SGV & Co.

September 26, 2008 BIR RULING [DA-(C-084) 266-08] Sec. 29; DA-106-2003; DA-432-05 SGV & Co. 6760 Ayala Avenue 1226 Makati Attention: Atty. Rafael C. Vinzon Partner, Tax Division Gentlemen : This refers to your letter dated September 6, 2006 requesting for a ruling, on behalf of your client, Monde M. Y. San Corporation ( "Monde" for brevity), that, for purposes of the imposition of the Improperly Accumulated Earnings Tax, the paid-up capital, which includes both the par value of shares issued and other capital investments classified under the "additional paid-in capital" account of the corporation, shall not be constituted as improperly accumulated earnings subject to the said tax imposed under Section 29 of the Tax Code of 1997, as implemented by Revenue Regulations No. 2-2001. In reply thereto, please be informed that RR No. 2-2001 implements the provision on IAET under Section 29 of the 1997 Tax Code. As stated in Section 2 thereof, "the touchstone of the liability is the purpose behind the accumulation of the income and not the consequences of the accumulation. Thus, if the failure to pay dividends is due to some other causes, such as the use of undistributed earnings and profits for the reasonable needs of the business, such purpose would not generally make the accumulation or undistributed earnings subject to tax" . Furthermore, Section 3 of RR No. 2-2001 enumerates the items which constitute accumulation of earnings for the reasonable needs of the business , thus: "a) Allowance for the increase in the accumulation of earnings up to 100% of the paid-up capital of the corporation as of Balance Sheet date, inclusive of accumulations taken from other years; . . ." It may be pointed out that the "reasonable needs of the business" aspect is not the sole issue; but rather the distinction between the terms " earnings " and " capital" . What is being subjected to tax under Section 29 is the " improperly accumulated earnings" of the corporation, not "accumulated capital". Although Section 3 (a) of RR No. 2-2001 made mention of the "paid-up capital" , what is constituted as falling within the ambit of "accumulation of earnings for the reasonable needs of the business" is the "increase in the accumulation of earnings up to 100% of the paid-up capital of the corporation as of Balance Sheet date, inclusive of accumulation taken from other years". DaHcAS In BIR Ruling No. DA-106-03 dated April 3, 2003 citing BIR Ruling No. DA-221-02 dated November 25, 2002, we have held that: "Premium on capital stock is the excess received over the par value of stock issued. The premium account is shown under the paid-in capital section of the stockholders' equity because it resulted from the issuance of stock. In another occasion, this Office ruled that the infusion of APIC (additional paid-in capital or premium on capital stock) . . . is in the nature of additional funds which will be used as, and forms part of, the recipient corporation's working capital for which no corresponding shares of stock will be issued." Hence, additional paid-in capital is logically classified as being included in the paid-up capital of a company, the same being a capital investment. (BIR Ruling No. 270-87 dated September 8, 1987; BIR Ruling No. DA-432-05 dated October 20, 2005) In view thereof, it is the opinion of this Office that the paid-up capital of the corporation, which includes both the par value of shares issued and other capital investments classified under the "additional paid-in capital" account of the corporation shall not be constituted as improperly accumulated earnings subject to the Improperly Accumulated Earnings Tax imposed under Section 29 of the Tax Code, as implemented by RR 2-2001. 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