BIR Ruling [DA-001-06]

January 4, 2006 BIR RULING [DA-001-06] Section 127 (B); DA-035-99 Puno and Puno Law Offices 12th Floor, East Tower Philippine Stock Exchange Centre Exchange Road, Ortigas Center Pasig City Attention: Atty. Ma. Elizabeth E. Peralta-Loriega Atty. Gracejenn Vizcarra Giron Atty. Ranulfo G. V. Payos, Jr . Gentlemen : This refers to your letter dated September 30, 2005 requesting in behalf of your client, First Gen Corporation ("First Gen"), confirmation to the effect that the listing of shares with the Philippine Stock Exchange ("PSE") will not be subject to the Initial Public Offering ("IPO") tax imposed under Section 127(B) of the Tax Code of 1997. It is represented that First Gen is a holding company organized and existing under the laws of the Philippines, with core business activity focused on power generation through various subsidiaries; that as of August 31, 2005, the shareholders of First Gen are First Philippine Holdings Corporation (FPHC), AIDEC FG Power Limited (AIDEC), Summit Global Management II B.V. and nine (9) individuals; that FPHC, the biggest shareholder of First Gen, is a corporation listed and traded in the PSE, owning at least 88% of the authorized capital stock. As of September 20, 2005, the shareholders of FPHC are Benpres Holding Corporation ("BHC"), PCD Nominee Corporation, PCD Nominee Foreign Corporation and others; that as for the shareholders of FPHC, BHC is likewise a corporation listed and traded in the PSE, while PCD Nominee Corporations, both local and foreign, are composed of numerous corporations; that it was disclosed that the top 20 beneficial owners of the PCD nominee shares are composed of the following corporations: Social Security System, Government Service Insurance System, HSBC Custody and Clearing Department, Standard Chartered Bank, Deustche Bank AG Manila Branch, BPI Securities, RCBC Securities, Inc., PCCI Securities Brokers Corp., ATR-Kim Eng Securities, Inc., First Orient Securities, Inc.; Asiasec Equities, Inc., Quality Investments & Securities, Wealth Securities, Inc., Ansaldo Godinez & Co., Papa Securities Corporation, Yao & Zialcita, Inc., Eagle Securities, Inc. and SB Equities, Inc.; and that you now request for the confirmation of your opinion that at the time of the IPO, First Gen is not a closely held corporation, as such, not subject to IPO tax under Section 127 (B) of the NIRC. aTIAES In reply thereto, please be informed that pursuant to Section 127 (B) of the Tax Code of 1997 which provides: "SEC. 127. Tax on sale, barter or exchange of shares of stock listed and traded through the local stock exchange or through initial public offering. (B) Tax on shares of stock sold or exchanged through initial public offering. There shall be levied, assessed and collected on every sale, barter, exchange or other disposition through initial public offering of shares of stock in closely held corporation, as defined herein, a tax at the rates provided hereunder based on the gross selling price or gross value in money of the shares of stock sold, bartered, exchanged or otherwise disposed in accordance with the proportion of shares of stock sold, bartered, exchanged or otherwise disposed to the total outstanding shares of stock after the listing in the local stock exchange. Up to twenty-five percent (25%) 4% Over twenty-five percent (25%) but not over thirty three and one third percent (33 1/3%) 2% Over thirty-three and one third percent (33 1/3%) 1% The tax herein imposed shall be paid by the issuing corporation in primary offering or by the seller in secondary offering. For purposes of this Section, the term "closely held corporation" means any corporation at least fifty percent (50%) in value of the outstanding capital stock of all classes of stock entitled to vote is owned directly or indirectly by or for not more than twenty (20) individuals. For purposes of determining whether the corporation is a closely held corporation, insofar as such determination is based on stock ownership, the following rules shall be applied. (1) Stock not Owned by Individuals . Stock owned directly or indirectly by or for a corporation, partnership, estate or trust shall be considered as being owned proportionately by its shareholders, partners or beneficiaries . xxx xxx xxx (emphasis supplied) the IPO tax would apply only to corporations which are considered "closely held", meaning that at least 50% in value of the outstanding voting shares of all classes is owned directly or indirectly by or for not more than 20 individuals. In the case where the shares of stock in the corporation to be listed are owned by another corporation, such shares will be considered as being owned proportionately by the latter's shareholders. DTaSIc Since First Gen is owned by a publicly listed corporation FPHC, at the time of the application to list the shares of First Gen with the PSE, the corporate shareholding of FPHC in First Gen will be considered as being proportionately owned by FPHC's shareholders. Taking it further, since FPHC is owned by another publicly listed corporation BHC, the shareholdings of BHC in First Gen through FPHC will still be proportioned among the shareholders of BHC. In the case of a multi-tiered corporation, the stock attribution rule must be allowed to run continuously along the chain of ownership until it finally reaches the individual stockholders. This is in consonance with the "grandfather rule" adopted in the Philippines under Section 96 of the Corporation Code (Batas Pambansa Blg. 68) which provides that notwithstanding the fact that all the issued stocks of a corporation are held by not more than twenty persons, among others, a corporation is nonetheless not to be deemed a close corporation when at least two thirds of its voting stock or voting rights is owned or controlled by another corporation which is not a close corporation. ( BIR Ruling No. 072-97 dated July 02, 1997 ). Since the shareholders of FPHC and even further, BHC, consist of possibly hundreds and thousands of individuals, First Gen cannot be considered as a "closely held corporation" prior to its listing with the PSE. Accordingly, this Office is of the opinion as it hereby holds that the listing of shares of stock of First Gen with the PSE will not be subject to IPO tax because prior to the listing of shares, First Gen is not a closely held corporation as defined under Section 127(B) of the NIRC. ( BIR Ruling No. 035-99 dated 25 March 1999 ). This ruling is being issued on the basis of the foregoing facts as represented. However, if upon its investigation, it will be ascertained that the facts are different, then this ruling shall be considered null and void. Very truly yours , (SGD.) JOSE MARIO C. BUAG Commissioner of Internal Revenue