BIR Ruling [DA-086-03]

March 20, 2003 BIR RULING [DA-086-03] 29 (A) & (B); 025-2002 June 25, 2002 Joaquin Cunanan & Co. 29th Floor Philamlife Tower 8767 Paseo de Roxas Makati City Attention: Atty. Mary A.S. Bautista-Villareal Principal Gentlemen : This refers to your letter dated November 15, 2002 stating that IBM Philippines, Inc. (IBM-PI) is a corporation organized and existing under the laws of the Philippines duly registered with the Securities and Exchange Commission (SEC) under SEC Registration Certificate No. 283; that it is authorized to carry on the business of merchants, brokers, traders, and dealers in and with business machines, office equipment, information systems and technology, computer programs, processes, goods, wares, merchandise and commodities of every kind and description, provide services in connection with the supply, installation, maintenance, management, upgrade, upkeep, development of such office machines, programs, processes, and information systems and technology, and to conduct and carry on all business appertaining thereto; that IBM-PI is a wholly owned subsidiary of IBM World Trade Corporation (IBM-WTC), a corporation organized and existing under the laws of the State of Delaware, USA; that IBM-WTC in turn, is a wholly owned subsidiary of International Business Machines Corporation (IBMC), a corporation organized and existing under the laws of the State of New York, USA whose shares are publicly listed in the New York, Chicago and Pacific Stock Exchanges; that on the other hand, IBM Solutions Delivery, Inc. (IBM Solutions) [formerly ACI Systems, Inc.] is a wholly-owned subsidiary of IBMPI; that it is registered with the SEC under SEC Registration Certificate No. ASO92000133 and duly authorized to carry on the business of providing and outsourcing of services, developing, trading, marketing and installing of computers, computer hardware, electronic data, or information processing equipment, computer programs or software, computer applications such as information handling products, helpdesk, hardware maintenance as well as exporting and providing local computer system and application development services covering the full range of software development phases which involve data preparation, system design and analysis programming, computer processing, computer education services, computer components repair and other related computer technology activities, with emphasis on IBM information and handling products; that IBM Services Delivery, Inc. (IBM-Services) [formerly known as Center for Information Technology Exponents, Inc.) is also a wholly-owned subsidiary of IBM-PI; that it is registered with the SEC under SEC Registration Certificate No. 181387 to carry on the business of providing and outsourcing of computer and information technology related services, development, installation, servicing and maintenance of office automation systems, as well as computer centers to include, but not limited to, physical planning, equipment lay-out, installing and cabling power protection systems, precision-type air-conditioning systems, fire protection and security/access system, facilities management services, raised floor system and its related accessories, full interior design, data storage equipment, ergonomically designed office environment, systems, and networking interconnections for voice, data, video, and power, and such other services, including systems integration as may be conductive to the purpose of the Corporation but it shall not engage in internet services provider; that based on the above ownership structure, the ultimate shareholder of IBMPI, IBM Solutions and IBM Services is IBMC; that as of June 30, 2002, IBMC has a total of 675,184 shareholders holding a combined shareholdings of 1,694,323,457; and that at least fifty percent (50%) of the Company's total, combined voting power of all classes of voting stock is owned directly or indirectly by or for more than twenty individuals and not one single stockholder of IBMC holds more than 5% of its stocks. In connection therewith, you now request for an opinion that since IBM-PI, IBM Solutions and IBM Services are publicly-held corporations as defined under Revenue Regulations No. 2-2001, they are exempt from the 10% Improperly Accumulated Earnings Tax (IAET) imposed under 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, provide 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. IEaATD 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 IBMC, the parent company of IBM-PI, IBM Solutions, and IBM-Services, is a publicly-held corporation whose shares are listed in the New York, Chicago and Pacific Stock Exchanges and of which, at least fifty percent (50%) of its combined voting stocks is owned by more than twenty (20) individuals with no one stockholder holding more than five percent (5%) of IBMC's issued and outstanding stock, it necessarily follows that IBM-PI, IBM Solutions, and IBM-Services which are all ultimately wholly-owned by IBMC are also considered publicly-held corporations, and are, 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