December 22, 2009

BIR RULING [DA-(C-335) 815-09]

Secs. 27, 98 & 179; DA-419-04; DA-(C-

005) 023-08; DA-038-06

SGV & Co.

6760 Ayala Avenue
1226 Makati City

Attention: Atty. W. U. Villanueva

Principal, Tax Services

Gentlemen :

This refers to your letter dated December 18, 2009 requesting

confirmation of your opinion that the partial condonation by Kimberly-Clark
Luxembourg Finance S.a.r.l. (KCLF) of the debt of Kimberly-Clark Philippines,
Inc. (KCPI) is not subject to income, donor's and documentary stamp taxes.
It is represented that KCPI, with Tax Identification No. 000-162-194-
000, is a domestic corporation engaged in the manufacture and sale of facial
and bathroom tissues, paper towels and napkins for household and away-
from-home use, disposable diapers, feminine pads/liners, and baby toiletries;
that KCLF is a foreign corporation not doing business in the Philippines, with
principal office located in 46A, Avenue J.F. Kennedy, L-1855 Luxembourg
R.C.S. Luxembourg B122.039; that KCLF is a private limited liability company
organized to enter into, assist or participate in financial, commercial and
other transactions, and to grant to any holding company subsidiary or
affiliated company, or any other company associated in any way with the
Company, or any said holding company, subsidiary or affiliated company, in
which the Company has a direct or indirect financial interest, any assistance,
loans, advances or guarantees; that both KCPI and KCLF are subsidiaries of
Kimberly Clark Corporation ("KCC"), a foreign corporation organized and
existing in the United States of America; that on September 15, 2005,
Kimberly-Clark Irish Finance Corporation Limited ("KCIFCL"), a corporation
organized under the laws of England, and KCPI entered into a Credit
Agreement whereby the former extended credit to the latter in the amount
of Twenty Five Million US Dollars (US$25 Million); that in accordance with the
Agreement, KCPI shall pay KCIFCL interest on the each advance at a USD-
LIBOR rate plus one-eight percent (1/8%); that on June 21, 2007, KCIFCL and
KCLF executed an Assignment Agreement whereby the former transferred
and assigned its right, title, and interest in Credit Agreement in favor of the
latter; that on December 31, 2008, KCPI closed its manufacturing facility in
San Pedro, Laguna due to severe losses; that the influx of imported tissues,
paper towels and napkins as well as diapers and other toiletries has resulted
in a drop in the demand for KCPI products and consequently, its local market
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 share; that as of December 31, 2008, KCPI has reflected a capital deficit
position to the extent of P1,279,085,465.00; that the said capital deficiency
arose from the financial difficulties suffered by KCPI; that due to its
continued losses it suffered at least in the past three years, the Company
has been unable to service its debt to KCLF; that the Audited Financial
Statements of KCPI as of December 31, 2007 and December 31, 2008 reflect
that the Company continually sustained capital deficiency amounting to
595,305,774.00 and P1,279,085,465.00, respectively; that given its
insolvency, KCPI's loan has been designated by KCC and KCLF as not payable
in the foreseeable future; that as part of the global mandate to restore KCPI's
business into a viable operation and in order to minimize its capital
deficiency, KCLF decided to partly condone the debt of KCPI; that of the
outstanding debt of $23,226,364, $21,800,000 was proposed by the KCLF
board of managers to be condoned in a special meeting on December 15,
2009; that the balance of $1,431,364 will be payable in a period of five (5)
years beginning December 31, 2010; and that after the proposed
condonation, KCPI will still be in a capital deficit position. IEHDAT

In reply, please be informed that in BIR Ruling No. 076-89 dated April
17, 1989, it has been settled that before a condonation or forgiveness of
indebtedness will give rise to a taxable income, there must be an increase in
the assets of the debtor thereby enriching the latter. A transaction whereby
nothing of exchangeable value comes to or is received by a taxpayer does
not give rise to or create a taxable income. Gain or profit is essential to the
existence of taxable income.
In BIR Ruling No. DA-(C-005) 023-08 dated July 10, 2008, this Office
had the occasion to rule that debt condonation is not subject to income tax if
the assets of the debtor has not been enriched and thus, does not realize
any taxable income therefrom. It held as follows:
"In reply, please be informed that in BIR Ruling No. DA-419-04
dated August 4, 2004, the BIR held as follows:
'Thus, the condonation of the CPI's debt to SJ shall
not be subject to income tax considering that CPI is in a
capital deficiency position and will remain insolvent
before and after the said condonation considering that
the amount to be condoned would only be
P84,198,555.20. Moreover, the condonation is likewise
not subject to gift tax since there is no donative intent on
the part of SJ but solely for business consideration.'
The above ruling was issued by the BIR on the basis of the
discussions stated in BIR Ruling No. 076-89 dated April 17, 1989
which states as follows:
'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
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 benefit a debtor without any consideration therefore
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 a debt, the transaction
has the effect of the payment of a dividend. (Section 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 GMPI shares from GM-US if
GMPI has a "clean" balance sheet with no outstanding
liabilities except those to Isuzu.'
HAaECD

It is clear from the foregoing that the condonation of LCI's

indebtedness is not subject to income tax if nothing of exchangeable
value comes to or is received by LCI. This is based on the basic and
generally accepted principle of taxation that taxable income is
created from the inflow of wealth. Therefore, if after the condonation
of the liability, LCI will remain insolvent or in a capital deficit position,
then the cancellation of the indebtedness is not subject to any tax.
The said condonation is also not subject to donor's tax in the hands of
LCI, for lack of donative intent on the part of its creditors."
The write-off or condonation of debt will not be subject to income tax if
it does not result in the reduction of the taxable income of the debtor or the
debtor is in a capital deficit position after the condonation. [BIR Ruling DA-(C-
091) 288-08 dated October 13, 2008, DA-(C-005) 023-08 dated July 10, 2008,
DA-643-07 dated December 13, 2007, DA-419-04 dated August 4, 2004 and
076-89 dated April 17, 1989]
In this case, KCPI will remain to be in a capital deficit position despite
the partial condonation by KCLF. Hence, the Company will not derive any
taxable gain from the condonation that is subject to income tax.
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 The subject partial condonation is a mandate given by KCC, parent
company of both KCLF and KCPI, as a business strategy and not to be
construed as an act of liberality on the part of KCLF. The partial condonation
is bereft of any generous and voluntary motive on the part of KLCF from
which an intent to donate in favor of KCPI may be derived. Thus, the partial
condonation by KCLF of KCPI's debt is not subject to donor's tax. [BIR Ruling
No. (DA-038-06) dated February 9, 2006 citing 076-89, supra.]
Moreover, execution of an agreement to implement debt condonation
is not subject to DST. In BIR Ruling No. DA-378-2008 dated June 24, 2008,
this Office held as follows:
"In reply, please be informed that Section 179 of the Tax Code
of 1997, as amended by Republic Act (R.A.) No. 9243, provides:
'Sec. 179. Stamp Tax on all Debt Instruments. — On
every original issue debt instruments, there shall be
collected a documentary stamp tax of One Peso (P1.00)
on each two hundred pesos (P200), or a fraction thereof,
of the issue price of any such debt instruments: Provided,
that for such debt instruments with terms of less than one
(1) year, the documentary stamp tax to be collected shall
be of a proportional amount in accordance with the ratio
of its terms in number of days to three hundred sixty five
(365) days: Provided, further, That only one documentary
stamp tax shall be imposed on either loan agreement, or
promissory notes issued to secure such loan.' AaECSH

In the case of POPI, the compromise agreement is

not in the nature of a loan agreement, but is executed
precisely to effect the payment of terms embodied in a
loan agreement. Since POPI did not execute any
document that may be considered as a loan agreement to
which the tax under Section 179 of the Tax Code, as
amended, is imposed, and since a compromise
agreement is not one among those instruments falling
under any of the documents enumerated under the Tax
Code that are subject to a specific DST, then the said
compromise agreement which provides for the new terms
and conditions of payment of an original loan, shall not be
subject to documentary stamp tax (BIR Ruling No. 146-95
dated September 19, 1995 and BIR Ruling No. DA-381-08-
24-98 dated August 24, 1998).
Accordingly, the execution of a compromise
agreement to document and effect the terms of a
previously agreement upon condonation of a loan by POPI
from one of its creditors, is not subject to the
documentary stamp tax.'
In view of the foregoing, the execution of a compromise
agreement to document and effect the terms of a previously agreed
upon condonation of a loan between LCI and one of its creditors, is
not subject to the documentary stamp tax imposed under Section
179 of the Tax Code, as amended."

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 Based on the foregoing, this Office hereby confirms your opinion that
the partial condonation by KCLF of the debt of KCPI is not subject to income,
donor's and documentary stamp taxes.
This ruling is being issued on the basis of the foregoing facts as
represented. However, if upon investigation it will be disclosed that the facts
are different, then this ruling shall be considered null and void.

Commissioner of Internal Revenue

By:

(SGD.) JAMES H. ROLDAN

Assistant Commissioner
Legal Service

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