BIR Ruling [DA-372-03]

October 15, 2003 BIR RULING [DA-372-03] 29; RR 2-2001; DA-203-2002 SGV & Co. 6760 Ayala Avenue 1226 Makati City Attention: Atty. J.A. Osana Tax Division Gentlemen : This refers to your letter dated September 4, 2003 requesting on behalf of your client, Bayer Philippines, Inc. ("Bayer Phils.") for a confirmation of your opinion that Bayer Phils is a publicly-held corporation under Revenue Regulations No. 2-2001 and therefore not subject to the 10% Improperly Accumulated Earnings Tax ("IAET" for brevity). The facts as represented, are as follows: 1. Bayer Phils. is a corporation organized and existing under the laws of the Philippines, with principal office at Bayer House, Canlubang Industrial Estate, Canlubang, Calamba, Laguna 4028. It is primarily engaged in the manufacture, sale, importation and exportation of chemical, medicinal, pharmaceutical and biological products. It is a 100%-owned subsidiary of Bayer Aktiengesellschaft ("Bayer AG"), as shown in the latest General Information Sheet filed by Bayer Phils. with the Securities and Exchange Commission ("SEC"). 2. Bayer AG is a corporation organized and existing under the laws of Germany, with principal office at Bayermerk, Gebude W1, Kaiser-Wilhelm-Alee, 51368 Leverkusen, Germany. Bayer AG is a publicly traded company, listed on the New York Stock Exchange, the Frankfurt Stock Exchange and seven other German stock exchanges, the stock exchanges of eight other European countries, and the Tokyo Stock Exchange. 3. As of June 2001, Bayer AG had approximately 500,000 stockholders holding a total of 730,341,920 no-par value shares of stock with voting rights. Under German Securities Trading Act, holders of voting securities of a listed German company must notify that company of the level of their holding whenever it reaches, exceeds or falls below specified thresholds ( i.e. , 5, 10, 25, and 75% of the company's outstanding voting securities). As of July 10, 2003, there is only one stockholder, Allianz Versicherungs-Aktiengessellschaft, which holds at least 5% (specifically 6.18%) of Bayer AG's outstanding stock. a. Copy of the latest Form 20-F (Registration Statement) filed by Bayer AG on June 24, 2002 with the United States Securities & Exchange Commission pursuant to Section 12(b) or 12(g) of the Securities Exchange Act of 1934; b. Bayer AG's Financial Statement for 2002; c. Certification executed by Bayer AG's Head of Finance, Johannes Diestsch dated July 10, 2003 on the capital structure and stockholders base of Bayer AG; and d. Certified true copy of Bayer Phils.' latest General Information Sheet duly filed with the SEC. In reply, please be informed that pursuant to Section 4 of Revenue Regulations No. 2-2001 implementing Section 29 of the Tax Code of 1997 on Improperly Accumulated Earnings Tax provides, viz. : ". . . closely-held corporations are those corporations at least 50% in value of the outstanding capital stock or at least 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 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. . . . " Moreover, improperly accumulated earnings tax shall not apply to publicly-held corporations pursuant to Section 29 of the Tax Code of 1997. DTSaIc Since Bayer Phils., a domestic corporation, is a wholly-owned subsidiary of Bayer Aktiengesellschaft, a publicly-owned corporation, its shares shall be considered as being owned proportionately by the shareholders of Bayer Aktiengesellschaft. 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 total combined voting power of all classes of stock entitled to vote in a corporation is owned directly or indirectly by more than 20 individuals, the corporation is considered a publicly-held corporation as the term is defined under the Regulations. Further, Section 29 of the Tax Code of 1997 provides, viz. : "(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 "(2) (2) Exceptions. The improperly accumulated earnings tax as provided for under this Section shall not apply to: (a) Publicly-held corporations; xxx xxx xxx (C) Evidence of Purpose to Avoid Income Tax. (1) Prima Facie Evidence. The fact that any corporation is a mere holding company or investment company shall be prima facie evidence of a purpose to avoid the tax upon its shareholders or members. xxx xxx xxx." Accordingly, this Office confirms your opinion that Bayer Phils. is considered a publicly-held corporation exempt from the Improperly Accumulated Earnings Tax (IAET), based on the representation that as of June 2001, Bayer AG had approximately 500,000 stockholders holding a total of 730,341,920 no-par value shares of stock with voting rights. 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 as null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group