    with their accumulated "interests" and dividends, to C/S at the conversion price of
    P1.00 (par value); that the conversion will entail the issuance of C/S in such a number
    as their total par value will equal the total par value of the P/S and the accumulated
    "interests" and dividends thereon; that UPMC likewise proposes to issue C/S in lieu
    of the unpaid accrued interests on convertible bonds and that, in this connection,
    Copyright 2013

    CD Technologies Asia, Inc. and Accesslaw, Inc.

    Philippine Taxation Encyclopedia 2012

    UPMC shall issue P287.468 million C/S at P1.00 par value, itemized as follows:
    Preferred A (principal and "interests")
    Preferred B (principal and dividends)
    Accrued interest (bonds)
    Total

    P47.496 million
    147.631 million
    92.340 million

    P287.468 million
    ============

    and that at present, UPMC has P765.156 million previously authorized and unissued
    C/S available to cover the above proposed conversion.
    Based on the foregoing, you request for clarification on the following:
    (a)

    Whether or not the conversion of the preferred shares into common


    shares will be subject to the capital gains tax on the part of the
    holders thereof; and

    (b)

    Whether or not the issuance of the common shares for the


    converted preferred shares will be subject to the documentary
    stamp tax.

    In reply thereto, please be informed as follows:


    (a The conversion of the P/S for C/S, at par for par, in line with the
    conversion feature of the P/S, shall not be subject to capital gains tax since the holders
    thereof merely change the form of their shareholdings from preferred to common
    shares and they do not realize any gain or economic benefit therefrom.
    Moreover, the exchange of P/S for C/S qualifies as a mere recapitalization and
    no gain or loss is recognized therefrom. Recapitalization has been defined as a
    "readjustment of existing interests in the rearrangement of the capital structure" of the
    company, which generally are non-taxable to both the holders and the issuing
    corporation. [Mertens, Law of Federal Income Taxation, Section 43.105, pp.
    164-166]
    However, while the conversions of the P/S into C/S are non-taxable, the
    issuance of C/S for accrued dividends on P/S is taxable as dividend distribution to the
    extent of the arrearages. [Mertens, ibid, p. 165] Moreover, the issuance of C/S for the
    discharge of accrued interest on the convertible bonds is also taxable as ordinary
    income on the part of the bondholders. [Mertens, supra, Section 43.107, p. 170]
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    CD Technologies Asia, Inc. and Accesslaw, Inc.

    Philippine Taxation Encyclopedia 2012

    (b) The issuance of new C/S for the converted P/S, not being a sale or
    transfer of shares or certificates of stock, shall not be subject to the DST imposed
    under Section 176 of the Tax Code of 1997.
    The conversion of P/S into C/S, pursuant to a conversion feature of the P/S,
    which does not involve any transfer of ownership to another shareholder/(s), is not a
    transaction distinct from the subscription contract but a mere continuation thereof for
    which the required DST has been previously paid. Accordingly, the conversion of the
    shares is not therefore subject to DST.
    However, the issuance of C/S for the accrued dividends and interest, which
    presumably shall be sourced from unissued shares, shall be subject to DST at the rate
    of P2.00 for every P200 or fractional part thereof, of the par value of the C/S to be
    issued, pursuant to Section 175 of the Tax Code of 1997. (BIR Ruling No. 158-98
    dated November 10, 1998)
    cdasia

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


    However, if upon investigation it be disclosed that the facts are different, then this
    ruling shall be considered null and void.

    Very truly yours,


    Commissioner of Internal Revenue
    By:

    (SGD.) SIXTO ESQUIVIAS IV


    Deputy Commissioner
    (Legal and Enforcement Group)

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    CD Technologies Asia, Inc. and Accesslaw, Inc.

    Philippine Taxation Encyclopedia 2012

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