Nava & Associates

April 18, 2008 BIR RULING [DA-257-08] 127 (B); DA-535-2007 Nava & Associates 12th Floor, The Valero Tower 122 Valero Street, Salcedo Village Makati City Attention: Atty. Ma. Rosario C.Z. Nava Gentlemen : This refers to your letter dated March 10, 2008, requesting on behalf of your client, Pepsi-Cola Products Philippines, Inc. (PCPPI), confirmation to the effect that the listing of shares with the Philippine Stock Exchange (PSE) will not be subject to the Initial Public Offering (IPO) tax imposed under Section 127 (B) of the Tax Code of 1997, and that the documentary stamp tax (DST) on the original issue of PCPPI shares of stock during the IPO is based on the par value pursuant to Section 174 of the Tax Code of 1997, as amended. aEAcHI It is represented that PCPPI was registered with the Securities and Exchange Commission on March 8, 1989 to engage in manufacturing, sales and distribution of carbonated soft drinks and non-carbonated beverages to retail, wholesale, restaurants and bar trades; that prior to the listing of PCPPI shares with the PSE on February 1, 2008, PCPPI had an authorized capital stock of P750,000,000, divided into 5,000,000,000 common shares with a par value of P0.15 per share; that it had an issued and outstanding capital stock of P496,948,407.90, divided into 3,312,989,386 common shares with a par value of P0.15 per share; that prior to the listing of the PCPPI shares, more than 50% of the issued and outstanding shares of PCPPI were held by Quaker Global Investments, B.V. ("Quaker"), a corporation organized and existing under the laws of The Netherlands, and Hong Way Holdings, Inc. ("Hong Way"), a corporation registered under the laws of the Philippines; that prior to the listing at the stock exchange, Quaker had subscribed to and fully paid 1,089,101,362 PCPPI shares or 32.87% of the total outstanding capital stock; that the ultimate shareholder of Quaker is PepsiCo, Inc., a corporation organized and existing under the laws of the United States of America; that PepsiCo, Inc. is a public company listed in the New York Stock Exchange and has 187,723 stockholders as of January 4, 2008; that as of January 31, 2008, Hong Way had subscribed to and fully paid 857,788,628 common shares of PCPPI or 25.89% of the total outstanding capital stock; that similar to Quaker, the ultimate beneficial shareholders of Hong Way number more than twenty (20) shareholders; that on February 1, 2008, 1,142,348,680 common shares of PCPPI were offered to the market by way of listing at the PSE; that the shares sold consist of 380,782,893 new shares to be issued by way of primary offering and 761,565,787 existing shares to be sold by shareholders by way of secondary offering; and that all shares offered for sale at the PSE at a price of P3.50 per share. DaAIHC From the foregoing, you are requesting for a confirmation of the following opinion: 1. PCPPI and the selling shareholders are not subject to the IPO tax under Section 127 (B) of the Tax Code, as amended. 2. The stamp tax on the original issue of shares of stock of PCPPI during the IPO is based on the par value of the shares of stock, pursuant to Section 174 of the Tax Code, as amended. In reply, please be informed that Section 127 (B) of the Tax Code, as amended, provides as follows: "SEC. 127. Tax on Sale, Barter or Exchange of Shares of Stock. Listed and Traded through the Local Stock Exchange or through Initial Public Offering . (A) . . . (B) Tax on Shares of Stock Sold or Exchanged Through Initial Public Offering. There shall be levied, assessed and collected on every sale, barter, exchange or other disposition through initial public offering of shares of stock in closely held corporations, as defined herein, a tax at the rates provided hereunder based on the gross selling price or gross value in money of the shares of stock sold, bartered, exchanged or otherwise disposed in accordance with the proportion of shares of stock sold, bartered, exchanged or otherwise disposed to the total outstanding shares of stock after the listing in the local stock exchange: CHATcE Up to twenty-five percent (25%) 4% Over twenty-five percent (25%) but not over thirty three and one third percent (33 1/3%) 2% Over thirty-three and one third percent (33 1/3%) 1% The tax herein imposed shall be paid by the issuing corporation in primary offering or by the seller in secondary offering. For purposes of this Section, the term 'closely held corporation' means any corporation at least fifty percent (50%) in value of the outstanding capital stock of all classes of stock entitled to vote is owned directly or indirectly by or for not more than twenty (20) individuals. For purposes of determining whether the corporation is a closely held corporation, insofar as such determination is based on stock ownership, the following rules shall be applied: IcCEDA (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. (2) . . . (3) . . . (4) . . . (C) . . . (D) . . ." (Emphasis supplied) The IPO tax would apply only to corporations which are considered as "closely held", meaning that at least 50% in value of the outstanding voting shares of all classes is owned directly or indirectly by or for not more than 20 individuals. In the case where the shares of stock in the corporation to be listed are owned by another corporation, such shares will be considered as being owned proportionately by the latter's shareholders. (BIR Ruling No. DA-535-2007 dated October 11, 2007) EaHATD Since at the time of the application to sell the shares of PCPPI with the PSE, more than 50% of its outstanding capital stock is owned by Quaker and Hong Way, which are corporations whose shares of stock are owned by more than 20 beneficial shareholders, PCPPI will be considered as proportionately owned by the shareholders of Quaker and Hong Way. Since the shareholders of Quaker and Hong Way are owned by corporations or entities with individual shareholders, then the stock ownership of PCPPI will be further apportioned among the ultimate individual shareholders. In the case of a multi-tiered corporation, the stock attribution rule must be allowed to run continuously along the chain of ownership until it finally reaches the individual stockholders. This is in consonance with the "grandfather rule" adopted in the Philippines under Section 96 of the Corporation Code (Batas Pambansa Blg. 68) which provides that notwithstanding the fact that all the issued stocks of a corporation are held by not more than twenty persons, among others, a corporation is nonetheless not to be deemed a close corporation when at least two thirds of its voting stock or voting rights is owned or controlled by another corporation which is not a close corporation. (BIR Ruling No. 072-97 dated July 2, 1997) Since the ultimate beneficial shareholders of Quaker and Hong Way consist of possibly hundreds and thousands of individuals, PCPPI cannot be considered as a "closely held corporation" prior to its listing with the PSE. (BIR Ruling No. 035-99 dated March 25, 1999) EAcIST Accordingly, this Office is of the opinion that as it hereby holds that the listing of shares of stock of PCPPI with the PSE will not be subject to the IPO tax because prior to the listing of shares, PCPPI is not a closely held corporation as defined under Section 127 (B) of the Tax Code, as amended. (BIR Ruling No. DA-535-2007 dated October 11, 2007) Moreover, Section 174 of the Tax Code provides as follows: "SEC. 174. Stamp Tax on Original Issue of Shares of Stock . On every original issue , whether on organization, reorganization or for any lawful purpose, of shares of stock of any association, company or corporation, there shall be collected a documentary stamp tax of One peso (P1.00) on each Two hundred pesos (P200), or fractional part thereof, of the par value of such shares of stock : Provided, That in the case of the original issues of shares of stock without par value, the amount of the documentary stamp tax herein prescribed shall be based on the actual consideration for the issuance of such shares of stock: Provided further, That in the case of stock dividends, on the actual value represented by each share." (Emphasis supplied) Considering that the shares to be issued by PCPPI have a par value, this Office is of the opinion that the original issuance thereof shall be based on the total par value of the shares newly issued, pursuant to Section 174 of the Tax Code, as amended. TADcCS This ruling is being issued on the basis of the foregoing facts as represented. However, if upon its investigation, it will be ascertained that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service