Tax Articles

Merger: Short Period Returns

By: Atty. Fulvio D. Dawilan

Merger and acquisition trend has increased over the years. Merger transactions are undertaken horizontally, vertically and between and among conglomerates for a number of business reasons. Owing to competitive business environments, mergers and acquisitions are becoming important catalyst for improving on the profitability, leveraging and liquidity positions of businesses. Through mergers and acquisitions, firms are able to overcome the problem of limitation by expanding their resources, and improve competiveness.

In undertaking mergers and acquisitions, regulatory and tax frameworks are also important factors that must be taken into account, aside from the business considerations. I’ll discuss the requirement for the filing of short-period return for absorbed corporations, in relation to the effectivity of mergers.

Effectivity of Merger. The Revised Corporation Code of the Philippines (“RCC”) expressly provides for the effectivity of merger, which shall be the issuance of a certificate by the Securities and Exchange Commission (“SEC”) approving the articles and plan of merger. The law is silent on whether the parties may agree upon or stipulate a different effective date. A reference, however, to a number of SEC Opinions would show that this is possible. In one opinion, the SEC noted that notwithstanding the effectivity of merger as provided in the Corporation Code, a stipulation may be allowed taking into account the following factors: (1) public policy considerations; and (2) the fact that no party will be prejudiced. The stipulated merger date is binding on the parties to the merger agreement.

In essence, a merger takes effect upon the issuance of the certificate approving the merger. This shall be observed in the absence of an agreement between the parties stating otherwise. Notwithstanding the strict provisions of the RCC, the parties to a merger may stipulate on its effectivity, subject to the SEC’s approval. Once approved, the agreed date for the merger is controlling even if the certificate is issued by the SEC on a different date. On such agreed effective date, the parties shall observe the effects of merger including the obligations arising from the combination.

Short Period Return Requirement. A dissolved corporation is required to file short-period returns covering the transactions/income earned by the corporation from the beginning of the year up to the date of its dissolution. The short-period return will commence from the beginning of the year when the corporation was dissolved up to the date of its dissolution. This short period return is required to be filed within 30 days from the date of dissolution.

Previously, the short-period return was expressly required for corporations contemplating dissolution, excluding corporations contemplating reorganization such as mergers. Jurisprudence and changes in the laws, however, applied the rules on absorbed corporations in cases of mergers. These absorbed corporations in merger transactions are therefore also required to file short period returns.

When should the 30-day period be reckoned for purposes of filing the short-period return by the absorbed corporations? Jurisprudence and BIR issuances had confirmed that the 30-day period should start from the effectivity of merger. Thus, in cases where no specific date of effectivity is provided in the articles and/or plan of merger, the 30-day period shall be counted from the date of issuance of the certificate of merger by the SEC, the same being the effectivity date.

On the other hand, should the parties specifically provide for date of effectivity, there are two possible scenarios that may happen: (a) SEC approval comes after the stipulated effectivity date, and (b) SEC approval is made earlier than the stipulated date. Under these two situations, rulings issued by the BIR provided inconsistent answers. In the first situation, a ruling of the BIR had confirmed that the SEC’s approval is the operative fact that gives legal effect to the merger and results to the cessation of the separate personality of the absorbed corporation. As such, the 30-day period shall be reckoned from the SEC’s approval of the merger. Thus, should the issuance of the certificate of merger be far removed for the effectivity date as stipulated by the parties, the approval date shall be used as the reckoning date of the 30-day period.

In the second scenario, a ruling by the BIR confirmed that the effectivity date as stipulated by the parties shall be observed for purposes of complying with the short period return. This is so because the absorbed corporation will be considered automatically dissolved only on the stipulated date. Accordingly, the 30-day period shall be counted from the effective date of merger as agreed by the parties.

It would seem that under these two scenarios, whichever is the latter date shall prevail. Before the approval by the SEC, there is certainly no obligation on the part of the absorbed corporation to comply with the short-period return. The approval gives effect to the merger and all the provisions stipulated in the plan of merger. An obligation to file short period return arises only when there is approval. Thus, should the agreed effectivity date be later that the approval, the filing shall be deferred until after the agreed effectivity date so that all transactions up to the agreed date will be covered. On the other hand, should the agreed effectivity date be earlier than the approval date, the filing shall be deferred until after the approval. In either case, a request for extension for the filing of the short-period return may have to be made to avoid the late filing of the return.

This is just one of the concerns attendant to a merger. We will discuss some of the other issues in subsequent articles in this column.