April 17, 1989
BIR RULING NO. 076-89 28 000-00 076-89 Gentlemen: This refers to your letter dated February 24, 1989 stating that General Motors Pilipinas, Inc. (GMPI) is a domestic corporation organized under the laws of the Philippines; that it is a joint venture corporation owned 60% by General Motors Overseas Distribution Corporation (GM-US) and 40% by Isuzu Motors Limited of Japan (ISUZU); that GMPI was engaged in the manufacture of transmissions and components as well as in the assembly of cars and trucks (largely Isuzu) under the former PCMP and PTMP programs of government; that in September 1985, due to economic recession in the Philippines and the depressed automotive market, plus the non-availability of foreign exchange for the importation of parts for car and truck assemblies, GMPI ceased its manufacturing and assembly operations; that at the time operations were terminated, GMPI was insolvent and has since remained insolvent; that in meetings held in December 1985, the shareholders and the Board of Directors of GMPI recommended the dissolution of GMPI; that in order to facilitate the liquidation and dissolution of the company, on September 30, 1986, the stockholders approved a resolution to shorten GMPI's corporate life to October 15, 1986; that pursuant to said resolution, GMPI filed with the Securities and Exchange Commission, an application to amend its Articles of Incorporation to shorten GMPI's corporate life; that a liquidating trustee was designated to dispose the remaining assets, satisfy the obligations and wind up the affairs of the company; that based on the December 31, 1988 unaudited financial statements of GMPI, it has outstanding liabilities/indebtedness to banks and affiliates in the following amounts: cdasia
Bank Debt Non-Trade Related Trade Related
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Principal Interest Principal Interest
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P280,150 54,522 246,942 48,093 1
Due to Affiliated Companies Isuzu Motors Limited General Motors Corp. (GMC) TOTAL
P113,240 19,334 ————
132,574 ———— P762,281 =======
that the total outstanding liabilities to banks and GMC plus accrued interest amount to P649,041,000; that the 1987 unaudited financial statements, as submitted with GMPI's 1987 income tax return, show that as of December 31, 1987 GMPI had a capital deficiency of P664,522,000; that based on the December 31, 1988 unaudited financial statements, the capital deficiency is P739,057,000; that pursuant to liquidation accounting principles, the value of the property, plant and equipment was adjusted to P20,450,000; that since GM-US, has no further interest to continue its ownership in the inactive corporate shell of GMPI, GM-US, will assign its 60% shareholdings in GMPI to Isuzu; that in connection with the proposed acquisition of the GMPI shares from GM-US it was agreed that GMPI would "clean-up" the liabilities shown in the financial statements and that it would have no major current outstanding liabilities except the liability to Isuzu; that it is proposed that this would be accomplished when the shares are transferred in three steps, as follows: (1) By having GMPI's creditor banks waive accrued interest totalling P102,615,000 on the non-trade and trade related debt; (2) By having these banks assign to GM-US, its GMPI non-trade related receivables totalling P280,150,000. At that time GM-US will condone the total GMPI indebtedness due to it amounting to P299,484,000 including the aforementioned non-trade debt as well as other non-trade liabilities due GMC totalling P19,334,999; (3) By having the banks grant a participation to GM-US in GMPI trade related receivables totalling P246,942,000 GM-US would then assign these receivables to Isuzu. As approved by the Central Bank of the Philippines and the SEC, Isuzu would accept pesos from GMPI in repayment of the trade debt and simultaneously reinvest the pesos in GMPI as paid-in surplus; that subsequent to the three-step transaction outlined above, and after GM-US assignment of GMPI shares to Isuzu, the latter as the new 100% parent company may consider infusing additional capital to restore the business into a viable operation and eliminate the capital deficiency; that inasmuch as the business operations of the company will be revived in the future by Isuzu, the company will resume its "going concern" status following the transfer of share by GM-US; and that as a going concern, its assets previously adjusted to liquidation values shall be restored to its valuation prior to liquidation of P19,579,000 including depreciation and amortization up to December 31, 1988. In connection therewith, you now request confirmation of your opinion to the Copyright 1994-2006
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effect that the bank's waiver of accrued interest on the non-trade and trade related indebtedness of GMPI and GM-US condonation or forgiveness of GMPI's non-trade related indebtedness are not subject to income tax nor to gift tax. In reply, thereto, I have the honor to inform you that your opinion is hereby confirmed. Cancellation and forgiveness of indebtedness may amount to a payment of income, to a gift, or to a capital transaction, dependent upon the circumstances. If for example, an individual performs services for a creditor who, in consideration thereof cancels the debt, income to that amount is realized by the debtor as compensation for his services. If, however, a creditor merely desires to benefit a debtor and without any consideration therefor cancels the debt, the amount of the debt is a gift from the creditor to the debtor and need not be included in the latter's gross income. If a corporation to which a stockholder is indebted forgives the debt, the transaction has the effect of the payment of a dividend. (Sec. 50 Revenue Regulations No. 2) The waiver of interest by the banks on non-trade and trade related indebtedness of GMPI is not subject to income tax considering that the deduction of said interest as expense in prior years did not offset nor reduce the taxable income of GMPI since it was in a financial loss position even without the deduction. (See Barnhart-Marrow Consolidated v. Commissioner of Internal Revenue, 47 BTA 590) Moreover, when a creditor cancels a debt as part of a business transaction, the debtor is enriched or its net assets has been increased and, therefore, he realized taxable income (Philippine Fiber Processing Co. v. CIR, CTA Case No. 1407 Dec. 29, 1966). However, a transaction whereby nothing of exchangeable value comes to or is received by a taxpayer does not give rise to or create taxable income. (See Dallas Transfer and Terminal Warehouse Co. v. Commissioner of Internal Revenue 5 Cir. 70 F 2d 95, 13AFTR 930) Accordingly, the condonation of GMPI's indebtedness by GM-US is not subject to income tax since before and after the condonation GMPI remains insolvent, i.e., in a capital deficiency position. The condonation is likewise not subject to gift tax since there is no donative interest on the part of GM-US but solely for business consideration since Isuzu will only acquire the GMPI shares from GM-US if GMPI has a "clean" balance sheet with no outstanding liabilities except those to Isuzu. Moreover, a return to solvency due to a possible future additional capital infusion by Isuzu and/or subsequent profitability in a different taxable year will not affect the non-taxability of the condonation. cdta
Very truly yours, Copyright 1994-2006
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(SGD.) JOSE U. ONG Commissioner
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