BIR Ruling [DA-232-03]

July 22, 2003 BIR RULING [DA-232-03] 29 (A) & (B); 035-2002 8-29-02 Laya Mananghaya & Co. 22/F Philamlife Tower 8767 Paseo de Roxas Makati City Attention: Atty. Francisco G. Tagao and Roberto L. Tan Gentlemen : This refers to your letters dated June 2, 2003 and July 7, 2003, stating that your client, Honda Cars Philippines, Inc. (HCPI) is a corporation duly organized and existing under the laws of the Philippines with principal office address at Laguna Technopark, Sta. Rosa, Laguna. As of May 2003, the shareholdings and percentage ownership of HCPI areas follows: No. of Shares Percentage Stockholders Subscribed & Paid-up Ownership Honda Motor Company, Ltd. 383,504 54.24% Mitsubishi Corporation 141,429 20.00% Ayala Corporation 91,049 12.88% Rizal Commercial Banking Corp. 91,049 12.88% Nine (9) Individuals 9 - Total 707,040 100% ======= ======= that Honda Motor Company, Ltd. (HMCL) is a corporation duly organized and existing under the laws of Japan, with its stock being listed and traded in the Tokyo Stock Exchange; that HMCL owns 383,504 shares, or more than 50%, of the capital stock of HCPI; that as of March 31, 2003, HCML's capital structure is held by or broken down as follows: Financial Institutions 53.49% Foreign Investors 27.67% Individuals and Others 6.81% Securities Companies 0.35% Other Corporations 11.68% that as of March 31, 2003, the top twenty-one (21) shareholders of HCML owning 50.29% of the said Japanese company, and their respective percentage shareholding, are as follows: The Master Trust Bank of Japan, Ltd. 4.82% The Bank of Tokyo-Mitsubishi, Ltd. 4.62% Japan Trustee Services Bank, Ltd. 4.44% State Street Trust and Banking Co., Ltd. 4.33% The Tokio Marine and Fire Insurance Co., Ltd. 3.86% UFJ Bank, Ltd. 3.53% The Chase Manhattan Bank N.A. London 3.06% Meiji Life Insurance Co. 2.92% The Mitsubishi Trust and Banking Corp. 2.70% Sompo Japan Insurance Inc. 2.45% Nippon Life Insurance Co. 1.98% Mitsui Sumitomo Insurance Co., Ltd. 1.92% UFJ Trust Bank Ltd. 1.55% Boston Safe Deposit BSDT Treaty Clients Omnibus 1.39% Moksley and Company 1.39% The Chase Manhattan Bank, N.A. London, SL Omnibus Account 1.26% Japan Trustee Services Bank, Ltd (for the re-trust of Resona Trust & Banking Co., Ltd., and the retiring trust of Resona Bank, Ltd.) 1.00% Aioi Insurance Co., Ltd. 0.81% Honda Stock-Ownership Plan of Business Partner 0.79% Axa Group Life Insurance, Co., Ltd. 0.77% Mitsui Asset Trust and Banking Company, Ltd. 0.71% Total Percentage Shareholdings 50.29% ====== that among this 21 shareholders of HCML are banks, insurance companies, and that some of these corporations are also publicly listed or publicly held companies in the Tokyo Stock Exchange or other foreign stock exchanges; that on the other hand, Mitsubishi Corporation (MC) is a corporation duly organized and existing under the laws of Japan and with share of stocks listed and traded in the Tokyo Stock Exchange, also; that MC is the second largest shareholder of HCPI, owning 141,429 shares or 20% of the HCPI's capital stock; as of March 31, 2003, the capital structure of MC is held or broken down as follows: Financial Institutions 57.54% Foreign Investors 19.61% Individual and others 9.59% Securities Companies 0.40% Other Corporations 12.86% Based on the foregoing, you now seek for confirmation that HCPI is a publicly held corporation as defined under Revenue Regulations No. 2-2001, and hence, exempt from the 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, 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 deterrent against non-declaration of dividends in order for shareholders to avoid payment of dividends tax on the undistributed earnings by the corporation. However, the improperly accumulated earnings tax shall not apply to, among others, publicly-held corporations. Under Sections 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, partners 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. ASEIDH THEREFORE, this Office holds that since HCML, the stockholder that holds more than 54% of the capital stocks of HCPI, is a publicly-held corporation in Japan and that the other corporations hold more than 65% of the outstanding capital stock of HCML, HCPI 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. Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group