BIR Ruling [DA-299-03]

September 11, 2003 BIR RULING [DA-299-03] Sec. 29; 025-02 C&E Corporation Meralco Avenue corner General Araneta Street Pasig City Attention: Ms. Lourdes P. Reyes Finance/Adm. Senior Manager and Treasurer Gentlemen : This refers to your letter dated May 16, 2003 requesting for a ruling that C&E Corporation being a publicly-held corporation is exempt from the Improperly Accumulated Earnings Tax (IAET) under Section 29 of the Tax Code of 1997, as implemented by Revenue Regulations No. 2-2001. It is represented that C&E Corporation is a legal entity organized and operating under the laws of the Philippines and is owned by two publicly-held corporation as follows: 75% by Chiyoda Corporation of Japan whose stocks are listed and traded in the Tokyo Stock Exchange and held approximately by 20,738 shareholders as of September 30, 2002 and its capital structure is broken down as follows: Financial Institutions 29.46% Securities Firm 0.96% Ordinary Firm 30.94% Foreign Investors 8.42% Individuals and others 30.22% The top (20) shareholders of Chiyoda Corporation owning 51.5% of the company with their respective percentage of shareholding, are comprised as follows: 1. Mitsubishi Corporation 10.71% 2. The Mitsubishi Trust & Banking Corp. 4.87 3. The Bank of Tokyo-Mitsubishi, Ltd. 4.87 4. Japan Trustee Services Bank, Ltd. (Trust A/C) 3.40 5. KBR MC Investment 3.23 6. Ebara Corp. 3.07 7. UFJ Trust Bank of Japan, Ltd. (Trust A/C) 2.43 8. The Master Trust Bank of Japan, Ltd. 2.40 9. The Nippon Life Insurance Company 2.10 10. Morgan Stanley & Co.,Ltd. 1.78 11. The Tokio Marine & Fire Insurance Co.,Ltd. 1.49 12. Asahi Glass Co.,Ltd. 1.42 13. Mitsui & Co.,Ltd. 1.39 14. The Meiji Mutual Life Insurance Co. 13.80 15. Mitsubishi Heavy Industries, Ltd. 1.36 16. Mizuho Corporate Bank 1.30 17. Dabtco Client Lending AC 1.27 18. Kajima Corp. 1.09 19. Mitsui Asset Trust & Banking Company, Ltd. 1.08 20. Chiyoda Kyoeikai 0.86 Total 51.50% 25% by EEI Corporation, local company with its stocks listed and traded in the Philippine Stock Exchange and held approximately by 4,640 shareholders as of December 31, 2002 and its capital structure by citizenship as follows: Filipino 97.18% Japanese 1.32% American 0.54% Chinese 0.09% German 0.01% Other Aliens 0.86% The top (20) shareholders of EEI Corporation owning 89.65% of the company with their respective percentage of shareholding are as follows: 1. House of Investments, Inc. 50.40% 2. PCD Nominee Corporation (Fil) 29.80% 3. Pan Malayan Management & Investment Corp. 2.08 4. Mitsubishi Corporation 1.32 5. Ching, Carlos J. 1.00 6. PCD Nominee Corporation (Non-Fil) 0.81 7. EEI Corporation ITF ESOIP 0.74 8. Lin, Bo 0.43 9. Sy, Janice C. 0.36 10. Solco, Francis Solco &/Or Francis Bervick 0.35 11. Titanium Corporation 0.29 12. Chona, Edward Tan 0.29 13. Great Pacific Life Assurance Corporation 0.29 14. Lee Siok &/Or Yap Kek Kiong 0.29 15. Abacus Capital & Investment Corporation 0.27 16. Sy, Richmond C. 0.22 17. King, Archimedes 0.20 18. UBP Capital Corporation 0.20 19. Barretto, Celestino S. 0.16 20. Yu, Alberto or Elizabeth Lim 0.15 Total 89.65% 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. 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 to the avoidance of tax upon shareholders who are supposed to pay dividends tax on the earnings distributed to them by the corporation. However, the improperly accumulated earnings tax shall not apply to, among others, publicly-held corporations. Under Section 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. Similarly situated is BIR Ruling No. 025-2002 dated June 25, 2002, where this Office ruled that since Abbott-Phils. is a wholly-owned subsidiary of Abbott-US, such shares will be considered as being owned proportionately by the Abbott-US 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 20 or more individuals, the corporation is considered a publicly-held corporation as the term is defined under the Regulations, to wit: "Further, Section 29 of the Tax Code of 1997 provides, viz. : Sec. 29. Imposition of Improperly Accumulated Earnings Tax (A) ... (B) Corporations Subject to Improperly Accumulated Earnings Tax. (1) In General. The improperly accumulated earnings tax imposed in the preceding section shall apply to every corporation formed or availed for the purpose of avoiding the income tax with respect to its shareholders or the shareholders of any other corporation, by permitting earnings and profits to accumulate instead of being divided or distributed. (2) Exceptions The improperly accumulated earnings tax as provided for under this Section shall not apply to: (a) Publicly-held corporation [ sic ]; (b) Banks and other non-bank financial intermediaries; and (c) Insurance companies. xxx xxx xxx Accordingly, this Office confirms your opinion that Abbott-Phils. is considered a publicly-held corporation exempt from the Improperly Accumulated Earnings Tax (IAET),based on the representation that as of the year-end 2000, Abbott-US had 101,272 shareholders holding a combined 1,545,934,133 shares of common stock and the twenty largest shareholders of Abbott-US as of September 30, 2001 own an aggregate of 30.1 percent of Abbott-US' issued and outstanding shares." IN THE LIGHT OF ALL THE FOREGOING, this Office holds since Chiyoda Corporation and EEI Corporation, the parent companies, of C&E Corporation, based on the representation are publicly-held corporations, it necessarily follows that C&E Corporation, a wholly-owned subsidiary is also 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