All Things are Subject to Interpretation
All Things are Subject to Interpretation
by: Brea Jaye N. Uy
Under Section 2 and 3 of the Tax Code, the Bureau of Internal Revenue (BIR) shall be under the supervision and control of the Department of Finance and it shall have a chief known as Commissioner of Internal Revenue (CIR). The Tax Code grants the CIR powers pertaining to tax matters. An example of such power is the power to interpret the provisions of the Tax Code and other tax laws.
However, the CIR is not entirely infallible – with the power to interpret tax laws, comes the responsibility to take into account other laws applicable to a particular situation. This is demonstrated in the case of Commissioner of Internal Revenue v. My Solid Technologies & Devices Corporation (CTA EB No. 1767).
In the instant case, My Solid Technologies & Devices Corporation, hereinafter referred to as the Company, planned to execute a merger with Mytel Mobility Solutions, Inc. (Mytel), with the Company being the surviving entity. On 29 May 2012, the Securities and Exchange Commission (SEC) approved the Plan and Agreement and the Articles of Merger executed on 25 April 2012. Prior to this, the Company filed its quarterly VAT return for the 1st calendar quarter of 2012, which was later amended on 02 May 2012. Thereafter, both entities filed their respective quarterly VAT return for the 2nd quarter on 25 July 2012.
On 06 February 2013, pursuant to the VAT Audit Program under Revenue Memorandum Order (RMO) No. 20-2012, the CIR issued a Letter of Authority (LOA) authorizing revenue officers to examine the Company’s books of accounts for the period covering 01 January 2012 to 30 June 2012. Thereafter, on 02 December 2013, the CIR issued a Formal Assessment Notice (FAN) for deficiency VAT. This deficiency resulted from the disallowance of the unutilized input VAT of Mytel carried in the VAT return of the Company.
The CIR contends that Section 235 (e) of the Tax Code, as amended, prescribes that corporations and partnerships contemplating dissolution must notify the Commissioner and shall not be dissolved until cleared of any tax liability. Furthermore, Section 236 (f) of the Tax Code, as amended, states that the registration of any person who ceases to be liable to a tax type shall be canceled upon filing with the Revenue District Office where he is registered an application for registration information updated in a form prescribed thereof. Based on the abovementioned, the CIR disallowed the unused input tax of the absorbed corporation on the fact that there was no application for merger or any notification filed in the Bureau of Internal Revenue (BIR).
To simplify, the issue of this case is whether a prior filing of an application for notice of merger and/or notification of closure with the BIR is a precondition for the use of the unutilized input VAT of Mytel by My Solid Technologies & Devices Corporation as the surviving corporation.
The answer to this is a NO as ruled by the Court of Tax Appeals En Banc. Section 79 of the Corporation Code provides that if SEC is satisfied that the merger or consolidation of the corporations concerned is not inconsistent with the Corporation Code and existing laws, it shall issue a certificate of merger or of consolidation, as the case may be, at which time the merger or consolidation shall be effective. This certificate is known as the “Certificate of Filing of the Articles and Plan of Merger. In the case of Mindanao Savings and Loan Association, Inc. v Willkom, the Supreme Court held that the issuance of the certificate of merger is crucial because not only does it bear out SEC’s approval, it also marks the moment when the consequence of a merger took place.
The foregoing can be treated as the general rule on the effectivity of merger. However, BIR Ruling No. 032-2002 has taken an exception that when the parties to the merger provided for a date when their merger shall take effect, in which case, the effectivity date shall be the date agreed upon by the constituent corporations.
As stated before, the SEC issued the Certificate of Filing of Articles and Plan of Merger on 29 May 2012. However, based on the express provisions of the Articles of Merger, the effectivity of the merger shall be on 01 June 2012.
Further, the cited provisions of the Tax Code by the CIR do not refer to the conditions to be complied with before the legal effect of a merger may be realized under the relevant provisions of the Corporation Code. The effects of closure of an entity is not similar to the effects of a merger or consolidation.
Section 80 of the Corporation Code states the following legal effects of a merger or consolidation:
4. The surviving or the consolidated corporation shall thereupon and thereafter possess all the rights, privileges, immunities and franchises of each of the constituent corporations; and all property, real or personal, and all receivables due on whatever account, including subscription to shares and the other choses in action, and all and every other interest of, or belonging to, or due to each constituent corporation, shall be deemed transferred to and vested in such surviving or consolidated corporation without further act or deed;
5. The surviving or the consolidated corporation shall be responsible and liable for all the liabilities and obligations of each of the constituent corporations in the same manner as if such surviving or consolidated corporation had itself incurred such liabilities or obligations; and any pending claim, action or proceeding brought by or against any of such constituent corporations may be prosecuted by or against the surviving or consolidated corporation. The rights of creditors or liens upon property of any such constituent corporations shall not be impaired by such merger or consolidation.
In the closure of entities, the BIR will not grant the application for cancellation of registration until all tax liabilities of the closing entity are settled and all penalties for non-filing of tax returns are paid. The closing entity shall be required to submit its accounting records and other documents to enable revenue officers to conduct an examination to determine the remaining tax liabilities. This process is to ensure that all unpaid taxes and penalties will be paid by the closing entity before the BIR finally cancels its registration and its corresponding TIN.
The CIR failed to differentiate the effects of a closure of entity and a statutory merger; hence, the erroneous application of the provisions of the Tax Code to a statutory merger as governed by the Corporation Code. To summarize, a notice of merger and/or an application of cancellation of registration filed with the BIR are not conditions before the effects of a statutory merger may take place, which includes the transfer of properties, i.e. input tax, of the absorbed entity.
Please note that as of this article, this case has not yet been appealed in the Supreme Court. Rulings of the Court of Tax Appeals are not jurisprudential and only hold persuasive powers in the courts.
Brea Jaye N. Uy is an Associate from the tax group of KPMG R.G. Manabat & Co. KPMG RGM&Co. has been recognized as a Tier 1 tax practice and Tier 1 transfer pricing practice by the International Tax Review.
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