Sycip Gorres Velayo & Co.

May 22, 2009 BIR RULING [DA-(C-071) 247-09] RR 2-2001; 29 (A) & (B) (2) (a); DA-323-2006; DA (C-031) 126-2009 Sycip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Attention: Atty. Emmanuel C. Alcantara Co-Head, Tax Services Gentlemen : This refers to your letter dated February 16, 2009 requesting on behalf of your client, HP Metal, Inc. (HP Metal), for confirmation that HP Metal is a publicly held corporation which is exempt from the Improperly Accumulated Earnings Tax (IAET) imposed under Section 29 of the Tax Code of 1997. It is represented that HP Metal is a corporation duly organized and existing under the laws of the Philippines with principal office address at No. 288-A Iba Road, Iba, Meycauayan, Bulacan. It is engaged in the business of buying scrap metals, processing these scrap metals by segregation, re-packing and quality checking, and exporting the processed metals to clients abroad. HP Metal was incorporated in the Philippines on July 29, 2003 with the Securities and Exchange Commission (SEC) with Company Registration No. CS200316816. As per SEC Articles of Incorporation, HP Metal has an authorized capital stock of Forty Thousand Pesos (P40,000.00) divided into Four Hundred (400) shares with par value of One Hundred Pesos (P100.00) per share. The amount of capital stock which has been actually subscribed is Ten Thousand Pesos (P10,000.00). Out of the total subscribed capital stock of HP Metal, 95% or 95 shares with total par value of P9,500.00 is registered in the name of Bowman Top Limited (BTL), a corporation organized and existing under the laws of Hong Kong, as trustee for and on behalf of Smorgon Hartwell Recycling Limited, a corporation likewise organized and existing under the laws of Hong Kong, as the legal and beneficial owner of the HP shares. Smorgon Hartwell Recycling Limited is a wholly-owned subsidiary of Smorgon Steel Group Limited (SSGL), a publicly listed corporation organized and existing under the laws of Australia. HCATEa On August 20, 2007, SSGL was merged with One Steel Limited (OST), a corporation organized and existing under the laws of Australia with OST as the surviving entity, acquiring 100% of SSGL. OST is a publicly-held corporation whose shares are listed in the Australian Stock Exchange (ASX). As of September 1, 2008, OST has 105,101 stockholders of record. The top eight shareholders holding 50.54% shares in OST consists of banks or financial institutions which are also publicly-held companies in their respective country of domicile. The fact that OST is the ultimate parent of HP Metal is disclosed under Note 27 of the Notes to the Financial Statements of OST for 2008, whereby HP Metal included in the list of entities 100% owned by OST. In reply, please be informed that Section 29 (B) (2) (a) of the 1997 Tax Code, 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 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; xxx xxx xxx." From the foregoing, it is clear than 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 earnings distributed to them by the corporation. However, it is also evident that the abovementioned rule admits of exceptions, such as the IAET shall not apply to, among others, publicly-held corporations. In this regard, Section 4 of Revenue Regulations (RR) No. 2-2001, "Implementing the Provision on Improperly Accumulated Earnings Tax under Section 29 of the Tax Code of 1997", provides: DHSCEc "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 (C-031) 126-2009 dated February 26, 2009 , 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 RR No. 2-2001. In the present case, since HP Metal's ultimate parent OST is a publicly-held corporation, whose stockholders are likewise publicly-held corporations with its respective stockholders, it follows that at least 50% of its outstanding capital stock of HP Metal is owned indirectly by more than 20 individuals. Consequently, HP Metal should be considered a publicly-held corporation exempt from IAET pursuant to Section 29 (2) (a) of the 1997 Tax Code as implemented by RR No. 2-2001. (BIR Ruling Nos. 025-2002 dated June 25, 2002; DA-086-2003 dated March 20, 2003; DA-323-2006 dated May 17, 2006; DA-682-2006 dated November 29, 2006 and DA-682-2006 dated November 29, 2006) EDSAac Accordingly, this Office holds that HP Metal is considered a publicly-held corporation, and therefore exempt from the imposition of IAET pursuant to Section 29 (B) (2) (a) of the Tax Code of 1997, as amended. 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service