BIR Ruling [DA-682-06]

November 29, 2006 BIR RULING [DA-682-06] RR 2-2001, DA 372-03, DA 299-03 Samsung Electronics Philippines Manufacturing Corporation Block 6, Calamba Premiere International Park Barangay Batino, Calamba City Laguna Attention: Mr. Jeong Ho Park Chief Financial Officer Gentlemen : This refers to your letter dated November 17, 2006 requesting confirmation of your opinion that Samsung Electronics Philippines Manufacturing Corporation (SEPHIL) is a publicly-held corporation as defined under Revenue Regulations No. 2-2001 and, therefore, exempt from the Improperly Accumulated Earnings Tax (IAET) imposed under Section 29 of the Tax Code of 1997. It is represented that SEPHIL [formerly Philippines Samsung Electronics Corporation (PSEC)] is a corporation duly organized and existing under Philippine laws with office address at the Calamba Premiere International Park-Special Economic Zone; that it is primarily engaged in the design, manufacture, and sale of electronic products, including optical disk drive products, their components and parts; that is a wholly owned subsidiary of SAMSUNG ELECTRONICS CORPORATION LTD. (SECL) as shown in the latest General Information Sheet filed by SEPHIL with the Securities and Exchange Commission (SEC); that SECL is a corporation organized and existing under the laws of Korea, with principal office at 250 KA, Taepyung-ro, Chung-Ku, Seoul Korea, 100-742; that it is a publicly-traded company listed in the Korea Stock Exchange; and that the top ten shareholders of SECL owning 31.8% of the company with their respective percentage of shareholding, are as follows: Name of Stockholder No. of Shares % Ownership Citibank. N.A. (ADR Dept) 14,653,297 9.9% Samsung Life Insurance 10,689,381 7.3% Samsung Corporation 5,917,362 4.0% National Pension Corporation 4,757,527 3.2% Kun-Hee Lee 2,819,659 1.9% NTC-Government of Singapore 2,590,427 1.8% Samsung Fire & Marine Insurance 1,856,370 1.3% Fidelity Contra Fund 1,278,224 0.9% NTC/Bony/SSB-Monetary Singapore 1,196,262 0.8% Abu Dhabi Investment Authority 1,096,110 0.7% In reply, 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. cSEDTC In BIR Ruling No. 025-2002 dated June 25, 2002, this Office held 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. This is because 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' Consequently, this Office ruled that Abbott-Phils. is a publicly-held corporation exempt from the Improperly Accumulated Earnings Tax (IAET), based on its 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. Applying the foregoing to the instant case, it is the opinion of this Office that since SECL, the parent company, is a publicly-listed and traded corporation and hence, a publicly-held corporation, it necessarily follows that its wholly-owned subsidiary, SEPHIL, is likewise 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service