BIR Ruling No. 148-10

December 17, 2010 BIR RULING NO. 148-10 Section 127 (B); RR No. 6-2008; BIR Ruling No. DA-327-07; BIR Ruling No. DA-001-06; BIR Ruling No. 035-99 IP Converge Data Center, Inc. 34th Floor RCBC Plaza Tower II Ayala Avenue, Makati City 1200 Attention: Rhodaline Regoso-Jumamil Legal Counsel Gentlemen : This refers to your letter dated March 10, 2010 requesting for a confirmation of your opinion that IP Converge Data Center, Inc. is not a closely held corporation for purposes of the Initial Public Offering Tax ("IPO Tax") under Section 127 (B) of the Tax Code of 1997, as amended, and consequently, IP Converge Data Center, Inc. and its selling shareholders are not subject to IPO Tax upon the listing of the IP Converge Data Center, Inc. shares with the Philippine Stock Exchange. It is represented that IP Converge Data Center, Inc. Tax Identification Number (TIN) 239-508-223, is a corporation organized and existing under the laws of the Philippines with an authorized capital stock of Four Hundred Sixty Million Pesos (Php460,000,000.00) divided into Four Hundred Sixty Million common shares with a par value of One Peso (Php1.00) per share, of which One Hundred Thirty Six Million Four Hundred Thousand (Php136,400,000.00) common shares have been subscribed, fully paid and are issued and outstanding. IP Converge Data Center, Inc. is currently controlled by IPVG Corp. which holds approximately ninety one percent (91%) while the remaining nine percent (9%) has been held by IPVG Employees, Inc. ("IEI"). IPVG Corp. is a corporation organized and existing under the laws of the Philippines with an authorized capital stock of Eight Hundred Million Pesos (Php800,000,000.00) divided into Eight Hundred Million common shares with a par value of One Peso (Php1.00) per share, of which Six Hundred Seventy Five Million Five Hundred One Thousand One Hundred Sixty Three (675,501,163) common shares have been subscribed, fully paid and are issued and outstanding, and is currently listed with the Philippine Stock Exchange. IPVG Corp.,at the moment, has approximately over seven hundred (700) stockholders, of which some are held by the Philippine Depository & Trust Corp.,some of whom are stock brokerages also holding shares for numerous individual and corporate stockholder. Thirty six percent (36%) of the outstanding shares of IPVG Corp. is owned by its directors, officers, employees and other related parties, while the remaining sixty four percent (64%) of IPVG Corp.'s outstanding capital has been distributed to the investing public. HAaScT IPVG Employees, Inc.,on the other hand, is a corporation organized and existing under the laws of the Philippines and with an authorized capital stock of One Million Pesos (Php1,000,000.00) divided into One Million common shares with a par value of One Peso (Php1.00) per share of which One Million (1,000,000) common shares have been subscribed. IP Converge Data Center, Inc. is registering with the Board of Investments and commenced the process of listing its shares by way of introduction with the Philippine Stock Exchange pursuant to its listing rules and regulations. In support of your request, you have submitted the following documents: 1) Photocopy of the Certificate of Registration of IP Converge Data Center, Inc. issued by the Securities and Exchange Commission dated July 8, 2005; 2) Photocopy of the Amended Articles of Incorporation of IP Converge Data Center, Inc.; 3) Photocopy of the By-laws of IP Converge Data Center, Inc.; 4) Photocopy of Certificate of Increase of Capital Stock issued by the Securities and Exchange Commission dated March 30, 2007; 5) Photocopy of Certificate of Increase of Capital Stock of IP Converge Data Center, Inc. issued by the Board of Directors dated August 25, 2006; 6) Photocopy of Notarized Summary of Shareholdings of IP Converge Data Center, Inc.; 7) Photocopy of the Certificate of Filing the Amended Articles of Incorporation of IP Converge Data Center, Inc. dated March 30, 2007; 8) Photocopy of the Amended Articles of Incorporation of IP Converge Data Center, Inc.; 9) Photocopy of Certificate of Increase of Capital Stock issued by the Securities and Exchange Commission dated July 8, 2008; 10) Photocopy of Certificate of Increase of Capital Stock of IP Converge Data Center, Inc. issued by the Board of Directors dated October 10, 2007; 11) Photocopy of Secretary's Certificate regarding the shareholdings of the Corporation dated October 10, 2007; 12) Photocopy of the Certificate of Filing the Amended Articles of Incorporation of IP Converge Data Center, Inc. dated July 8, 2008; 13) Photocopy of the Amended Articles of Incorporation of IP Converge Data Center, Inc.; 14) Photocopy of General Information Sheet filed with the Securities and Exchange Commission dated March 8, 2010; 15) Certified true copy of Notice of Disclosure to Investor and SEC Form 10.1 filed with the Securities and Exchange Commission on February 4, 2010 regarding the Subscription by IPVG Employees, Inc. of 12,400,000 shares on February 3, 2010; 16) Certified true copy of BIR Certificate of Registration of IP Converge Data Center, Inc.; 17) Latest Financial Statements of IP Converge Data Center, Inc.; 18) Original Secretary's Certificate as to the Capital Structure of IP Converge Data Center, Inc.; 19) Illustration and List of Individual Stockholders of Corporate Stockholders with Percentage of Individual Stockholders; 20) Stock Transfer Module List of Top 100 Stockholders of IPVG as of February 28, 2010 issued by Securities Transfer Services, Inc.,the stock and transfer agent of IPVG; 21) Ownership Structure in IPVG showing the Thirty Six Percent (36%) interest held by IPVG Directors, Officers, Employees and Other Related Parties; acCTSE 22) Latest General Information Sheet of IPVG Employees, Inc. as certified by Securities and Exchange Commission; 23) Latest General Information Sheet of Elite Holdings, Inc. as certified by Securities and Exchange Commission; 24) Certificate of Non-Forum Shopping; 25) Letter notice of approval dated October 27, 2010 issued by the Philippine Stock Exchange; and 26) Letter notice of approval dated October 15, 2010 issued by the SEC. In reply, please be informed that Section 127 (B) of the Tax Code, as amended, provides as follows: "SEC. 127. Tax on Sale, Barter or Exchange of Shares of Stock. Listed and Traded through the Local Stock Exchange or through Initial Public Offering. (B) Tax on Shares of Stock Sold or Exchanged Through Initial Public Offering. There shall be levied, assessed and collected on every sale, barter, exchange or other disposition through initial public offering of shares of stock in closely held corporations, as defined herein, a tax at the rates provided hereunder based on the gross selling price or gross value in money of the shares of stock sold, bartered, exchanged or otherwise disposed in accordance with the proportion of shares of stock sold, bartered, exchanged or otherwise disposed to the total outstanding shares of stock after the listing in the local stock exchange: Up to twenty-five percent (25%) 4% Over twenty-five percent (25%) but not over thirty three and one third percent (33 1/3%) 2% Over thirty-three and one third percent (33 1/3%) 1% The tax herein imposed shall be paid by the issuing corporation in primary offering or by the seller in secondary offering. For purposes of this Section, the term 'closely held corporation' means any corporation at least fifty percent (50%) in value of the outstanding capital stock of all classes of stock entitled to vote is owned directly or indirectly by or for not more than twenty (20) individuals. For purposes of determining whether the corporation is a closely held corporation, insofar as such determination is based on stock ownership, the following rules shall be applied: (1) Stock not Owned by Individuals. 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. xxx xxx xxx" Thus, under Section 2 (g) of Revenue Regulations No. 6-2008, a closely-held corporation pertains to a corporation 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. For purposes of determining whether the corporation is a closely-held corporation, it is provided therein 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. Since IP Converge Data Center, Inc. is owned by a publicly-listed corporation IPVG Corp.,at the time of the application to list the shares of IP Converge Data Center, Inc. with the PSE, the corporate shareholding of IPVG Corp. in IP Converge Data Center, Inc. will be considered as being proportionately owned by IPVG Corp.'s shareholders. In the case of a multi-tiered corporation, the stock attribution rule must be allowed to run continuously along the chain of ownership until it finally reaches the individual stockholders. This is in consonance with the "grandfather rule" adopted in the Philippines under Section 96 of the Corporation Code (Batas Pambansa Blg. 68) which provides that notwithstanding the fact that all the issued stock of a corporation are held by not more than twenty persons, among others, a corporation is nonetheless not to be deemed a close corporation when at least two thirds of its voting stock or voting rights is owned or controlled by another corporation which is not a close corporation. (BIR Ruling No. DA-327-07 citing BIR Ruling Nos. DA-001-06 dated January 4, 2006; 072-97 dated July 02, 1997) Since the shareholders of IPVG Corp. consist of hundreds of individuals, IP Converge Data Center, Inc. cannot be considered as a closely held corporation prior to its listing with the PSE. Accordingly, this Office is of the opinion as it hereby holds that the listing of shares of stocks of IP Converge Data Center, Inc. with the PSE will not be subject to IPO tax because prior to the listing of shares, IP Converge Data Center, Inc. is not a closely held corporation as defined under Section 127 (B) of the Tax Code, as amended. (BIR Ruling No. DA-327-07 citing BIR Ruling Nos. DA-001-06 dated January 4, 2006; 035-99 dated 25 March 1999) This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered as null and void. CaAcSE Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue