BIR Ruling [DA-129-03]

April 23, 2003 BIR RULING [DA-129-03] 29; 072-97, 196-81 Siguion Reyna Montecillo & Ongsiako 6th Floor, Citibank Center, 8741 Paseo de Roxas, Makati City Attention: Attys. Jose Lis C. Leagogo and Catherina M. Fernandez Gentlemen : This refers to your letter dated January 25, 2002 requesting for confirmation of your opinion that The Thomson (Philippines) Corporation ("TPC"), is not a closely-held corporation and hence, is exempt from improperly accumulated earnings tax ("IAET") imposed under Section 29 of the Tax Code of 1997. It is represented that TPC is a corporation duly organized in accordance with Philippine laws with principal office address at the 20/F Ayala Life-FGU Center, 6811 Ayala Avenue, Makati City; that it has an authorized capital stock of P2,400,000.00 divided into 24,000 common shares with a par value of P100.00, subscribed and paid-up as follows: No. of Shares Amount Name of Stockholder Subscribed Paid Datastream International Ltd. 23,991 P2,399,100 Alastair Hazell 1 100 Stephen Charles Settle 1 100 Lan-Fang Tan 1 100 Elaine B. Kunkle 1 100 Romarie G. Villonco 1 100 Cesar P. Manalaysay 1 100 Mario V. Andres 1 100 Jose Lis C. Leagogo 1 100 Edgardo G. Balois 1 100 TOTAL 24,000 P2,400,000 ======== ======== that the individual shareholders of TPC own qualifying shares which are beneficially owned by Datastream International Ltd. ("DIL"); that DIL is a corporation incorporated in England and Wales; that DIL is owned by Primark Corporation, a company headquartered in Massachusetts, USA; that Primark Corporation was acquired by The Thomson Corporation, a publicly listed company in the London and Toronto stock exchanges; that after the acquisition, the shares of DIL are now 100% held by Thomson Information & Solutions Limited ("TISL"); that TISL is ultimately owned by The Thomson Corporation Limited of Canada and that The Thomson Corporation Limited of Canada is a public company whose shares are listed in the Toronto stock exchange; and that in support of your request, you submitted to this Office the following documents: a. Articles of Incorporation of TPC; b. Chart showing the holding structure of TPC; c. Articles of Incorporation of The Thomson Corporation, PLC of England; d. Print-out of the web page of the London Stock Exchange showing that the common shares of The Thomson Corporation, PLC of England is listed in the London Stock Exchange ( www.fsa.gov.uk/officillist ); e. Articles of Incorporation of The Thomson Corporation of Canada; f. Print-out of the web page of the Toronto Stock Exchange showing that the common shares of The Thomson Corporation is listed in the Toronto Stock Exchange ( www.tse.com ); g. Print-out of web page describing the acquisition of Primark by Thomson; and h. General Information Sheet of the Annual Stockholders' Meeting of TPC held on April 30, 2001. In reply, please be informed that Section 4 of Revenue Regulations No. 2-2001 implementing Section 29 of the Tax Code of 1997 on Improperly Accumulated Earnings Tax provides, viz: ". . . closely-held corporations are those corporations at least 50% in value of the outstanding capital stock or at least 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. IDASHa For purposes of determining whether the corporation is closely held corporation, insofar as such determination is based of 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. . . ." Moreover, improperly accumulated earnings tax shall not apply to publicly-held corporations pursuant to Section 29 of the Tax Code of 1997. 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 total combined voting power of all classes of stock entitled to vote in a corporation is owned directly or indirectly by more than 20 individuals, the corporation is considered a publicly-held corporation. Where a corporation's issued and outstanding stock are held by not more than twenty persons, said corporation is nonetheless not to be deemed a close corporation when at least 2/3 of its voting stock or voting rights is owned or controlled by another corporation which is not a close corporation ( BIR Ruling No. 55-81 dated March 23, 1981) . In applying the "grandfather rule" under Section 96 of the Corporation Code for purposes of determining whether a corporation is closely-held, the attribution rule must be allowed to run continuously along the chain of ownership until it finally reaches the individual stockholders ( BIR Ruling 250-81 dated December 3, 1981 ) in the case of a multi-tiered corporation. Applying the foregoing rules and considering that TPC's outstanding capital stock, which is owned by DIL, is considered proportionately owned by TISL that is ultimately owned by a publicly-listed company, The Thomson Corporation Limited of Canada, this Office hereby holds that TPC is not considered a closely-held corporation, and is, therefore, exempt from the 10% IAET. Ultimately, the question of whether TPC is a publicly-held corporation, depends on whether at least 50% of said corporation is owned by more than 20 individuals. This is a question of fact, which is not a proper subject of a legal ruling. The proper function of a ruling is to interpret the tax laws and not to determine questions of fact. Accordingly, if TPC can show that it is a publicly-held corporation, it will not be subject to the improperly accumulated earnings tax. 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 as null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group