Atty. Remigio A. Noval

February 22, 2001 ATTY. REMIGIO A. NOVAL and ATTY. MA. GEORGINA J. SOBERANO Laya Mananghaya and Co. 22/F Antel 1000 Corporate Centre 139 Valero St., Salcedo Village Makati City, 1227 S i r s : This has reference to your letter dated January 22, 2001 requesting confirmation of your opinion that the activities of Wirtgen-Philippines, Inc. ("WPI") do not fall under the classification of "retail trade" as provided for under Republic Act 8762 (Retail Trade Liberalization Act) and its implementing rules and regulations. Thus, subject corporation may be 100% foreign owned. It appears that WPI is engaged in the business of selling, leasing and repairing machineries, equipments and spare parts. In accordance with such purpose, the company is engaged in the distribution of heavy road rehabilitation equipment. Its actual activities include: 1. selling and leasing machinery to road construction and rehabilitation subcontractors for their completion of road work projects, machines include: cold milling machines, asphalt pavers, asphalt mixing plants, cold recyclers, road compaction rollers, and surface miners; 2. selling spare parts to the road construction and rehabilitation machinery users for maintaining the working condition of the above-mentioned machines; 3. repairing road construction and rehabilitation machines, 4. advising present and potential customers on cost effective road construction and rehabilitation methods. This Commission confirms the view that WPI is not engaged in retail trade based on the following jurisprudence and SEC Opinions: In Marsman vs. First Coconut Central Company, Inc., GR No. L-39841, June 20, 1988, the Supreme Court ruled that the sales to industrial or commercial users do not fall within the scope of the Retail Trade Nationalization Law is further confirmed by Presidential Decree No. 714 promulgated on May 28, 1975 amending said law when the latter provided in its preamble that 'whereas' it is believed to be not within the intendment of said nationalization law to include within its scope sales made to industrial or commercial users of consumers '. In said case, the court enumerated the following elements for a sale to be considered 'retail': (1) The seller should be habitually engaged in selling, (2) the sale must be direct to the general public, (3) the object of the sale is limited to merchandise, commodities or goods for consumption . Based on the above ruling, the Commission previously opined that tools and equipment which will be used for business purposes , not for personal, family or household purposes, are considered as ' producer goods ' not as ' consumer goods '. Accordingly, the sale thereof does not constitute as retail transaction since the third element required for a sale to be considered as retail is absent (SEC Opinion addressed to Mr. Moises Villanueva, dtd. July 11, 1995). In another opinion, the SEC defined producer goods as 'goods (as tools and raw material) that are factors in the production of other goods and that satisfy wants only indirectly-called also as auxiliary goods, instrumental goods, intermediate goods'. They are by their very nature not sold to the public for consumption. As such, the sale of producer goods used for industry or business is classified as a wholesale transaction. Likewise, the Commission further pronounced in said opinion that since the goods are to be sold to entities firms or persons who in turn will use the same for business purposes , particularly in rendering infrastructures and construction services to the public, they may be considered as producer goods , not as consumer goods. Consequently, the above-proposed activity, regardless of the quantity of the goods involved, does not constitute 'retail transaction' as contemplated under the Retail Trade Law. (SEC Opinion addressed to Sycip Salazar Hernandez & Gatmaitan dtd. January 15, 1996) Again in 1998, the Commission further opined that: Republic Act No. 1180 as amended by PD No. 714, otherwise known as the Retail Trade Law is explicit that the sale of producer goods used for industry or business is not treated as retail business. Said law provides: 'Sec. 4. As used in this Act, the term 'retail business' shall mean any act, occupation or calling of habitually selling direct to the general public merchandise, commodities or good for consumption, but shall not include: xxx xxx xxx (c) a manufacturer or processor selling to industrial and commercial users or consumers who use the products bought by them to render service to the general public and/or to produce or manufacture goods which are in turn sold by them (SEC Opinion addressed to Atty. Demosthenes B. Donato ESQ. dtd October 28, 1998). Finally, the recently passed R.A. 8762 (An Act Liberalizing the Retail Trade Business, Repealing Republic Act No. 1180, As Amended) defines ' retail trade as any act, occupation or calling of habitually selling direct to the general public merchandise, commodities or goods for consumption .' Its Implementing Rules and Regulations provides for the following exceptions to the abovementioned definition: "Sec. 2. Sales not considered retail . The following sales are not considered retail: xxx xxx xxx (e) sales to industrial or commercial users or consumers who use the products bought by them to render service to the general public and/or product or manufacture of goods which are in turn sold by them; In view of all the foregoing, we confirm your opinion that the activities of WPI do not fall under the classification of "retail trade" as provided under R.A. 8762 and its implementing rules and regulations and therefore may be 100% foreign owned. Very truly yours, (SGD.) FE ELOISA C. GLORIA Commissioner January 22, 2000 SECURITIES AND EXCHANGE COMMISSION SEC Building, EDSA, Greenhills, Mandaluyong, Metro Manila Attention: Atty. Benito Cataran Corporate and Legal Department Gentlemen : In behalf of our client, Wirtgen-Philippines, Inc. (hereinafter referred to as "WPI"), we would like to request for a confirmation of our opinion that WPI's activities do not fall under the classification of "retail trade" as provided for under Republic Act. No. 8762 or the Retail Trade Liberalization Act and its Implementing rules and regulations; hence, WPI may be 100% foreign owned. BACKGROUND WPI is a 100% owned Filipino corporation duly organized and existing under the laws of the Philippines, with the primary purpose of selling, leasing and repairing machineries, equipments and spare parts. In accordance with its primary purpose, WPI is engaged in the distribution of heavy road rehabilitation equipment. A detailed description of WPI's actual activities include the following: 1. Selling and leasing machinery to road construction and rehabilitation subcontractors for their completion of road work projects, machines include: Cold milling machines; Asphalt pavers; Asphalt mixing plants; Cold recyclers; Road compaction rollers; and Surface miners 2. Selling spare parts to the road construction and rehabilitation machinery users for maintaining the working condition of the above-mentioned machines; 3. Repairing road construction and rehabilitation machines; and 4. Advising present and potential customers on cost effective road construction and rehabilitation methods. A proposed reorganization of WPI however, intends to transfer ownership of WPI to a foreign corporation. As a result, WPI will now be a 100% foreign owned Philippine subsidiary. The paid-up capital of WPI following the change in equity will at least be USD$200,000.00 DISCUSSION Under Republic Act No. 7042, as amended, or otherwise known as the Foreign Investment Act (FIA), a non-Philippine national may own up to 100% of a domestic (Philippine) corporation provided the domestic corporation is engaged in activities not covered by the Foreign Investments Negative List (FINL). The FINL, on the other hand, limits foreign equity ownership to a maximum of 40% and includes activities where foreign ownership is limited by the Constitution or special laws. While foreign ownership of retail businesses is already allowed, subject to certain conditions, under the Retail Trade Liberalization Act, the provisions of this law do not apply to WPI as its activities are not retail. Thus, shares of WPI may be transferred without any issue, to the foreign company which will hold 100% thereof. Section 3 of the Retail Trade Liberalization Act defines the term "retail trade" to mean any act, occupation or calling of habitually selling direct to the general public merchandise, commodities or goods for consumption. Furthermore, under Section 2 of the Implementing Rules and Regulations, the following sales are not considered as retail: (e) Sales to industrial and commercial users or consumers who use the products bought by them to render service to the general public and/or produce or manufacture of goods which are in turn sold by them; [Emphasis Supplied] Considering the main business activities of WPI in relation to the foregoing provision, we believe there is clear basis for our opinion that WPI is not engaged in retail trade. In Marsman & Company vs. First Coconut Central Company, Inc., GR No. L-39841, June 20, 1998, the issue was whether or not the sale of industrial machinery is covered by the Anti-Dummy Law and the Retail trade nationalization Law. In ruling that such sale is not considered as retail held that: "For a sale to be considered as retail, the following elements should occur: 1. The seller should habitually engaged in selling; 2. The sale must be direct to the general public; and 3. The object of the sale is limited to merchandise, commodities or goods for consumption. . . . The last element refers to the subject of the retailer's activities or which he is selling, i.e., consumption goods or consumer goods. Consumer goods may be defined as 'goods which are used or brought for use primarily for personal, family or household purposes. Such goods are not intended for resale or further use in the production of other products.' In other words, consumer goods are goods which by their very nature are ready for consumption. Producer goods have been defined as 'goods (as tools and raw materials) that are factors in the production of other goods and that satisfy wants only indirectly-called also auxiliary goods, instrumental goods, intermediate goods. They are by their nature not sold to the public for consumption. As such, the sale of producer goods used for industry or business is classified ass wholesale transaction. Wholesaling has been defined as "selling to the retailers or jobbers rather than to consumers or a sale in large quantity to one who intends to resell". In the case at bar, the article in controversy is a piece of industrial machinery a diesel generating unit purchased to be used in its coconut central and as such may be classified as 'production or producer goods'. Since the diesel generating unit is not consumer item, it necessarily does not come within the ambit of retail business as defined by (then) Republic Act No. 1180. [now R.A. No. 8762]" The SEC adhered to the Marsman ruling in two subsequent opinions it has issued. In SEC Opinion dated July 11, 1995, it was held that 'tools and equipment which will be used for "business purposes", not for personal, family or household purposes, are considered as "producer goods", not as "consumer goods" Accordingly, the sale thereof does not constitute as retail transaction since the third element ("the object of the sale is limited to merchandise, commodities or goods for consumption") for sale to be considered as retail is absent.' In another opinion, the SEC explained that 'since the goods are to be sold to persons, firms or persons who will use the same for business purposes, particularly in rendering infrastructures and construction services to the public, they may be considered as producer goods, not as consumer goods. Consequently, the aforesaid activity, regardless of the quantity of the goods involved, does not constitute "retail trade" as contemplated under the Retail Trade Law.' [SEC Opinion dated January 15, 1996] Analogous to the foregoing cases, the heavy road equipment and spare parts relative thereto being sold by WPI are not simple commodities for consumption within the purview of the definition provided by law. We also believe that the instant case of WPI falls squarely within the circumstances in SEC Opinion dated January 15, 1996. OPINION REQUESTED In view of the foregoing, we respectfully request for a confirmation of your opinion that WPI is not engaged in retail trade activity; hence its shares may be transferred to the ownership of a foreign corporation, as a result of which WPI will be 100% foreign-owned. We look forward to your prompt and favorable action on the foregoing. Very truly yours, LAYA MANANGHAYA & CO. By: (SGD.) Remigio A. Noval Partner (SGD.) Ma. Georgina J. Soberano Senior Manager