BIR Ruling [DA-203-02]

November 13, 2002 BIR RULING [DA-203-02] 29; 072-97 & 196-81 Philippine Sinter Corporation 11/F, Allied Bank Center 6754 Ayala Avenue Makati City Attention: Mr. Onofre H. Molina Vice President and Comptroller Gentlemen : This refers to your letters dated August 6, 2001, January 31, 2002 and September 16, 2002 requesting for a confirmation of your opinion that your company, Philippine Sinter Corporation (PSC), is a publicly-held corporation for purposes of Revenue Regulations No. 2-2001 implementing the provision on improperly accumulated earnings tax under Section 29 of the Tax Code of 1997. TDcAaH Documents show that while PSC is a wholly-owned (100%) subsidiary of Kawasaki Steel Corporation (KSC) of Japan, KSC is a publicly-owned corporation having 163,071 stockholders as of March. 31, 2002, owning 3,167,303 shares of stock of KSC; that the largest ten (10) stockholders, taking into account all corporate and individual stockholdings combined are as follows: Mitsui Asset Trust and Banking Co., Ltd. 168,226,666 5.27 The Dai-Ichi Kangyo Bank, Ltd. 147,105,700 4.61 Nippon Life Insurance Co. 139,304,518 4.36 The Mitsubishi Trust and Banking Corporation 135,723,000 4.25 Japan Trustee Services Bank, Ltd. 135,423,000 4.24 Shinsei Bank, Ltd. 115,668,000 3.62 J.P. Morgan Trust Bank, Ltd. 98,818,000 3.10 Sumitomo Mitsui Banking Corporation 91,704,946 2.87 UFJ Trust Bank, Ltd. 85,938,000 2.69 Trust & Custody Services Trust Bank, Ltd. 78,432,000 2.46 that the top ten (10) stockholders are all banks and insurance companies and they account for about 37.47% of the total outstanding capital stock; that the remaining 62.53% is owned by the remaining 163,061 stockholders which consist of both corporate and individual stockholders; that KSC is listed in five (5) stock exchanges in Japan namely: Tokyo, Osaka, Nagoya, Fukuoka, and Sapporo; that even assuming that the next twenty (20) stockholders are all individuals owning at least two percent (2%) each of the total outstanding capital stock, the maximum percentage would amount to only 40% which is below the 50% requirement in the revenue regulations; that applying the definition of closely-held corporations as defined in the regulations, PSC cannot be considered as a closely-held corporation because based on the above assumption, the total stockholdings of the 20 largest individual stockholders of KSC would only aggregate to 40% at the most; and that it is your opinion that PSC is a publicly-held corporation and therefore, not subject to the 10% tax on improperly accumulated earnings. 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. For purposes of determining whether the corporation is 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. . . ." 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. Since Philippine Sinter Corporation, a domestic corporation, is a wholly-owned subsidiary of Kawasaki Steel Corporation of Japan, a publicly-owned corporation, its shares shall be considered as being owned proportionately by the shareholders of Kawasaki Steel Corporation of Japan. Ultimately, the question of whether Philippine Sinter Corporation 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 Philippine Sinter Corporation 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.) EDMUNDO P. GUEVARA Deputy Commissioner Legal & Inspection Group