BIR Ruling [DA-332-04]

June 22, 2004 BIR RULING [DA-332-04] Sec. 29 (A) & (B), RR No. 2-2001, DA-109-04/3-11-04 Laya Mananghaya & Co. 22/F Philamlife Tower 8767 Paseo de Roxas Makati City Attention: Attys. F. G. Tagao & M. P. Salvador III Tax & Corporate Services Gentlemen : This refers to your letter dated March 14, 2003 requesting on behalf of your client, JVC (Philippines) Inc. ("JVC"), for confirmation that it is a publicly-held corporation, as defined under Revenue Regulations ("RR") No. 2-2001, and hence, is not subject to Improperly Accumulated Earnings Tax ("IAET") under Section 29 of the Tax Code of 1997. It is represented that JVC is a domestic corporation duly organized and existing under Philippine laws; it is a foreign-owned subsidiary inasmuch as 70% of its shares are owned by JVC Asia Pte. Ltd., a corporation duly organized and existing under laws of Singapore, and only 30% is owned by other entities and individuals; that JVC Asia Pte. Ltd., on the other hand is 100% owned by Victor Co. of Japan, Limited; that 52.4% of the shares of Victor Co. of Japan, Limited is owned by Matsushita Electric Industrial Co., Ltd., which is a corporation listed in the New York Stock Exchange and the Main Board in Japan; and that in support of your request, you have submitted copies of the following documents: 1. Articles of Incorporation of JVC (Philippines) Inc.; 2. Latest General Information Sheet of JVC (Philippines) Inc.; 3. Secretary's Certificate, dated February 28, 2003, executed by Jose V. E. Jimenez, the Corporate Secretary of JVC (Philippines) Inc., certifying that 70% of the shares of the corporation are held by JVC Asia Pte Ltd.; 4. Duly authenticated Director's Certificate, dated February 25, 2003, executed by Masayuki Mochida, the Director of Finance & Accounting of JVC Asia Pte Ltd., certifying that all of the shares of the said corporation are held by Victor Company of Japan Limited; 5. Duly authenticated Certification, dated June 4, 2003, executed by Masahiko Terada, the President of Victor Company of Japan, Limited, certifying that 52.4% of the shares of the said corporation are held by the Matsushita Electric Industrial Co., Ltd.; and 6. Duly authenticated Certification, dated July 31, 2003, executed by Kunio Nakamura, President of Matsushita Electric Industrial Co., Ltd., certifying to the enumerated stockholders of the corporation, which total to at least twenty-two (22) corporate stockholders. In reply thereto, please be informed that Section 29 (A) and (B) provide that: "SEC. 29. Imposition of Improperly Accumulated Earnings Tax . "(A) In General. In addition to other taxes imposed by this Title, there is hereby imposed for each taxable year on the improperly accumulated taxable income of each corporation described in Subsection B hereof, an improperly accumulated earnings tax equal to ten percent (10%) of the improperly accumulated taxable income. "(B) Tax on 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 corporations; (b) Banks and other non-bank financial intermediaries; and (c) Insurance companies." (Emphasis supplied) Accordingly, the IAET shall not apply to, among others, publicly-held corporations. In BIR Ruling No. DA-232-2003 dated July 22, 2003, this Office ruled that "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, partner 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 2-2001." (Emphasis supplied.) Applying the foregoing precepts, this Office holds that, JVC Asia Pte. Ltd. owns 70% of the shares of stock of JVC, and since ownership of JVC Asia Pte. Ltd., may ultimately be traced to Matsushita Electric Industrial Co., Ltd., a corporation where at least 50% of the outstanding capital stock is owned directly or indirectly by at least 21 or more individuals, JVC is considered a publicly-held corporation and therefore exempt from the imposition of IAET. This ruling is being issued on the basis of the forgoing 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. ESTcIA Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group