BIR Ruling [DA-085-03]

March 20, 2003 BIR RULING [DA-085-03] 29 (A) & (B); 035-2002 8-29-02 Laya Mananghaya & Co. 22/F Philamlife Tower 8767 Paseo de Roxas Makati City Attention: Atty. Ronald L. Carreon Director Gentlemen : This refers to your letter dated December 4, 2002 stating that your client, Allen-Arthur (Manila),Inc. (AAMI) is a corporation duly organized and existing under the laws of the Philippines which is 99.9% owned by Aderans Company Ltd. (ACL);that ACL in turn is a corporation established and existing by virtue of the laws of Japan; that its stocks are listed and traded in the Tokyo Stock Exchange; that ACL is a publicly-held international company whose stocks, as of August 31, 2002, are held approximately by 7,545 shareholders and its capital structure is broken down as follows: Financial Institutions 48.1% Foreign Investors 21.4% Individuals and others 21.7% Securities Companies 1.4% Other Corporations 7.4% that the top twenty (20) shareholders of ACL owning 56.02% of the company with their respective percentage of shareholding, are comprised as follows: Nobuo Nemoto 11.08% Japan Trustee Services Bank 7.85% UFJ Trust Bank 6.20% The Master Trust Bank of Japan 5.63% Aderans Company 3.24% The Chase Manhattan Bank N.A. London 2.30% The Dai-ichi Mutual Life Insurance 1.93% Company Mitsui Asset Trust and Banking Company 1.91% State Street Bank & Trust Company 1.84% Euroclear Bank S.A./N.V. 1.77% The Mitsubishi Trust and Banking 1.74% Corporation DBTCO Client Lending AC 1.53% Nippon Life Insurance Company 1.51% Trust and Custody Services Bank 1.23% The Bank of New York (Luxemborg),S.A. 1.19% Japan Trustee Services Bank 1.14% The Asahi Bank 1.00% The Hokuriku Bank 0.99% Trust and Custody Services Bank 0.98% Mitsui Asset Trust and Banking Company 0.96% Percentage Total Shareholdings 56.02% that all of the top twenty shareholders of ACL are banks or financial institutions, which are also publicly-held companies in their respective country of domicile; that the first 15 stockholders hold 50.95% of ACL, with Nobuo Nemoto being the only individual while the rest are corporations with their respective shareholders; that in applying the attribution rule for purposes of determining whether a corporation is closely-held or not, will show that the ownership of 50.95% of ACL's outstanding capital is highly diversified as they are attributable to stockholders of those corporations owning ACL shares of stock and thus, more than 20 individual stockholders will ultimately own at least fifty percent (50%) of the outstanding stocks of AAMI; and that AAMI is considered a publicly-held corporation and therefore exempt from IAET. Based on the foregoing representations, you now request for a ruling that AAMI, being a publicly-held corporation, is not covered by the improperly accumulated earnings tax prescribed in Section 29 of the Tax Code of 1997. In reply thereto, please be informed that Section 29(A) and (B) of the Tax Code of 1997, as implemented by Revenue Regulations No. 2-2001, provides that in addition to other taxes imposed by Title II of the Tax Code of 1997, there shall be imposed for each taxable year a tax equal to 10% of the improperly accumulated taxable income of corporations formed or availed of for the purpose of avoiding the income tax with respect to its shareholders or the shareholders of any other corporation, by permitting the earnings and profits of the corporation to accumulate instead of dividing them among or distributing them to the shareholders. However, the improperly accumulated earnings tax shall not apply to, among others, publicly-held corporations. Thus, this kind of tax is being imposed in the nature of a penalty to the corporation for the improper accumulation of its earnings, and as a form of deterrence against non-declaration of dividends in order for shareholders to avoid payment of dividends tax on the undistributed earnings by the corporation. Under Section 4 of Revenue Regulations No. 2-2001, 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, it is provided that a stock that is 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. DAcaIE In BIR Ruling No. 025-2002 dated June 25, 2002, this Office ruled that since Abbott-Phils. is a wholly-owned subsidiary of Abbott-US, such shares will be considered as being owned proportionately by the Abbott-US shareholders. 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 a publicly-held corporation as the term is defined under the cited Revenue Regulations No. 2-2001. THEREFORE, this Office holds that since ACL, the parent company of AAMI, is a publicly-held corporation in Japan and that other corporations hold 50.95% of the outstanding capital stock of ACL, AAMI is considered as a publicly-held corporation and therefore exempt from the imposition of IAET. 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. Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group