Taxation of

cross-border
mergers and
acquisitions
Philippines

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KPMG International
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Philippines
Introduction If the commission determines that such agreement
is prohibited and does not qualify for exemption, the
In recent years, corporate acquisitions, business commission may:
reorganizations, combinations and mergers have — prohibit the agreement’s implementation
become more common in the Philippines. Corporate
— prohibit the agreement’s implementation until changes
acquisitions can be effected through a variety of
specified by the commission are made
methods and techniques, and the structure of a
deal can have material tax consequences. Although — prohibit the agreement’s implementation unless and until
the relevant party or parties enter into legally enforceable
reorganizations are generally taxable transactions,
agreements specified by the commission.
tax-efficient strategies and structures are available to
the acquiring entity. The Commission published Memorandum Circulars (MC)
Nos. 16-001 and 16-002 on 22 February 2016 and they
will take effect on 8 March 2016. MC 16-001 provides for
Recent developments transitional rules for M&As executed and implemented
Republic Act 10667 after the effective date of the Philippine Competition Law
In 2015, one major law was enacted affecting mergers and and before the effective date of its Implementing Rules and
acquisitions (M&A) in the Philippines. Republic Act No. Regulations (IRR). Similarly, MC 16-002 provides transitional
10667, also known as the ‘Philippine Competition Act’, was rules for M&As of companies listed with the Philippine
signed into law on 21 July 2015. It provides for the creation Stock Exchange.
of an independent, quasi-judicial body called the Philippine Application for tax treaty relief
Competition Commission. On 25 August 2010, the Bureau of Internal Revenue (BIR)
The law grants the commission the power to review mergers issued Revenue Memorandum Order 072-10, which
and acquisitions based on factors the commission deems mandates the filing of a tax treaty relief application (TTRA)
relevant. M&A agreements that substantially prevent, restrict for entitlement to preferred tax treaty rates or exemptions.
or lessen competition in the relevant market or in the market The TTRA must be filed before the occurrence of the first
for goods or services, as the commission may determine, are taxable event (i.e. the activity that triggers the imposition
prohibited, subject to certain exemptions. of the tax).

Parties to a merger or acquisition agreement with a The BIR relaxed the TTRA filing deadline after a Philippine
transaction value exceeding 1 billion Philippine pesos (PHP) Supreme Court ruling in August 2013. In that case, the BIR
are barred from entering their agreement until 30 days after denied a TTRA because the taxpayer failed to file their TTRAs
providing notification to the commission in the form and before the occurrence of the first taxable event. The court
containing the information specified in the commission’s held that the obligation to comply with a tax treaty takes
regulations. An agreement entered in violation of this precedence over a BIR revenue memorandum.
notification requirement would be considered void and
subject the parties to an administrative fine of 1–5 percent of Asset purchase or share purchase
the transaction’s value.
An acquisition in the Philippines may be achieved through
The law also provides that the commission shall promulgate a purchase of a target’s shares, assets or entire business
other criteria, such as increased market share in the relevant (assets and liabilities). Share acquisitions have become more
market in excess of minimum thresholds, which may be common, but acquisitions of assets only still occur. A brief
applied specifically to a sector or across some or all sectors in discussion of each acquisition method follows.
determining whether parties to a merger or acquisition should
notify the commission.

Taxation of cross-border mergers and acquisitions | 1

 Philippines
Purchase of assets may be claimed as a deduction from gross income, except for
Income from an asset acquisition is taxed in the Philippines capital losses, which can only be used to offset capital gains.
where the transfer of title or ownership takes place in the Depreciation
Philippines. This is an important consideration for planning
Depreciation allowances for assets used in trade and
and structuring an asset acquisition. Generally, the value
business are allowed as tax deductions. Any method, such
of an asset is its selling price at the time of acquisition. For
as straight-line, declining-balance, sum-of-the-years’ digit and
purposes of determining gain or loss, the gain is the amount
rate of depreciation, may be adopted as long as the method
realized from the sale over the asset’s historical or acquisition
is reasonable and has due regard to the operating conditions
cost or, for a depreciable asset, its net book value.
under which it was chosen.
Purchase price
An asset purchase does not generally affect the depreciation.
To help avoid questions from the tax authorities on the Usually, the purchaser revalues the life of the asset purchased
valuation of an asset, the selling price should be at least for the purposes of claiming the tax-deductible allowance.
equivalent to the book value or fair market value (FMV) of
the asset, whichever is higher. In a purchase of assets in Tax attributes
a business, it is advisable that each asset be allocated a An acquisition of assets may be structured tax-free (non-
specific purchase price in the purchase agreement, or the tax recognition of gain or loss) when property is transferred
authorities might arbitrarily make a specific allocation for the to a corporation in exchange for stock or units of
purchase price of those assets. In addition, in an acquisition of participation, resulting in the transferor, alone or with no
assets, a sale comes within the purview of the Bulk Sales Law more than four others, gaining control (at least 51 percent
if it is a sale of all or substantially all of the trade or business or of voting power) of the corporation. However, if money or
of the fixtures and equipment used in the business. The seller other property (boot) is received along with the shares in the
must comply with certain regulatory requirements; if not, the exchange, any gain is recognized up to the value of the boot
sale is considered fraudulent and void. and FMV of other property where the transferor does not
distribute the boot. Gains should also be recognized if, in the
Goodwill
exchange, a party assumes liabilities in excess of the cost of
Goodwill is not subject to depreciation. The tax authorities assets transferred. Losses cannot be deducted.
have consistently held that no amount of goodwill paid may
be deducted or amortized for tax purposes unless the same The provisions for tax-free exchanges merely defer the
business or the assets related to the goodwill are sold. recognition of gain or loss. In any event, the original or
Thus, for tax purposes, since goodwill is not deductible historical cost of the properties or shares is used to determine
or recoverable over time in the form of depreciation or gain or loss in subsequent transfers of these properties.
amortization allowances, the taxpayer can only recover In later transfers, the cost basis of the shares received in
goodwill on a disposal of the asset, or a part of it, to which the a tax-free exchange is the same as the original acquisition
goodwill attaches. In this case, the gain or loss is determined cost or adjusted cost basis to the transferor of the property
by comparing the sale price with the cost or other basis of the exchanged. Similarly, the cost basis to the transferee of the
assets, including goodwill. property exchanged for the shares is the same as it would be
In the sale of a business or asset, payment for goodwill to the transferor.
is normally included as part of the purchase price without The formula for determining substituted basis is provided in
identifying the portion of the purchase price allocated to it. BIR Revenue Memorandum Ruling No. 2-2002. ‘Substituted
Therefore, goodwill could form part of the purchase price for basis’ is defined as the value of the property to the transferee
purposes of determining gain or loss from the subsequent after its transfer and the shares received by the transferor
sale of the business or assets, or for depreciation of from the transferee. The substituted bases of the shares or
depreciable assets. property are important in determining the tax base to be used
Intangibles, such as patents, copyrights and franchises used in a tax-free exchange when calculating any gain or loss on
in a trade or business for a limited duration, may be subject later transfers.
to a depreciation allowance. Intangibles used in a business or Value added tax
trade for an unlimited duration are not subject to depreciation.
In asset acquisitions, a 12 percent valued added tax (VAT) is
However, an intangible asset acquired through capital outlay
imposed on the gross selling price of the assets purchased
that is known, from experience, to be of value to the business
in the ordinary course of business or of assets originally
for only a limited period may be depreciated over that period.
intended for use in the ordinary course of business. Mergers
On the sale of a business, a non-competition payment is a and tax-free exchanges are not subject to VAT, except on the
capital expenditure that may be amortized over the period exchange of real estate properties (Revenue Regulations
mentioned in the agreement, provided the non-competition 16-2005 implementing RA 9337).
is for a definite and limited term. Any loss incurred on the sale

2 | Taxation of cross-border mergers and acquisitions

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In 2011, in Revenue Regulations (RR) No. 10-2011, the BIR A capital loss from a sale of shares is allowed as a tax
held that the transfer of goods or properties used in business deduction only to the extent of the gains from other sales.
or held for lease in exchange for shares of stock is subject to In other words, capital losses may only be deducted from
VAT. This treatment applies whether or not there is a change capital gains.
in the controlling interest of the parties. This creates a conflict
Most acquisitions are made for a consideration that is readily
where an acquisition is subject to VAT but not to income tax.
determined and specified, so for share purchases, it is
Perhaps as an attempt to cushion the effects of this imperative that shares not be issued for a consideration less
pronouncement, the BIR subsequently released Revenue than the par or issued price.
Regulations 13-2011. As a result, VAT only applies on transfers
Consideration other than cash is valued subject to the
of property in exchange for stocks where the property
approval of the Philippine Securities and Exchange
transferred is an ordinary asset and not a capital asset. This
Commission (SEC).
relief is limited as it only applies where the transferee is a real
estate investment trust (REIT). Tax indemnities and warranties
In 2014, the BIR issued a ruling stating that the transfer of When the transaction is a share acquisition, the purchaser
assets to a corporation in exchange for the corporation’s acquires the entire business of the company, including
shares is not exempt from VAT as it is not specifically provided existing and contingent liabilities. It is best practice to conduct
under Section 109 of the Philippine Tax Code, as amended.1 a due diligence review of the target business. A due diligence
review report generally covers:
Transfer taxes
— any significant undisclosed tax liability of the target
An ordinary taxable acquisition of real property assets is
that could significantly affect the acquiring company’s
subject to stamp duty. In tax-free exchanges, no stamp duty
decision
is due. In all cases, transfers of personal property are exempt
from stamp duty. — the target’s degree of compliance with tax regulations,
status of tax filings and associated payment obligations
Purchase of shares
The shares of a target Philippine company may be acquired — the material tax issues arising in the target and the
through a direct purchase. Gains from the sale are considered technical correctness of the tax treatment adopted for
Philippine-source income and are thus taxable in the significant transactions.
Philippines regardless of the place of sale. Capital gains tax Following the results of the due diligence review, the parties
(CGT) is imposed on both domestic and foreign sellers. Net execute an agreement containing the indemnities and
capital gain is the difference between the selling price and the warranties for the protection of the purchaser. As an alternative,
FMV of the shares, whichever is higher, less the shares’ cost it is possible to spin-off the target business into a new
basis, plus any selling expenses. In determining the shares’ company, thereby limiting the liabilities to those of the target.
FMV, the adjusted net asset method is used whereby all
assets and liabilities are adjusted to FMVs. The net of adjusted Tax losses
asset minus the liability values is the indicated value of the The change in control or ownership of a corporation
equity. The appraised value of real property at the time of sale following the purchase of its shares has no effect on any
is the higher of: net operating loss (NOL) of the company. The NOL that was
not offset previously as a deduction from gross income of
— FMV as determined by the Commissioner of Internal
the business or enterprise for any taxable year immediately
Revenue
preceding the taxable year in question is carried over as a
— FMV as shown in the schedule of values fixed by the deduction from gross income for the 3 years immediately
provincial and city assessors following the year of such loss. The NOL is allowed as a
deduction from the gross income of the same taxpayer
— FMV as determined by an independent appraiser.
that sustained and accumulated the NOL, regardless of
Accordingly, for CGT purposes, it is advisable that the selling any change in ownership. Thus, a purchase of shares of the
price not be lower than the FMV. Capital gains are usually target corporation should not prevent the corporation from
taxed at: offsetting its NOL against its income.
— 5 percent (for amounts up to PHP100,000) and 10 percent Crystallization of tax charges
(for amounts over PHP100,000) for sales of unlisted As a share acquisition is a purchase of the entire business, any
shares and all tax charges are assumed by the purchaser. This is one
— one-half of 1 percent of the gross selling price or gross of the areas covered by the indemnities from the seller, for
value in money for sales of publicly listed/traded shares. which a hold-harmless agreement is usually drawn up.

1
BIR Ruling No. 424-14 dated 24 October 2014.

Taxation of cross-border mergers and acquisitions | 3

 Philippines
Pre-sale dividend taxes deemed to have been paid in the Philippines equivalent
While not a common practice, dividends may be issued prior to 15 percent. Similarly, the tax rate may be reduced where
to a share purchase. However, dividends are subject to tax, a tax treaty applies, subject to securing a prior confirmatory
except for stock dividends received by a Philippine company ruling from the BIR. As noted earlier, all preferential rates
from another Philippine company. and exemptions under a treaty apply only if a prior ruling
is secured. This is still the prevailing rule under Revenue
Transfer taxes Memorandum Order No. 72-2010.
Transfers of shares of stock, whether taxable or as part of
a tax-free exchange, are subject to stamp duty. Only sales Philippine corporation law does not permit a foreign company
of shares listed and traded through the Philippine stock to merge with a Philippine company under Philippine
exchange are exempt from stamp duty. As of 20 March 2009, jurisdiction. However, they may elect to merge abroad.
the Republic Act 9648 permanently exempts such sales from Non-resident intermediate holding company
stamp duty. Certain tax treaties provide exemption from CGT on the
disposal of Philippine shares. Gains from sales of Philippine
Choice of acquisition vehicle shares owned by a resident of a treaty country are exempt
from CGT, provided the assets of the Philippine company
In structuring an acquisition or reorganization, an acquiring
whose shares are being sold do not consist principally (more
entity or investor can use one of the entities described below.
than 50 percent) of real property interests in the Philippines.
Since the tax implications for different income streams vary
Also, some treaties (e.g. Philippines-Netherlands tax treaty)
from one acquisition vehicle to another, it is best to examine
grant a full exemption on alienation of shares without
each option in the context of the circumstances of each
condition (i.e. without the real property interest component).
transaction.
This is a potential area for planning, and specific treaties
Local holding company should be consulted.
A Philippine holding company may be used to hold the shares Local branch
of a local target company directly. The main advantage of this
In certain cases, foreign companies may opt to hold Philippine
structure is that dividends from the target company to the
assets or shares through a branch office. As with a domestic
holding company are exempt from tax. Although distributing
corporation, the Philippine-source income of a resident
the dividends further upstream to the foreign parent company
foreign corporation, such as a branch, is taxed at the rate of
will attract the dividend tax, tax-efficiency may still be
30 percent (from 1 January 2009). Through the attribution
achieved through the use of jurisdictions where such foreign
principle implemented under Revenue Audit Memorandum
parent company is located. It is common to use a jurisdiction
Order (RAMO) No. 1-95, a portion of the income derived from
with which the Philippines has an effective tax treaty to
Philippine sources by the foreign head office of the branch is
optimize tax benefits.
attributed to the branch, following the formula in the RAMO.
One disadvantage of a Philippine holding company is that The income is apportioned through the branch or liaison
it attracts an improperly accumulated earnings tax (IAET). office that was not party to the transaction that generated
Under current law, the fact that a corporation is a mere holding the income. The branch or liaison office then becomes liable
company or investment company is prima facie evidence to pay tax on the income attributed to it. Profit remitted to
of a purpose to avoid the tax on the part of its shareholders a foreign head office is subject to a 15 percent WHT, unless
or members. Thus, if the earnings of the Philippine holding reduced by a tax treaty.
company are allowed to accumulate beyond the reasonable
In establishing a branch office in the Philippines, the SEC
needs of the business, the holding company may be subject
requires that the foreign head office comply with certain
to the 10 percent IAET.
financial ratios (i.e. 3:1 debt-to-equity ratio, 1:1 solvency ratio
Foreign parent company and 1:1 currency ratio).
Where a foreign company opts to hold Philippine assets Joint venture
or shares directly, it is taxed as a non-resident foreign
Joint ventures may be either incorporated (registered with
corporation. A final withholding tax (WHT) of 15 percent is
the SEC as a corporation) or unincorporated. Both forms
imposed on the cash or property dividends it receives from
are subject to the same tax as ordinary corporations.
a Philippine corporation, provided the country in which the
Unincorporated joint ventures formed to undertake
non-resident foreign corporation is domiciled allows a credit
construction projects, or those engaged in petroleum, coal,
against the tax due from the non-resident foreign corporation

4 | Taxation of cross-border mergers and acquisitions

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geothermal or other energy operations under a government of stock in the other company, and the transferor gains
service contract, are not taxable entities. Profits distributed by control of the transferee company. In the same manner, the
the joint venture or consortium members are taxable. transferee company becomes the controlling stockholder
of the transferor company since the shares received are the
Choice of acquisition funding domestic shares of the transferee company.

Corporate acquisitions may be funded through equity, debt or This is considered a tax-free exchange within the scope of
a combination of the two. section 40(C)(2) of the Philippine Income Tax Code. No gain
or loss is recognized if property (including shares of stocks) is
Debt transferred to a corporation by a person in exchange for stock
Companies tend to favor debt over equity as a form of or units of participation in such a corporation such that the
financing mainly because of the tax-favored treatment of person, alone or with no more than four others, gains control
interest payments vis-à-vis dividends (see this report’s (stock ownership of at least 51 percent of the total voting
information on deductibility of interest). The tax advantage power) of the corporation.
of interest payments, in contrast to dividends, is an outright
Hybrids
savings of 30 percent in the form of deductible expense
against the taxable base. Since interest payments are The current laws contain no guidelines on whether to classify
subject to a 20 percent final tax under the Tax Code, financing hybrid financial instruments as equity infusions or debt
through debt still has an advantage over financing with equity instruments. The question is whether a loan is a bona fide loan
equivalent to 15 percent. or a disguised infusion of capital.

Currently, there are no specific rules for determining what If it is the latter, there is a risk that the BIR may:
constitutes excessively thin capitalization, so a reasonable — disallow the interest expense
ratio of debt to equity must be determined case-by-case.
— where the loan is interest-free or carries an interest rate
Deductibility of interest that is less than the prevailing market rate, impute interest
Under current law, interest payments incurred in a business income to the lender and assess additional income tax
are deductible against gross income. The allowable deduction thereon.
for interest expense is reduced by 33 percent of the
Certain court decisions may provide some guidance on
company’s interest income, if any, subjected to final tax.
whether a transaction should be considered a bona fide loan
Withholding tax on debt and methods to reduce or or a dividend distribution. To date, no authoritative or definitive
eliminate it rulings have been issued.
Generally, interest income received by a Philippine corporation Discounted securities
from another Philippine corporation is subject to the regular
Under Philippine laws, the discount on discounted securities
corporate income tax of 30 percent. However, interest income
is treated as interest income rather than a taxable gain. For
received by a non-resident foreign corporation from the
discounted instruments, a trading gain arises only where the
Philippines is subject to a final withholding tax of 20 percent.
instrument is sold above par.
The rate of WHT may be reduced or eliminated under a tax
treaty, subject to securing a prior ruling.
Other considerations
Checklist for debt funding
As no specific rules determine what constitutes excessively Concerns of the seller
thin capitalization, a reasonable ratio of debt-to-equity should In an acquisition of assets, a sale comes within the purview
be determined case-by-case. 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
Equity used in the business. The seller must comply with certain
A purchaser may use equity to fund its acquisition by issuing regulatory requirements; if not, the sale is considered
shares to the seller as consideration. fraudulent and void.
A tax-free acquisition of shares can be accomplished VAT applies to sales of goods in the ordinary course of trade or
through a share-for-share exchange between the acquiring business (i.e. the regular conduct or pursuit of a commercial
company and the target company. In such an exchange, one or an economic activity, including incidental transactions).
party transfers either its own shares or the shares it owns Thus, isolated transactions generally are not subject to VAT.
in a domestic corporation solely in exchange for shares

Taxation of cross-border mergers and acquisitions | 5

 Philippines
However, decisions of the Philippine Court of Tax Appeals A legitimate business purpose for the merger is essential.
in 2013 consistently hold that an isolated transaction Without it, the merger could be treated as a mere arrangement
may be considered an incidental business transaction for to avoid the payment of taxes, and the BIR could disregard the
VAT purposes. Hence, VAT may be imposed on isolated tax-free nature of the transaction. In determining the existence
transactions such as sales of assets, shares or the whole of a bona fide business purpose for the merger, each step of the
business enterprise. transaction is usually considered and the entire transaction or
series of transactions could be treated as a single unit.
Company law and accounting
The Corporation Code of the Philippines governs the Applying the step transaction test is recommended. Under
formation, organization and regulation of private companies, this test, it is advisable to implement each successive step in a
unless they are owned or controlled by the government or its merger after the lapse of a certain period of time, say, a year or
agencies. The Corporation Code also governs mergers and so. This prevents an examination by the BIR on whether or not
other business combinations. a business purpose exists. However, the BIR has not issued a
ruling on the acceptable timeframe for each transaction.
The Corporation Code allows two or more corporations to
merge into either of the constituent corporations or a new Group relief/consolidation
consolidated corporation. Under the Philippine Tax Code, the Group tax relief is not applicable under Philippine law. For
terms ‘merger’ and ‘consolidation’ are understood to mean: tax purposes, each legal entity is registered as a separate
taxpayer and subject to separate tax filings, and tax
— an ordinary merger or consolidation
consolidations are not possible.
— the acquisition by one corporation of all or substantially
Transfer pricing
all the properties of another corporation solely for stock,
undertaken for a bona fide business purpose and not The Philippine Tax Code grants the Commissioner of Internal
solely for the purpose of escaping the burden of taxation. Revenue the power to reallocate income and deductions
between and among related entities. The Secretary of
Mergers in the Philippines require a transfer of all the assets Finance’s transfer pricing regulations (Revenue Regulations
and liabilities of the absorbed corporation to the surviving 2-2013) provide guidelines for applying the arm’s length
corporation. This step is followed by the dissolution of principle for transfer pricing.
the absorbed corporation. In return for the transfer of all
the assets and liabilities of the absorbed corporation, the These guidelines state that the most appropriate of the
surviving entity issues a block of shares equal to the net asset transfer pricing methods under the Organisation for Economic
value transferred. These shares are in turn distributed to the Co-operation and Development’s (OECD) transfer pricing
stockholders of the absorbed corporation. guidelines may be used in determining the arm’s length result.
These methods are:
A de facto merger is the acquisition by one corporation of all
or substantially all of the properties of another corporation — comparable uncontrolled price method
solely for stock, usually undertaken for a bona fide business — resale price method
purpose and not solely to escape taxation. For the acquisition
to be considered substantial, at least 80 percent of the assets — cost plus method
acquired must have an element of permanence; that is, not — profit split method
acquired for immediate disposal. Unlike a statutory merger,
where the absorbed corporation is automatically dissolved — transactional net margin method.
as a consequence of the merger, in a de facto merger, the The guidelines do not prescribe a preference for any one
corporation the assets of which were acquired survives after method. Instead, the method that produces the most reliable
the transfer until it is later dissolved by another act. results, taking into account the quality of available data and
The tax consequences of a de facto merger are similar to the degree of accuracy of adjustments, should be utilized.
those of a statutory merger. However, in a de facto merger, The guidelines recognize the authority of the Commissioner
the acquisition of assets does not automatically result in of Internal Revenue to make transfer pricing adjustments to
the dissolution of the corporation the assets of which are ensure that taxpayers clearly reflect income attributable to
acquired, and so the net operating loss carryover (NOLCO) related-party transactions and to prevent the avoidance of
of the absorbed corporation is not transferred to the taxes with respect to such transactions.
acquiring corporation.

6 | Taxation of cross-border mergers and acquisitions

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The documentation supporting the transfer pricing analysis Disadvantages of asset purchases
is not required to be submitted upon filing of tax returns. — Unless specifically provided for in the agreement, the
The taxpayer should retain the documentation for the period transferee corporation does not acquire the rights,
provided under the Tax Code and be prepared to submit to the privileges and franchises of the transferor corporation.
BIR when required or requested to do so.
— The transferee corporation cannot claim any NOLCO of
Further, the documentation should be contemporaneous the transferor corporation since the transferor corporation
(i.e. existing; prepared at the time the related parties develop continues to exist as a legal entity.
or implement any arrangement that might raise transfer
pricing issues, or prepared when the parties review these — The transferor’s unused input VAT cannot be absorbed by
arrangements when preparing tax returns). or transferred to the transferee corporation.

Dual residency — A transfer of all or substantially all of the assets must

comply with the requirements of the Bulk Sales Law.
The Philippines follows the incorporation/domestication rule:
a corporation is considered a resident of the country where — A higher purchase price arises in the event of any
it is incorporated. Certificates of incorporation or registration additional premium or goodwill imputation.
and articles of incorporation or association are considered
— Acquisition is subject to VAT where the transaction is
sufficient proof of residency.
deemed to be a sale.
Foreign investments of a local target company
— Any real property purchased is subject to stamp duty and
Philippine domestic corporations are taxed on their worldwide VAT.
income at the rate of 30 percent, subject to foreign tax credits
in compliance with applicable rules. Advantages of stock purchase
— The buyer may benefit from an automatic transfer of
Comparison of asset and share purchases the rights, privileges and franchises by the transferor
corporation to the transferee corporation.
Advantages of asset purchase
— The transferee corporation may claim the NOLCO of
— The transferee corporation does not automatically assume
the transferor corporation, subject to the provisions
liabilities of the transferor corporation.
of the Tax Code and its regulations. However, in 2012,
— The transferor corporation does not automatically dissolve the BIR ruled that in a statutory merger, the NOLCO
and may continue its separate existence. of the absorbed corporation is not one of the assets
that can be transferred and absorbed by the surviving
— The transferor and transferee corporations may select
corporation, as this privilege or deduction is only
which assets to transfer or purchase.
available to the absorbed corporation. Accordingly,
— The transfer of all or substantially all of the assets solely the tax-free merger does not cover the NOLCO of
for stock is not subject to donor’s tax. the absorbed corporation that can be transferred and
absorbed by the surviving corporation.
— The transfer of all or substantially all of the assets solely
for stock is not subject to stamp duty unless the assets — The transferor’s unused input VAT may be absorbed by or
transferred involve real property. transferred to the transferee corporation.
— No loss or gain is recognized, provided the conditions in — A merger may not be subject to donor’s tax and VAT,
section 40(c)(2) of the Tax Code are met. subject to the comments above. Moreover, no loss or gain
is recognized, provided the conditions in section 40(c)(2) of
— An asset purchase does not normally need SEC approval,
the Tax Code are met.
unless the assets are payments for subscription to the
capital stock and there is a need to increase the authorized — A stock purchase may involve a lower purchase price and
capital stock of the transferee corporation. lower taxes.
— The property purchased by the buyer is subject to
depreciation. The buyer may use a different method and
rate of depreciation based on the acquisition cost of the
property acquired.

Taxation of cross-border mergers and acquisitions | 7

 Philippines
Disadvantages of stock purchase
— The transferee corporation may be responsible for all the
liabilities and obligations of the transferor corporation as
if the transferee corporation had incurred them directly.
Any claim, action or pending proceeding by or against the
transferor corporation may be prosecuted by or against the
transferee corporation.
— It may be necessary to increase the authorized capital
stock of the transferee corporation to accommodate the
issue of new shares; hence, SEC approval is required.
— The issue of new shares is subject to stamp duty.
— Regulatory compliance would be required before the
shares are registered in the buyer’s name.

8 | Taxation of cross-border mergers and acquisitions

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 Taxation of cross-border mergers and acquisitions | 9

© 2016 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
KPMG in the Philippines

Maria Georgina J. Soberano

RG Manabat & Co
6787 KPMG Center
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Manila
1226
Philippines

T: +63 2 885 7000 x 319

E: [email protected]

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The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to
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Publication name: Philippines: Taxation of cross-border mergers and acquisitions
Publication number: 133201-G
Publication date: April 2016