SGV & Co.

September 8, 2009 BIR RULING [DA-(C-194) 498-09] DA683-07; DA682-06; DA-(025)090-09; DA(C-031)126-09 SGV & Co. 6760 Ayala Avenue Makati City Attention: Atty. Lucil Q. Vicerra Principal, Tax & Customs Services Gentlemen : This refers to your letter dated August 24, 2009 stating that your client, Monsanto Philippines, Inc. (MPI), is a domestic corporation engaged in the business of importing, processing, distribution and marketing of agricultural seeds; that it is a wholly-owned subsidiary of Monsanto Company, a corporation organized and existing under the laws of the State of Delaware, USA; and that Monsanto Company, in turn, is publicly listed in the New York Stock Exchange, with 45,153 stockholders of record as of 2008. Based on the foregoing representations, you now request confirmation of your opinion that MPI is a publicly-held corporation and is exempt from the Improperly Accumulated Earnings Tax (IAET) 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 Section 29 (A) and (B) of the Tax Code of 1997 on the imposition of IAET, states 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, an improperly accumulated earnings tax equal to ten percent (10%) of the improperly accumulated taxable income. (B) Tax on Corporation 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-listed corporations;" AcHaTE 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 IAET shall not apply to, among others, publicly-held corporations. Furthermore, Section 4 of Revenue Regulations No. 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. Thus, in BIR Ruling No. 025-2002 dated June 25, 2002 and later reiterated in BIR Ruling No. DA 085-03 dated March 20, 2003 , this Office ruled that such shares will be considered as being owned proportionately by the shareholders. 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. Accordingly, 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 publicly-held corporation as the term is defined in Revenue Regulations No. 2-2001. WHEREFORE, in view of the foregoing , this Office holds that MPI cannot be considered a closely-held corporation but rather a publicly-held corporation, and therefore, is EXEMPT from the imposition of IAET under Section 29 (B) (2) (a) of the Tax Code of 1997. 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. DIETcH Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service