Aboitiz Equity Ventures, Inc.

February 10, 2009 BIR RULING [DA-(VAT-018) 074-09] RMC 77-2008; 105 Aboitiz Equity Ventures, Inc. 110 Legazpi St., Legaspi Village Makati City Attention: Ms. Melinda R. Bathan Gentlemen : This refers to your letter dated January 23, 2009 requesting for confirmation of your opinion that the director's fees and other allowances received on behalf of Aboitiz Equity Ventures, Inc. ("AEV") and Aboitiz and Company, Inc. ("ACO") by AEV's and ACO's executives who are their nominee directors in Union Bank of the Philippines ("UBP") and AEV are not subject to value-added tax (VAT). As represented, AEV is a domestic corporation engaged in the business of acquiring and holding shares of stock in various corporations. One of the corporations partly owned by AEV is UBP. As a stockholder of UBP, it has the right under Section 24 of the Corporation Code (BP 68) to elect members of the Board of Directors of UBP. It appointed or nominated five of its executives, who are employed by AEV or its subsidiaries, to serve as members of the Board of Directors of UBP, and such officers now sit in the Board of UBP. AEV, on the other hand, is one of the companies partly owned by ACO which is also a domestic corporation that is likewise engaged in the business of acquiring and holding shares of stocks in various corporations. As a stockholder of AEV, ACO in the exercise of its right to vote under Section 24 of the Corporation Code, appointed four of its executives who are employed by ACO or its subsidiaries to serve as members of the Board of Directors of AEV. The four executives now sit as members of the Board of AEV. Such nominee directors receive director's fees and other allowances normally paid by UBP and AEV to all their directors. Since the nominee directors are employees of AEV and ACO or their subsidiaries and are paid salaries and other benefits as employees, and since the UBP and AEV shares do not belong to them in their personal capacity, the director's fees and allowances are ultimately paid to AEV and ACO and are declared by AEV and ACO as miscellaneous income. Since AEV and ACO do not appoint or nominate their executives (employees) to act as directors in corporations where AEV and ACO do not own shares of stocks and AEV and ACO appoint or elect such number of directors in corporations where AEV and ACO own shares of stock in proportion to their stockholdings in such corporations, and since directors are the vehicle of AEV and ACO to help manage the corporations which they co-own with the other stockholders, you now request for confirmation of your opinion that the director's fees and other allowances received on behalf of AEV and ACO by AEV's and ACO's executives who are their nominee directors in UBP and AEV are not subject to VAT. EacHSA In reply, please be informed that this Office have already clarified in Revenue Memorandum Circular (RMC) No. 77-2008 dated November 24, 2008 that: "Based on the foregoing, it is therefore apparent that the fees, per diems, honoraria or allowances being given to a director of a corporation as such cannot be considered as derived from an economic or commercial activity that have been pursued 'in the course of trade or business'. Rather, said director's fees are remunerations paid in the exercise of a right of an owner in the management of a corporation. Thus, not 'in the course of trade or business' as contemplated under Section 105 of the Code. Such fees, per diems, allowances and other income received by the director as such, are therefore, exempt from the imposition of the 12% VAT or 3% percentage tax, notwithstanding that the said payments are not among those enumerated under Section 109 of the said Code. In view thereof, the penultimate paragraph of Revenue Memorandum Circular No. 34-2008 stating that directors receiving fees, per diems, allowances, and the like, from corporations of which they are directors but are not employees thereof 'fall under the category of sellers of services under Title IV of the Code who are liable to pay the 12% VAT on their gross receipts pursuant to Section 108 thereof, or to the 3% percentage tax imposed under Section 116, should they fail to meet the VAT threshold', is hereby REPEALED. " From the afore-quoted paragraphs of RMC No. 77-2008, it is very clear that director's fees and other allowances being given to directors who are not employees of the payor-corporation are neither subject to 12% VAT nor to the 3% percentage tax since the said fees and other allowances are not derived from an economic or commercial activity that have been pursued in the course of trade or business. Accordingly, this Office hereby confirms your opinion that the director's fees and other allowances received on behalf of Aboitiz Equity Ventures, Inc. ("AEV") and Aboitiz and Company, Inc. ("ACO") by AEV's and ACO's executives who are their nominee directors in Union Bank of the Philippines ("UBP") and AEV are not subject to value-added tax (VAT). 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