BIR Ruling [DA-061-03]

March 3, 2003 BIR RULING [DA-061-03] Sec. 29; DA-25-2002 Quiason Makalintal Barot Torres & Ibarra 21st Floor, Robinsons Equitable Tower 4 ADB Avenue corner Pedro Poveda Street 1605 Ortigas Center, Pasig City Attention: Attys. Wilfredo E. Sanchez, Ruelito Q. Soriano and Benedict R. Tugonon Gentlemen : This refers to your letter dated January 9, 2003 requesting on behalf of your client, Enron Power Philippines Corp. (EPPC), for confirmation that EPPC is a publicly held corporation as defined under Revenue Regulations No. 2-2001, and hence, exempt from the Improperly Accumulated Earnings Tax (IAET) imposed under Section 29 of the Tax Code of 1997. It is represented that EPPC is a corporation duly organized and existing under the laws of the Philippines with office address at 3rd Floor, Corinthian Plaza, 121 Paseo de Roxas, Makati City; that 99.99% of the outstanding capital stock of EPPC is owned by Enron Global Power and Pipelines L.L.C. ("Enron Global"), a Delaware limited liability company with the remaining 0.01% being registered in the names of nominee directors; that 99.15% of the outstanding capital stock of Enron Global is indirectly owned by Enron Corporation, a corporation organized and existing under the laws of the State of Oregon ("Enron Corp."); that as a result of the above described ownership chain, 99.15% of the outstanding capital stock of EPPC is indirectly owned by Enron Corp; that as of year-end 2002, Enron Corporation had approximately 741 million shares of common stock outstanding and publicly-held; that the combined ownership by any 20 stockholders of Enron Corporation amounts to less than fifty percent (50%) in value of the outstanding capital stock of the total combined voting power of all classes of stock entitled to vote; that no individual natural person beneficially owns more than two percent (2%) of the common stock of Enron Corporation; that these shares were listed and actively traded on the New York Stock Exchange ("NYSE") for the years 1997 through 2001; that although no longer traded on the NYSE, shares in Enron Corporation continue to be publicly-traded as an Over-the-Counter (OTC) equity security; that consequently, more than twenty (20) natural persons indirectly own EPPC by virtue of their ownership of shares in Enron Corporation and the combined indirect ownership by any twenty (20) natural person does not exceed 50% of the outstanding capital stock of EPPC; and that in support of your request you submitted to this Office the following documents: 1. Copy of the Articles of Incorporation of EPPC; 2. Copy of the Articles of Incorporation of Enron Corporation; 3. Copy of the Certificate of Formation and other related certificates of Enron Global; and 4. Copy of the year 2000 Annual Report of Enron Corporation. In reply, please be informed that pursuant to Section 4 of Revenue Regulations No. 2-2001, "Implementing the Provision on Improperly Accumulated Earnings Tax under Section 29 of the Tax Code of 1997" viz. : "For purposes of these Regulations, closely-held corporations are those corporations at least fifty percent (50%) in value of the outstanding capital stock or at least fifty percent (50%) of the total combined voting power of all classes of stock entitled to vote is owned directly or indirectly by or for not more than twenty (20) individuals. Domestic corporations not falling under the aforesaid definition are, therefore, publicly-held corporations. " 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. (2) Family and Partnership Ownership An individual shall be considered as owning the stock owned, directly or indirectly, by or for his family, or by or for his partner. For purposes of this paragraph, the "family of an individual" includes his brothers or sisters (whether by whole or half blood) spouse, ancestors and lineal descendants. (3) Option to Acquire Stocks If any person has an option to acquire stock, such stock shall be considered as owned by such person. For purposes of this paragraph, an option to acquire such an option and each one of a series of option shall be considered as an option to acquire such stock. (4) Constructive Ownership as Actual Ownership Stock constructively owned by reason of the application of paragraph (1) or (3) hereof shall, for purposes of applying paragraph (1) or (2), be treated as actually owned by such person; but stock constructively owned by the individual by reason of the application of paragraph (2) hereof shall not be treated as owned by him for purposes of again applying such paragraph in order to make another the constructive owner of such stock. Such being the case, since EPPC is 99.99% owned by Enron Global and 99.15% of the outstanding capital stock of Enron Global is indirectly owned by Enron Corporation, hence, 99.15% of the outstanding capital stock of EPPC is indirectly owned by Enron Corporation which has more than twenty (20) stockholders. The ownership of a domestic corporation for purposes of determining whether it is a closely held corporation or a publicly held corporation is ultimately traced to the individual shareholders of the parent company . Thus, where at least 50% of the outstanding capital stock or at least 50% of the total combined voting power of all classes of stock entitled to vote in a corporation is owned directly or indirectly by at least 21 or more individuals, the corporation is considered publicly-held corporation as the term is defined under the Regulations. Further, Section 29 of the Tax Code of 1997 provides, viz. : "Sec. 29. Imposition of Improperly Accumulated Earnings Tax (A) . . . (B) Corporations Subject to Improperly Accumulated Earnings Tax . (1) In General . The improperly accumulated earnings tax imposed in the preceding Section shall apply to every corporation formed or availed for the purpose of avoiding the income tax with respect to its shareholders or the shareholders of any other corporation, by permitting earnings and profits to accumulate instead of being divided or distributed. (2) Exceptions The improperly accumulated earnings tax as provided for under this Section shall not apply to: (a) Publicly-held corporations ; (b) Banks and other non-bank financial intermediaries; and (c) Insurance Companies. (Emphasis ours) xxx xxx xxx." Accordingly, this Office confirms your opinion that EPPC is considered a publicly-held corporation and therefore, exempt from the Improperly Accumulated Earnings Tax (IAET), considering that EPPC has ultimately more than twenty (20) stockholders owning at least fifty percent (50%) in value of its outstanding capital stock. ( BIR Ruling No. 25-2002 dated June 25, 2002 ) This ruling is being issued in 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. Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group