Romulo Mabanta Buenaventura Sayoc & de los Angeles

January 9, 2008 BIR RULING [DA-005-08] Sec. 127 (a); RA 7151; 3-95; DA-107-01; DA-393-05; Romulo Mabanta Buenaventura Sayoc & de los Angeles 30/F Citibank Tower 8741 Paseo de Roxas Makati City Attention: Attys. Perry L. Pe & Jayson L. Fernandez Gentlemen : This refers to your letter dated May 18, 2007 requesting for confirmation of your opinion that the initial public offering to be undertaken by Cebu Air, Inc. ("Cebu Pacific") through the Philippine Stock Exchange ("PSE") in compliance with the mandatory public equity participation requirement in its franchise will not be subject to the IPO tax imposed under Section 127 (b) of the Tax Code of 1997, as amended, and that the original issuance of shares out of the authorized capital stock of Cebu Pacific is not subject to the documentary stamp tax imposed under Section 174 of the same Tax Code pursuant to Sec. 11 of Republic Act (R.A.) No. 7151 in relation to Sec. 13 of Presidential Decree (P.D.) No. 1590. aHTDAc It is represented that Cebu Pacific is a corporation organized and existing under the laws of the Republic of the Philippines; that it is the holder of a legislative franchise granted under R.A. No. 7151 to establish, operate and maintain transport services for the carriage of passengers, mail, goods and property by air, both domestic and international, with Cebu as its base; that under its franchise, Cebu Pacific is required to make a public offering of at least 30% of its common stocks through the PSE. Section 9 of RA No. 7151 provides: "SEC. 9. Public Equity Participation . In compliance with the constitutional mandate to democratize ownership of public utilities, the herein grantee shall make public offering through the stock exchanges of at least thirty percent (30%) of its common stocks within a period of ten (10) years from the date of effectivity of this Act: Provided, That no single person or entity shall be allowed to own more than five Percent (5%) of the stock offerings." aSIETH that at the time of filing of Cebu Pacific's application for listing with the PSE, 99.99% of the outstanding shares of stock in Cebu Pacific is owned by CPAir Holdings, Inc.; that JG Summit Holdings, Inc., in turn, holds 99.99% of the outstanding shares of CPAir Holdings, Inc.; and that JG Summit Holdings, Inc. is a publicly-listed corporation whose shares of stock are owned by more than 1,500 corporate and individual shareholders. In reply, please be informed as follows: 1. Initial public offering to be undertaken By Cebu Air, Inc. ("Cebu Pacific") through the Philippine Stock Exchange ("PSE") in compliance with the mandatory public equity participation requirement in its franchise will not be subject to the IPO tax . Under the pertinent provisions of Section 11 of R.A. No. 7151 (franchise of Cebu Pacific) in relation to Section 13 of P.D. No. 1590 (franchise of Philippine Airlines), which state as follows: "Sec. 11. Tax Provisions . The grantee shall pay to the Philippine Government during the life of this franchise a franchise tax of five percent (5%) of the gross revenues derived by the grantee from transport operations. cCTAIE In the event that any competing individual, partnership or corporation receives and enjoys tax privileges and other favorable terms which tend to place the herein grantee at any disadvantage, then such provisions shall be deemed ipso facto part hereof and shall operate equally in favor of the grantee . The grantee shall, however, be subject to income tax levied under Title II of the National Internal Revenue C od e, as amended, and tax on its real property under existing laws on revenue earned from activities other than air transportation." (Section 11, Republic Act No. 7151; emphasis ours) "Sec. 13. (Philippine Airlines franchise) In consideration of the franchise and rights hereby granted, the grantee shall pay to the Philippine Government during the life of this franchise whichever of subsections (a) and (b) hereunder will result in a lower tax: (a) . . . (b) A franchise tax of two percent (2%) of the gross revenues derived by the grantee from all sources, without distinction as to the transport or nontransport corporation provided that with respect to international air transport service, only the gross passengers, mail and freight revenues from its outgoing flights shall be subject to this tax. EHTCAa The tax paid by the grantee under either of the above alternatives shall be in lieu of all other taxes, duties, royalties, registration, license and other fees and charges of any kind, nature or description imposed, levied, established, assessed or collected by any municipal, city, provincial or national authority or government agency, now or in the future . . ." (Sec. 13(b), P.D. No. 1590) the tax exemption privileges granted to Philippine Airlines, Inc. (PAL) shall automatically become part of Cebu Pacific's franchise and shall operate equally in Cebu Pacific's favor. (BIR Ruling No. 3-95 dated January 6, 1995) Section 13 of P.D. No. 1590 provides that, in consideration of the franchise and rights therein granted, the payment by PAL of 2% franchise tax based on gross revenues shall be in lieu of all other taxes on income derived from activities connected with the franchised business. Considering that the Cebu Pacific's IPO is being undertaken solely to comply with the public equity participation requirement mandated by Section 9 of its franchise, this Office holds that the initial public offering of shares of stock in Cebu Pacific through the PSE is exempt from the IPO tax pursuant to Section 11 of R.A. No. 7151 in relation to Section 13 of P.D. No. 1590. Moreover, the initial public offering of shares of stock in Cebu Pacific in compliance with Section 9 of R.A. No. 7151 will not be subject to the IPO tax because Cebu Pacific is not a closely-held corporation as defined under Section 127 (b) of the 1997 Tax Code, as amended. IADaSE Section 127 (b) of the 1997 Tax Code, as amended, imposes a tax of 4%, 2%, or 1% of the gross selling price or gross value in money of shares of stock sold through an initial public offering of shares of stock in closely held corporations . The applicable tax rate depends on the proportion of the shares of stock sold in relation to the total outstanding shares of stock after listing in the PSE. Section 127 (b) of the Tax Code states: "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 . SAHIaD (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. HTDCAS 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) Under the above-quoted provision, only corporations where at least 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 20 individuals are considered as closely-held corporations subject to the IPO tax if its shares are sold through an initial public offering. In case 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. STcHDC 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). Cebu Pacific does not fall within the definition of the term "closely held corporation" under Section 127 (b) of the Tax Code because at the time of filing the PSE listing application, the corporate shareholding of Cebu Pacific will be considered proportionately held by the shareholders of CPAir Holdings, Inc. Since 99.99% of the shares of stock of CPAir Holdings is owned by JG Summit, the outstanding shares of stock of Cebu Pacific are considered owned proportionately by JG Summit's shareholders through CPAir Holdings. The shareholders of JG Summit, a publicly-listed corporation, consist of more than 1,500 corporate and individual shareholders. Thus, the Cebu Pacific shares are considered to be owned by or on behalf of far more than 20 individuals. At the time the application to list is filed with the PSE, Cebu Pacific will not be a "closely held corporation" as such term is defined under Section 127 (b) of the Tax Code. Hence, the listing of Cebu Pacific's shares of stock with the PSE will not be subject to the IPO tax. (BIR Ruling No. DA-001-06 dated January 4, 2006) 2. Exemption from Documentary Stamp Tax on the Original Issuance of shares . In BIR Ruling No. 097-94 dated April 13, 1994, the Commissioner of Internal Revenue stated that the payment by PAL of the 2% franchise tax based on gross revenues shall be in lieu of all taxes. Therefore, documentary stamp tax which is excluded in the enumeration of taxes PAL is liable to pay under its franchise is deemed included in the term taxes of the "in lieu of" clause to which PAL shall not be subject. Hence, the BIR has interpreted the above-quoted provision as being broad enough to exempt PAL from the payment of the DST. BIR Ruling No. 097-94 dated April 13, 1994 was reaffirmed in BIR Ruling No. 285-03 dated August 29, 2003. EHASaD Since Cebu Pacific is entitled to all the tax exemption benefits enjoyed by PAL pursuant to the ipso facto clause under Section 11 of RA No. 7151, Cebu Pacific is exempt from payment of DST on the original issuance of shares imposed under Section 174 of the Tax Code. (BIR Ruling No. DA-393-05 dated September 20, 2005) 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. ISHaTA Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service