Castillo Laman Tan Pantaleon & San Jose Law Firm

April 25, 2007 BIR RULING [DA-262-07] Sec 127 (B); DA 001-06 dtd 1/4/06 Castillo Laman Tan Pantaleon & San Jose Law Firm The Valero Tower, 122 Valero St., Salcedo Village, Makati City Attention: Atty. Yolanda M. Eleazar Atty. Joseph Gregson A. Castillo Atty. Mildred S. Melendres Gentlemen : This refers to your letter dated April 19, 2007 requesting in behalf of your client, National Reinsurance Corporation (NatRe), for confirmation of your opinion that the offering and listing of the shares of stock of NatRe on the Philippine Stock Exchange (PSE) is not subject to the initial public offering tax (IPO) tax under Section 127 (B) of the National Internal Revenue Code of 1997 (Tax Code of 1997). It is represented that NatRe is a corporation organized under the laws of the Philippines as a professional reinsurer by virtue of Presidential Decree No. 1270 1 and duly incorporated in 1978 under the provisions of Act No. 1459, otherwise known as the old Corporation Law; that as of February 28, 2007, NatRe has 1,440,052,000 common shares issued and outstanding and 148,506,300 common shares held in treasury; that at its meeting held on February 20, 2007, the Board of Directors of NatRe approved the offering and sale of 638,000,000 common shares of NatRe (the "Offer Shares"), to be listed and traded on the First Board of the PSE; that of the Offer Shares, 489,493,700 will be issued for subscription from its authorized and unissued capital stock and 148,506,300 shares held in treasury will be re-issued for subscription by way of a primary offer; and that in connection with the offering, NatRe also granted the lead underwriter an option, exercisable on the listing date, April 27, 2007, to purchase additional common shares comprising up to 103,902,600 authorized and unissued common shares under the same terms and conditions as the Offer Shares, solely to cover over-allotments (the "Over-Allotment Option Shares"). It is further represented that NatRe has a total of one hundred ninety eight (198) stockholders/beneficial owners; that its total outstanding capital stock is Php1,440,052,000.00 consisting of 1,440,052,000 shares with a par value of P1.00 per share; that no single beneficial owner/stockholder/or stockholder group owns fifty percent (50%) or more in value of such outstanding capital stock, or owns fifty percent (50%) or more of the company's total combined voting stock; and finally, that at least fifty percent of the total outstanding capital stock is owned by the following stockholders (and their nominees): Stockholder Total Capital Stock % of the outstanding capital stock Government Service Insurance System 24.90% 1. (GSIS) Php358,544,300.00 2. Bank of the Philippine Islands (BPI) 290,795,800.00 20.19% 3. MICO Equities Inc. (MICO) 260,448,000.00 18.08% Total Php909,788,100.00 63.17% ============== ====== Based on the foregoing, it is your opinion that NatRe is not a closely held corporation for purposes of the IPO tax; and consequently, the offering of the shares of stock of NatRe, consisting of the Offer Shares and the Over-Allotment Option Shares, on the PSE is not subject to the IPO tax. ICcaST In reply, please be informed that Section 127 (B) of the Tax Code of 1997 provides thus: "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. (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 corporation, 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. 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. (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 . xxx xxx xxx" (emphasis supplied) It is clear from the foregoing that the IPO tax would apply only to corporations which are considered "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. If 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. The above rule was applied in BIR Ruling 001-06 dated January 4, 2006 where this Office had occasion to state that: "In 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." In the said ruling, it was held that First Gen Corporation (First Gen) is not a closely-held corporation since prior to the IPO, 88% of First Gen's outstanding capital stock is owned by a publicly-listed corporation First Philippine Holdings Corporation (FPHC), which is in turn owned by another publicly-listed corporation, Benpres Holding Corporation (BHC). In determining the number of shareholders owning at least 50% of First Gen's outstanding capital stock, this Office considered the First Gen shares held by FPHC as being proportionately owned by FPHC's shareholders, thus, it was concluded that "Since the shareholders of FPHC and even further, BHC, consist of possibly hundreds and thousands of individuals, First Gen cannot be considered as a "closely held corporation" prior to its listing with the PSE." In the instant case, it is observed that at least 63.17% of NatRe's outstanding capital stock is owned by three corporate stockholders, namely: GSIS, BPI and MICO, each of which is a widely-held corporation or institution. aDcETC Applying the stock attribution rule, the shares of stock held by the aforementioned corporations in NatRe are considered as proportionately owned by their respective stockholders. Thus, in the case of GSIS, its shareholding of 24.90% in NatRe is considered as proportionately owned by all GSIS members which include all employees of the national government, its political subdivisions, branches, agencies or instrumentalities including government-owned or controlled corporations, financial institutions with original charters, the constitutional commissions and the judiciary. 2 BPI's shareholding of 20.19%, on the other hand, is considered as proportionately owned by BPI's shareholders which, in all probability, number in the thousands as BPI is a publicly-listed corporation. 3 As for MICO's shareholding of 18.08%, the same is also is considered as proportionately owned by all its seventeen (17) stockholders. 4 It is evident from the above that at least 50% of the outstanding capital stock of NatRe is owned directly or indirectly by more than twenty individuals. Accordingly, this Office hereby confirms your opinion as it hereby holds that NatRe is not a closely held corporation as defined under Section 127 (B) of the Tax Code of 1997. Consequently, the offering of the shares of stock of NatRe, consisting of the Offer Shares and the Over-Allotment Option Shares, on the PSE is not subject to the IPO tax. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon 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 Footnotes 1. A Decree Authorizing the Organization and Licensing of a Professional Reinsurer to be known as The National Reinsurance Corporation Of The Philippines and designating said Corporation as the National Institution that will Subscribe to the Capital Stock of the Asian Reinsurance Corporation. 2. Pursuant to Republic Act 8291 (An Act amending Presidential Decree No. 1146, as amended, Expanding and Increasing the Coverage and Benefits of the Government Service Insurance System, Instituting Reforms therein and for Other Purposes) . 3. As of March 19, 2007, 2,722,820,439 shares are listed on the PSE as per PSE Certification dated April 18, 1997. 4. Based on its 2005 General Information Sheet, MICO has 17 stockholders with Pan Malayan Management and Investment Corporation as the controlling shareholder.