BIR Ruling [DA-333-03]

October 3, 2003 BIR RULING [DA-333-03] 29; 025-02 Jimenez Gonzales Liwanag Bello Valdez Caluya & Fernandez SOL Building, 112 Amorsolo Street Legaspi Village Makati City Attention: Atty. Victoria Tan Limkico Gentlemen : This refers to your letter dated June 26, 2003 requesting for a ruling that Wartsila Philippines, Inc. (WPI) [formerly Wartsila NSD Philippines, Inc.] 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 WPI is a corporation duly organized and existing under the laws of the Philippines and registered with the Securities and Exchange Commission (SEC) on January 13, 1993 with principal office address at No. 6 Diode Street, Light Industry & Science Park, Barangay Diezmo, Cabuyao, Laguna; that WPI is engaged primarily to buy, sell, design, construct, assemble, install, commission, operate, maintain, repair, rehabilitate, undertake turn-key construction of, or otherwise deal in any and all kinds of diesel and gas engines, power plants and their auxiliary equipment, systems and related facilities, and diesel and gas engines for all types of marine application, including but not limited to, the provision of instruction and training in respect of the above-mentioned activities as provided in its Articles of Incorporation; that WPI is a wholly-owned subsidiary of Wartsila Technology OY AB, formerly Wartsila International Pte. Ltd., (WT), a corporation duly incorporated in Finland, which in turn is directly owned by Wartsila Corporation (WC), a company whose A and B shares are listed and traded in the main list of the Helsinki Exchange; that as of year-end 2001 and 2002, WC had a total of 20,202 and 25,482 shareholders, respectively; and that at least 50% of the outstanding capital stock of WC is owned directly or indirectly by or for more than twenty (20) individuals. 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. cAISTC 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 Abbot-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." SUCH BEING THE CASE, this Office holds that since WC and WT, the parent companies, of WPI, based on the representation are publicly-held corporations, it necessarily follows that WPI, 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