SGV & Co.

February 26, 2009 BIR RULING [DA-(C-031) 126-09] DA-323-2006; DA-085-2003; Sec. 29 (A) & (B) (2) (a), NIRC; Sec. 4, RR 2-2001 SGV & Co. 6750 Ayala Ave. Makati City Attention: Emmanuel C. Alcantara Co-Head, Tax Services Gentlemen : This refers to your letter dated May 24, 2007, requesting on behalf of your client, Connell Bros. Company Pilipinas, Incorporated (CBC-Phils.), for confirmation that CBC-Phils. is exempt from the ten percent (10%) Improperly Accumulated Earnings Tax (IAET) because CBC-Phils. qualities as publicly-held corporation under Section 29 (B) (2) (a) of the 1997 Tax Code, as amended by Republic Act (R.A.) No. 9337 and Revenue Regulations (RR) No. 2-2001. HIaTDS It is represented that CBC-Phils. is a corporation duly incorporated and existing under the laws of the Republic of the Philippines, having its former principal place of business in the 5/F Guada Building No. 31 EDSA, Mandaluyong City, Philippines. CBC-Phils. is now currently located at 3/F Guada Building, No. 31 EDSA, Mandaluyong City, Philippines. Under its Articles of Incorporation, CBC-Phils.' primary business purpose is to carry on a general mercantile business and to purchase, sell at wholesale and deal with such goods, supplies and merchandise as are or may be sold in a general store and to act as a distributor, manufacturer's representative or agent, commission merchant, merchandising broker, indentor, factor, consignment agent and in any other representative capacity for natural or juridical persons and other entities, either domestic or foreign. It is further represented that CBC-Phils. is wholly-owned by Wilbur Ellis Company (WEC), a foreign nonresident corporation duly incorporated and existing under the laws of the State of California, USA and that as of December 31, 2006, WEC's total outstanding and voting stock is owned by more than twenty-one (21) individuals. In reply, please be informed that Section 29 (A) and (B) (2) (a) of the Tax Code of 1997, as amended by R.A. 9337, provides 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, and 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: acHITE (a) Publicly-held corporations;" xxx xxx xxx From the foregoing, it is clear that an improperly accumulated earnings tax (IAET) is imposed on a corporation that permits earnings and profits to accumulate instead of being divided or distributed. This tax is in the nature of a penalty to a corporation for the improper accumulation of its earnings, and as a form of disincentive to the avoidance of tax upon shareholders who are supposed to pay dividends tax on the earnings distributed to them by the corporation. However, it is also evident that the abovementioned rule admits of exceptions, such as that the IAET shall not apply to, among others, publicly-held corporations. In this regard, Section 4 of RR 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. In BIR Ruling No. DA-085-03, dated March 20, 2003, and later in BIR Ruling No. DA-323-06, dated May 17, 2006, it was held that 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 a publicly-held corporation as the term is defined under the cited Revenue Regulations 2-2001. In the present case, WEC, the parent company of CBC-Phils has more than 21 stockholders as indicated in a Certification the former submitted to the Philippine Consulate in San Francisco, California on May 7, 2007. Under said Certification, WEC owns one hundred percent (100%) of the outstanding and voting capital stock of CBC-Phils. and that 65.28% of such stock is owned by 21 individuals. It is therefore clear that CBC-Phils. has met the requirements under Section 4 of RR 2-2001 for it to be considered a publicly-held corporation. aHIDAE Accordingly, this Office holds that CBC-Phils. is considered a publicly-held corporation, and therefore exempt from the imposition of IAET pursuant to Section 29 (B) (2) (a) of the same Tax Code. 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, Commissioner of Internal Revenue By: (SGD.) GREGORIO V. CABANTAC Deputy Commissioner Legal and Inspection Group