BIR Ruling [DA-383-05]

September 6, 2005 BIR RULING [DA-383-05] 29 (B) (2) (a); DA-232-2003 Castillo Laman Tan Pantaleon and San Jose Law Offices The Valero Tower 122 Valero St., Salcedo Village Makati City Attention: Attys. Paulino C. Petralba and J. Gregson A. Castillo Gentlemen : This refers to your letter dated June 9, 2005 requesting for a confirmation that Parsons Brinckerhoff Philippines, Inc. (PB-Phil for brevity) is a publicly-held corporation not subject to Improperly Accumulated Earnings Tax (IAET) under Section 29 of the 1997 Tax Code. The facts as you represented are as follows: PB-Phil is a domestic corporation duly organized and existing under Philippine laws. It is practically a wholly foreign-owned subsidiary inasmuch as 98.3% of its shares are owned by Parsons Brinckerhoff Pte. Ltd.,a corporation duly organized and existing under the laws of Singapore, and only 1.7% is owned by other persons who are actually the individual nominees of the aforestated Singapore company. Parsons Brinckerhoff Pte. Ltd.,in turn, is 100% owned by Parsons. Brinckerhoff International Pte. Ltd.,a corporation duly organized and existing under the laws of the Republic of Singapore. Furthermore, Parsons Brinckerhoff International Pte. Ltd. is 100% owned by Parsons Brinckerhoff International, Inc.,a corporation duly organized and existing under the laws of the State of Delaware, United States of America, and ultimately, Parsons Brinckerhoff International, Inc. is 100% owned by Parsons Brinckerhoff, Inc. (PB Inc. for brevity) which is a U.S. corporation. Based on the foregoing, you now seek for confirmation that PB-Phil is a publicly-held corporation as defined under Revenue Regulations No. 2-2001, and hence, exempt from the Improperly Accumulated Earnings Tax (IAET) imposed under Section 29(A) of the Tax Code of 1997. In reply, please be informed that Section 29 (A) and (B) of the 1997 Tax Code on the imposition of IAET, states that: "(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;" 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 IAET shall not apply to, among others, publicly-held corporations. Furthermore, Section 4 of Revenue Regulations No. 2-2001, "Implementing the Provision on Improperly Accumulated Earnings Tax Under Section 29 of the Tax Code of 1997", provides: "For purposes of these Regulations, 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. DHcTaE 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 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 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. Thus, the ownership of a domestic corporation (like PB-Phil) 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. Since PB-Phil is practically a wholly-owned subsidiary of PB Inc.,the shares of PB-Phil will be considered as being owned proportionately by PB Inc's shareholders. Applying the foregoing principles, it is clear that PB-Phil is a publicly-held corporation. Parsons Brinckerhoff Pte. Ltd. owns 98.3% of the shares of stock of PB-Phil, and in turn 100% ownership of Parsons Brinckerhoff Pte. Ltd. may ultimately be traced to PB Inc.,where 51% in value of its issued and outstanding capital stock is owned by 132 individual shareholders. While PB Inc. is not a publicly-listed corporation, its shares of stock are widely dispersed and held by numerous individuals by reason of its Key Employee Stock Option Plan. As stated in the Certificate dated March 11, 2005, as of February 4, 2005, PB Inc. has 1,127 individual shareholders of record and only 18.2% of the total issued and outstanding shares of stock of PB Inc. is owned in the aggregate by its 20 largest individual shareholders. In view of the foregoing, PB-Phil cannot be considered a closely held corporation but rather a publicly-held corporation, and therefore, is exempt from the imposition of IAET pursuant to Section 29 (B)(2)(a) of the 1997 Tax Code. 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, (SGD.) JOSE MARIO C. BUAG OIC, Commissioner of Internal Revenue