M&A Taxation on Acquisition of Shares / Assignment of Properties

Acquisition of shares in a private company

Capital gains tax of 5% on the first Php100,000 net gain and 10% on the net gain over Php100,000 realized by the seller and
a documentary stamp tax of approximately 0.375 percent of the par value of the shares sold (1)
If the shares of stock are sold at a price lower than their fair market value, the BIR may require the payment of donor's tax
from the seller, at a rate of 30 percent (if the transfer is between corporations) of the difference between the fair market value
of the shares and the selling price (1)
Net capital gain is the difference between the selling price and the fair market value (FMV) of the shares, whichever is higher,
less the share's cost basis, plus any selling expenses. In determining the shares' FMV, the adjusted net asset method is used
whereby all assets and liabilities are adjusted to FMVs. The net adjusted asset minus the liabilities is the indicated value of
the equity. The appraised value of real property at the time of sale is the higher of (2):
o FMV as determined by the Commissioner of Internal Revenue
o FMV as shown in the schedule of values fixed by the provincial and city assessors
o FMV as determined by an independent appraiser

Asset acquisition from a Philippine-resident corporation

This may attract corporate income tax (generally at the rate of 30 percent of the taxable income) and value added tax (generally
at the rate of 12 percent of the gross selling price), and other taxes, depending on the nature of the assets being sold. (1)
In an acquisition of assets, a sale comes within the purview of the Bulk Sales Law where it is a sale of all or substantially all
of the trade or business, or of the fixtures and equipment used in the business. The seller must comply with certain regulatory
requirements; if not, the sale is considered fraudulent and void. (2)

Assignment of properties pursuant to a plan of merger or consolidation

The assignment of properties pursuant to a plan or merger or consolidation may be exempt from income tax if the exchange
is made solely for shares stock in a corporation that is a party to the merger or consolidation, and proved that the requirements
of Section 40(C)(2) of the National Internal Revenue Code of 1997 are met. The transfer of property pursuant to Section
40(C)(2) of this code is also except from documentary stamp tax. However, other taxes (such as value added taxes and local
transfer taxes) may still be payable depending on teh type of property exchanged. (1)
Under the Philippine Tax Code, the terms merger and acquisition are understood to mean (2):
o an ordinary merger or consolidation
o the acquisition by one corporation of all or substantially all the properties of another corporation solely for stock,
undertaken for a bona fide business purpose and not solely for the purpose of escaping the burden of taxation
For the acquisition to be considered substation, at least 80 percent of the assets acquired must have an element of
permanence; that is, not acquired for immediate disposal. A legitimate business purpose for the merger is essential. Without
it, the merger could be treated as a mere arrangement to avoid the payment of taxes, and the BIR could disregard the tax-free
nature of the transaction. (2)
In determining the existence of a bona fide business purpose for the merger, each step of the transaction is usually considered
and the entire transaction or series of transactions could be treated as a single unit. Applying the step transaction test is
recommended. Under this test, it is advisable to implement each successive step in a merger after the lapse of a certain period
of time, say, a year or so. This prevents an examination by the BIR on whether or not a business purpose exists. However,
the BIR has not a issued a ruling on the acceptable time frame for each transaction. (2)

Sources:
1) SyCip, - The mergers and acquisitions review 7th Ed. (August 2013) http://www.syciplaw.com/Documents/philippines%20lbr.pdf
2) KPMG - Taxation of cross-border mergers and acquisitions (April 2016)
https://home.kpmg.com/content/dam/kpmg/pdf/2016/08/mergers-and-acquisitions-country-report-philippines.pdf
 APPENDIX

CHAPTER VII

ALLOWABLE DEDUCTIONS

SEC. 40. Determination of Amount and Recognition of Gain or Loss. -

(C) Exchange of Property. -

(1) General Rule. - Except as herein provided, upon the sale or exchange or property, the entire amount of the
gain or loss, as the case may be, shall be recognized.

(2) Exception. - No gain or loss shall be recognized if in pursuance of a plan of merger or consolidation -

(a) A corporation, which is a party to a merger or consolidation, exchanges property solely for stock in a
corporation, which is a party to the merger or consolidation; or

(b) A shareholder exchanges stock in a corporation, which is a party to the merger or consolidation, solely for
the stock of another corporation also a party to the merger or consolidation; or

(c) A security holder of a corporation, which is a party to the merger or consolidation, exchanges his securities
in such corporation, solely for stock or securities in such corporation, a party to the merger or consolidation.

No gain or loss shall also be recognized if property is transferred to a corporation by a person in exchange for
stock or unit of participation in such a corporation of which as a result of such exchange said person, alone or
together with others, not exceeding four (4) persons, gains control of said corporation: Provided, That stocks
issued for services shall not be considered as issued in return for property.

Source: https://www.bir.gov.ph/index.php/tax-code.html