BIR Ruling [DA-109-04]

March 11, 2004 BIR RULING [DA-109-04] S.29 (A) & (B) DA-232-2003/7-22-03 Samsung Electronics Philippines Corporation Ground Floor Bonaventure Plaza, Ortigas Avenue, Greenhills, San Juan, Metro Manila Attention: Jeong Ryeol Kim Treasurer Gentlemen : This refers to your letter dated June 19, 2003 requesting, on behalf of SAMSUNG ELECTRONICS PHILIPPINES CORPORATION (SEPCO for brevity), for confirmation that SEPCO is a publicly held corporation as defined under Revenue Regulations No. 2-2001; thus, exempt from the Improperly Accumulated Earnings Tax (IAET for brevity) imposed under Section 29 of the Tax Code of 1997. SEPCO is a corporation duly organized and existing under and by virtue of the laws of the Philippines with office address at Ground Floor Bonaventure Plaza, Greenhills, San Juan, Metro Manila. It is engaged in the business of Sales and Marketing of electronic products. It is a wholly owned subsidiary of SAMSUNG ASIA PRIVATE LIMITED (SAPL for brevity), a corporation organized and existing under the laws of Singapore, which is in turn owned by SAMSUNG ELECTRONICS CORPORATION LTD. (SEC for brevity) and SAMSUNG CORPORATION LTD (SCL for brevity), both corporations organized and existing under the laws of Korea and whose shares are listed and traded in the Korea Stock Exchange. SEC owns 42,991,351 shares, or more than seventy percent (70%), of the capital stock of SAPL. As of year-end 2003, the shareholding and the percentage ownership of SAPL is as follows: Name Country of No. of Shares of par Amount of Shares Incorporation value S$1.00 each Samsung Electronics Republic of Korea 42,911,351 S$42,911,351.00 Co., Ltd Samsung Corporation Republic of Korea 18,390,578 S$18,390,578.00 Ltd Total 61,301,929 $61,301,929.00 Among the shareholders of SEC are the Government of Singapore, banks, insurance companies and that some of these corporations are also publicly listed or publicly held companies in the Korea Stock Exchange. ASCTac In reply, please be informed that Section 29 (A) and (B) provide that: "SEC. 29. Imposition of Improperly Accumulated Earnings Tax . (A) In General. In addition to other taxes imposed by this Title, there is hereby imposed for each taxable year on the improperly accumulated taxable income of each corporation described in Subsection B hereof, an improperly accumulated earnings tax equal to ten percent (10%) of the improperly accumulated taxable income. (B) Tax on 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 nonbank financial intermediaries; and (c) Insurance companies." (Emphasis supplied.) Accordingly, the IAET shall not apply to, among others, publicly-held corporations. In BIR Ruling No. DA-232-2003 dated July 22, 2003, the BIR ruled that: "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 stock owned directly or indirectly by or for a corporation, partnership, estate or trust shall be considered as being owned proportionately by its shareholders, partner or beneficiaries. In BIR Ruling No. 025-2002 dated June 25, 2002 and later in BIR Ruling No. DA-085-03 dated March 20, 2003, this Office ruled that such shares will be considered as being owned proportionately by the 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 publicly-held corporation as the term is defined under the cited Revenue Regulations No. 2-2001." (Emphasis supplied.) Applying the foregoing precepts, this Office holds that since SEC, the stockholder that holds more than 70% of the capital stocks of SAPL, is a publicly-held corporation in Korea and that SEPCO is wholly-owned by SAPL, SEPCO is considered 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. ASDCaI Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group