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,
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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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(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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