JP Capanas Law Office

December 21, 2009 BIR RULING [DA-(C-328) 801-09] Section 24 (C); DA-236-2005 dtd. 5/31/05 JP Capanas Law Office Rm. 123 Camp Zubu, Ylaya Talamban, Cebu City Attention: Atty. Jonathan P. Capanas CPA-Lawyer/Tax Consultant Gentlemen : This refers to your undated letter, requesting in behalf of your client, JEG DEVELOPMENT CORPORATION, a confirmation of your opinion that in determining whether the corporation shall be subject to the Improperly Accumulated Earnings Tax (IAET) or not, as well as in the computation of the book value per share of its shares of stocks, the amount of retained earnings to be considered shall be that which is net of the accumulated and current equity in investments in associates or in the investees net earnings. EDcICT It is represented that JEG is a corporation duly organized and existing under Philippine laws, registered with the Securities and Exchange Commission (SEC) on February 9, 1994, with principal office address at Unit 2, Blue Garden Building, Wilson Street, Lahug, Cebu City; that its primary purpose is to invest in the stocks, bonds, securities or short-term notes of any government, or any subdivision thereof, or any public or private corporation, person, firm, partnership, association or other organization and in real and personal property of all kinds in the same manner and to the extent as a juridical person might, could and would do; that JEG is an owner of 33.88% interest in Vivant Corporation, an associate listed with the Philippine Stock Exchange (PSE), and 49.99% interest in JEGVEG Realty, Inc., a non-publicly listed entity; that the carrying values of investments in associates as reflected in the Financial Statements of JEG have been accounted for under the equity method in accordance with the Statements of Financial Accounting Standards No. 11, whereby the investment account is allowed to be adjusted in the investor's financial statements for the change in the investor's share of the earnings of the investee, among others; that as a result of the adoption of this accounting method, the retained earnings of JEG has increased to a much bigger amount but it does not reflect its true and realized income or earnings; that as of December 31, 2008, the retained earnings of JEG has a balance of P637,393,986.00 but P274,831,570.00 of the said amount represents the accumulated equity in net earnings which is a component of the carrying values of investments in associates; that moreover, the Retained Earnings coming from realized profits in connection with the business operations of JEG are intended to be appropriated and utilized for business expansion and development. In reply, please be informed that in computing the book value per share, the stockholder's equity must first be determined. Generally, the elements constituting stockholder's equity are as follows: 1. Capital Stock 2. Subscribed capital stock 3. Additional paid-in capital 4. Retained earnings 5. Treasury stock (if there is any, the same should be deducted from the subscribed capital stock.) In the case of Pangilinan, et al. vs. Commissioner of Internal Revenue , CTA Case No. 4826, August 23, 1994, it was ruled that the equity method of accounting is employed in the preparation of financial statements in accordance with the generally accepted accounting principles. However, it does not necessarily follow that in determining the book value, the same should be applied. They do not accurately reflect the retained earnings and the book value of shares because the same includes the share in the net earnings of its subsidiary. THaDAE In BIR Ruling No. 117-89 dated June 5, 1989, it was ruled that the accumulated and current equity in the investees net earnings and the share in revaluated increments are not considered as income and should not therefore be included in the determination of the book value of the shares. Moreover, in BIR Ruling (DA-236-05) dated May 31, 2005, it was ruled that since FMF uses the equity method of accounting for financial reporting, the total stockholders equity will not be correctly determined if the investments in its subsidiaries will not be deducted therein. In view of the above, this Office is of the opinion that in order for JEG to be subjected to the Improperly Accumulated Earnings Tax (IAET) and as well as for purposes of the computation of its book value per share, the amount of retained earnings to be considered shall be that which is net of the accumulated and current equity in investments in associates or in the investees net earnings. 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, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service