Tan Venturanza Valdez

August 4, 2008 BIR RULING [DA-(C-023) 105-08] 127 (B); DA-327-2007 Tan Venturanza Valdez 2704 East Tower Philippine Stock Exchange Centre Exchange Road, Ortigas Center Pasig City Attention: Atty. Enrico G. Valdez Gentlemen : This refers to your letter dated March 29, 2007 requesting on behalf of your client, Pacific Online Systems Corporation (POSC), for confirmation of your opinion that the listing of its shares with the Philippine Stock Exchange (PSE) will not be subject to the Initial Public Offering (IPO) tax imposed under Section 127 (B) of the Tax Code of 1997, as said corporation is not a closely held corporation. TAaCED BACKGROUND OF THE CASE POSC is a corporation organized and existing under the laws of the Philippines with an authorized capital stock of Five Hundred Million Pesos (P500,000,000.00) divided into Five Hundred Million (500,000,000) common shares with a par value of One Peso (P1.00) per share, of which One Hundred Seventy-Nine Million Two Hundred Fifty Thousand (179,250,000) common shares have been subscribed, fully paid and are issued and outstanding. Based on the Secretary's Certificate, as of March 27, 2007, the POSC shareholders and the number of shares owned are as follows: Shareholders No. of Shares Percentage 1. Abacus Global Technovisions, Inc. 46,245,954 25.8% 2. Subco Technology, Inc. 30,830,569 17.2% 3. Pacific Automated Systems Corporation 25,049,800 13.97% 4. Belle Corporation 23,122,977 12.9% 5. Powerball Gaming & Entertainment Corp. 13,000,000 7.25% 6. Falcon Resources, Inc. 7,000,000 3.9% 7. Premiere Global Connectivity, Inc. 6,000,000 3.35% 8. AB Gaming Leisure Specialist, Inc. 5,000,000 2.8% 9. Brandon C. Chan 5,000,000 2.8% 10. Ricardo Morales 5,000,000 2.8% 11. Alfredo B. Reyes 4,000,000 2.23% 12. Able Holdings, Inc. 3,000,000 1.67% 13. Roberto C. Cruz 3,000,000 1.67% 14. Virginia Vicencio 3,000,000 1.67% 15. Manuel A. Gana 200 .0001115% 16. Willy N. Ocier 100 .0000557% 17. Manuel A. de Leon 100 .0000557% 18. Alfredo B. Benitez 100 .0000557% 19. Clarita T. Zarraga 100 .0000557% 20. Tarcisio M. Medalla 100 .0000557% Total 179,250,000 100.00% ========= ====== In POSC, 11 individuals directly own 11.17% of its outstanding capital stock. At the parent level, another 27 individuals indirectly own 18.97% of its outstanding capital stock through other corporations, namely: Powerball Gaming & Entertainment Corp., Falcon Resources, Inc., Premiere Global Connectivity, Inc., AB Gaming Leisure Specialist, Inc. and Able Holdings, Inc. At the great-grandparent level, another 4 individuals indirectly own 8.59% of POSC through three (3) corporations, namely: (i) Agri Industrial Research Group, Inc., (ii) Agri Industrial Work Stations, Inc., and (iii) Agri Industrial Concepts, Inc., which collectively own 100% equity in Blue Stock Development Farms, Inc., the latter having a 33.33% equity in Abacus Global Technovisions, Inc. which has a 25.8% equity in POSC. Individuals having equity in more than one corporation are counted once. Individuals falling under the "family and partnership ownerships" under Sec. 127 (B) (2) of the 1997 Tax Code are likewise counted once. Thus: Level No. of Individuals Equity POSC 11 11.17% Parent 27 18.97% Great-grandparent 4 8.59% Sub-total 42 38.73% ==== ====== TAXPAYER'S OPINION POSC is not a closely held corporation for there are 42 individuals owning 38.73% equity therein and under either of the following treatment of which, POSC can be considered to be not a publicly listed corporation: I. The "grandfather rule" adopted in the Philippines under Section 96 of the Corporation Code (Batas Pambansa Bilang 68) which provides that notwithstanding the fact that all the issued stock of a corporation are held by not more than twenty persons, among others, a corporation is nonetheless not to be deemed a close corporation when at least two thirds of its voting stock or voting rights is owned or controlled by another corporation which is not a close corporation. cSCTID POSC is partly owned directly and indirectly by publicly listed corporations. It would be impractical, if not impossible, to follow the rule that the stock attribution should be allowed to run up to the individual level. In BIR Ruling DA-001-06 dated January 4, 2006, First Gen Corporation (First Gen) was, prior to its listing with the PSE, 88% owned by First Philippine Holdings Corporation (FPHC), a publicly listed corporation, which was in turn partly owned by Benpres Holdings Corporation (BHC), another publicly listed corporation. It was ruled that the corporate shareholdings of FPHC in First Gen will be considered as being proportionately owned by FPHC's shareholders. Taking it further, since FPHC is owned by BHC, another publicly listed corporation, the shareholdings of BHC in First Gen through FPHC will still be proportioned among the shareholders of BHC. The shareholders of FPHC and even further, BHC, consist of possibly hundreds and thousands of individuals. Accordingly, the listing of shares of stock of First Gen with the PSE will not be subject to IPO tax because prior to the listing of shares, First Gen was not a closely held corporation as defined under Section 127 (B) of the Tax Code of 1997. In the First Gen ruling, the stock attribution ceased when it reached the publicly listed corporate shareholder. It didn't require the stock attribution to run up to the individual level for purposes of determining if the corporation is a closely held corporation. It extended its discussion up to the next level (up to BHC) merely to emphasize the fact that if the corporate shareholder is a publicly listed corporation, the corporation can possibly have hundreds and thousands of individual shareholders, especially where the publicly listed corporate shareholder is in turn owned by another publicly listed corporation. SHcDAI In POSC, 47.3% of its outstanding capital stock is directly and indirectly owned by 2 publicly listed corporations, namely: Belle Corporation (Belle) and Abacus Consolidated Resources and Holdings, Inc. (Abacus Consolidated). Belle, a publicly listed corporation, directly owns 12.9% of POSC. In addition, Subco Technology, Inc. (Subco) owning 17.2% of POSC's equity, is a wholly owned subsidiary of Belle; making Belle own 30.10% equity, direct and indirect, in POSC. The shareholders of Belle are: PCD Nominee Corporation Filipino, PCD Nominee Corporation Foreign, Sysmart Corporation, SM Development Corporation (another publicly listed corporation), Eastern Securities Development Corporation and others. The top 20 beneficial owners of the PCD Nominee shares are: The Hongkong and Shanghai Banking Corp. Ltd.-Clients' Acct., Social Security System (SSS), Government Service Insurance System (GSIS), Eastern Securities Development Corporation, Wealth Securities, Inc., Lucky Securities, Inc., Citibank N.A. Citiomnifor, Regina Capital Development Corporation, Citibank N.A. Citifaophilam, Quality Investments & Securities Corporation, Citibank N.A. Citiomniloc, Globalinks Securities & Stocks, Inc., Standard Securities Corporation, BDO Securities Corp., Deutsche Regis Partners, Inc. AC Corporate, JSG Securities, Inc., Tower Securities, Inc., ATR-Kim Eng Securities, Inc. Free, Standard Chartered Bank, Citisecurities, Inc. AaHcIT The corporate shareholdings of Subco in POSC will be considered as being proportionately owned by Subco's lone corporate shareholder, Belle. In addition, the corporate shareholdings of Belle in POSC will be considered as being proportionately owned by Belle's shareholders. Since Belle's shareholders include another publicly listed corporation, SM Development Corporation, and the SSS and GSIS (the retirement funds of private and government employees, respectively), the beneficial stockholders of Belle consist of possibly thousands and millions of individuals. Accordingly, the 30.10% interest of Belle in POSC should be considered as not being owned by a closely held corporation. Abacus Global Technovisions, Inc. (Abacus Global) is the biggest shareholder of POSC Owning 25.8% of its equity. Abacus Consolidated, a publicly listed corporation, owns 66.67% of Abacus Global. The shareholders of Abacus Consolidated are PCD Nominee Corporation and others. The top 20 beneficial owners of the PCD Nominee shares are: Tower Securities, Inc., ATR Securities, Inc., Papa Securities Corporation, Yu & Company, Inc., RCBC Securities, Inc., Larrgo Securities Co., Inc., R. Coyiuto Securities, Inc., Standard Securities Corp., Wealth Securities, Inc., AB Capital Securities, Inc., I. Ackerman & Co., Inc., HDI Securities, Inc., Ansaldo Godinez & Co., Inc., Alpha Securities Corp., BPI Securities Corporation, First Integrated Capital Sec., Inc., R.S. Lim & Co., Inc., Goldstar Securities, Inc., BA Securities, Inc. and Accord Capital Equities Corporation. ESITcH The corporate shareholdings of Abacus Global in POSC will be considered as being proportionately owned by Abacus Global's shareholders. Since Abacus Global is owned by Abacus Consolidated, the shareholdings of Abacus Consolidated in POSC through Abacus Global will still be proportioned among the shareholders of Abacus Consolidated. Since Abacus Consolidated's shareholders consist of possibly hundreds and thousands of individuals, the 17.2% equity of Abacus Consolidated in POSC through Abacus Global should be considered as not being owned by a closely held corporation. Therefore, on account of the equity of Belle and Abacus Consolidated, both publicly listed corporations, 47.3% of POSC is considered as not owned by closely held corporations. The effect of applying the rule that "a corporation is nonetheless not to be deemed a close corporation when at least two thirds of its voting stock or voting rights is owned or controlled by another corporation which is not a close corporation" is, as follows: Level No. of Individuals Equity POSC 11 11.17% Parent 27 18.97% Great-grandparent 4 8.59% Sub-total 42 38.73% == ====== Belle 30.09% Abacus Consolidated 17.20% Sub-total held by publicly listed corporations 47.29% Total held by individuals and publicly listed corporations 86.02% Since there are 42 individuals owning 38.73% equity in POSC and possibly hundreds and thousands of individuals, through Belle and Abacus Consolidated both publicly listed corporations, owning 47.3% of POSC which is considered as not owned by closely held corporations, then POSC is not a closely held corporation. II. Section 127 (B) of the Tax Code of 1997 which states that the 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 ("stock attribution rule"). BIR Ruling No. 072-97 dated July 2, 1997 set down the rule that in the case of a multi-tiered corporation, the attribution rule must be allowed to run continuously along the chain of ownership until it finally reaches the individual stockholders. DaIAcC In the alternative, the stock attribution rule should be allowed to run continuously along the chain of ownership until it finally reaches the individual stockholders, regardless of publicly listed corporations that run along the chain of ownership. Belle, a publicly listed corporation, directly owns 12.9% of POSC. In addition, Subco owning 17.2% of POSC's equity, is a wholly owned subsidiary of Belle; making Belle own 30.10% equity, direct and indirect, in POSC. There are 65 additional individuals owning 5.367% equity in Belle. In addition, SSS owns 7.4973% and GSIS owns 6.0423% totaling 13.5396% in Belle. The Belle shares owned by SSS and GSIS should also be considered as owned by individuals since both are retirement funds of private and government employees, respectively. Since Belle is both a direct stockholder and indirect stockholder (through Subco) in POSC, the effect of such 65 additional individuals owning 5.367% and the combined equity of SSS and GSIS totaling 13.5396% will increase by 5.6889% the equity in POSC which is owned by individuals. EcDTIH Abacus Global is the biggest shareholder of POSC owning 25.8% of its equity. Abacus Consolidated, a publicly listed corporation, owns 66.67% of Abacus Global. For Abacus Consolidated, there are 341 additional individuals owning 16.2913% equity in it. In addition, 36.4990% of Abacus Consolidated is indirectly owned by 5 individuals (already counted as "grandparents" of POSC) through Blue Stock Development Farms, Inc. Since Abacus Consolidated is an indirect stockholder (through Abacus Global) in POSC, the effect of such 341 additional individuals as shareholders in Abacus Consolidated and the individuals in Blue Stock Development Farms, Inc. (which is a shareholder in Abacus Consolidated) will increase by 9.08% the equity in POSC which is owned by individuals. The effect of applying the stock attribution rule through publicly held corporations is, as follows: Level No. of Individuals Equity POSC 11 11.17% Parent 27 18.97% Great-grandparent 4 8.59% Sub-total 42 38.73% == ====== Individuals in Belle 63 1.61% SSS equity in Belle - 2.26% GSIS equity in Belle - 1.82% Individuals in Abacus Consolidated 325 9.08% Sub-total held by individuals in publicly-listed corporations 388 14.77% Total held by individuals 430 53.50% === ====== Since there are 430 individuals owning 53.50% equity in POSC not including the thousands and millions of individual members of SSS and GSIS, then POSC is not a closely held corporation. Moreover, there is still an undetermined number of individuals whose shares in Belle and Abacus Consolidated are lodged with their respective stockbrokers, who have in turn lodged the same with the PCD Nominee Corporations, both Filipino and Foreign. ADCTac BIR REPLY In reply thereto, please be informed that Sec. 127 (B) of the 1997 Tax Code, as amended, provides as follows: "SEC. 127. Tax on Sale, Barter or Exchange of Shares of Stock Listed and Traded through the Local Stock Exchange or through Initial Public Offering. xxx xxx xxx (B) Tax on Shares of Stock Sold or Exchanged through Initial Public Offering. There shall be levied, assessed and collected on every sale, barter, exchange or other disposition through initial public offering of shares of stock in closely held corporations, as defined herein, a tax at the rates provided hereunder based on the gross selling price or gross value in money of the shares of stock sold, bartered, exchanged or otherwise disposed in accordance with the proportion of shares of stock sold, bartered, exchanged or otherwise disposed to the total outstanding shares of stock after the listing in the local stock exchange: Up to twenty-five percent (25%) 4% Over twenty-five percent (25%) but not over thirty three and one third percent (33 1/3%) 2% Over thirty-three and one third percent (33 1/3%) 1% The tax herein imposed shall be paid by the issuing corporation in primary offering or by the seller in secondary offering. For purposes of this Section, the term 'closely held corporation' means any corporation at least fifty percent (50%) in value of the outstanding capital stock of all classes of stock entitled to vote is owned directly or indirectly by or for not more than twenty (20) individuals. aDHCcE For purposes of determining whether the corporation is a 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." xxx xxx xxx As such, the IPO tax would apply only to corporations which are considered "closely held", meaning that at least 50% in value of the outstanding voting shares of all classes is owned directly or indirectly by or for not more than 20 individuals. In the case where the shares of stock in the corporation to be listed are owned by another corporation, such shares will be considered as being owned proportionately by the latter's shareholders. TaCDIc Following the 1997 Tax Code, the aforestated rulings and regardless of the treatment of shareholders which are publicly listed 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 in POSC is owned directly or indirectly by or for more than twenty (20) individuals. Clearly, POSC is not a closely held corporation as defined under Section 127 (B) of the same Tax Code and consequently it should not be subjected to IPO tax for the listing of its shares in the PSE. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon its investigation, it will be ascertained that the facts are different, then this ruling shall be considered as null and void. aEHADT Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service