March 18, 2013
BIR RULING NO. 094-13 Sec. 29 of Tax Code of 1997, as amended; RR No. 2-2001 Alfredo V. Misajon OIC-Assistant Commissioner Large Taxpayers Service Attention: Maria Socorro O. Lozano Large Taxpayers Division-Cebu Gentlemen : This refers to your Memorandum dated 5 February 2013 requesting for a confirmatory ruling as to whether or not BIR can assess CEBU AIR, INC. of Improperly Accumulated Earnings Tax (IAET) for being a closely-held corporation pursuant to Section 29 of the Tax Code of 1997 as implemented by Revenue Regulations (RR) No. 2-2001. AcSCaI
A perusal of the General Information Sheets (GIS) attached to the above-stated Memorandum will show that CEBU AIR, INC. a domestic corporation, is 66.15% owned by CPAir Holdings, Inc. On the other hand, CPAir Holdings, Inc. is wholly-owned by JG Summit which, in turn, is owned by the following individual stockholders, to wit: 1.
2. 3. 4. 5. Copyright 2013
Gokongwei Brothers Foundation a. John Gokongwei, Jr. b. Elizabeth Gokongwei c. Lance Gokongwei d. Robina Gokongwei e. Patrick Henry L. Go f. Johnson Robert Go, Jr. g. James L. Go. John Gokongwei, Jr. Lance Y. Gokongwei &/or Elizabeth Gokongwei James L. Go John Gokongwei &/or Lance Gokongwei
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29.38%
12.75% 3.46% 2.19% 2.07% 1
6.
Robina Gokongwei Pe &/or Elizabeth Gokongwei
1.06% –––––– 50.91% =====
In reply, please be informed that Section 29 (A) and (B) of the Tax Code of 1997, as amended, and as implemented by RR No. 2-2001, provides that in addition to other taxes imposed by Title II of the Tax Code, there shall be imposed for each taxable year a tax equal to 10% of the improperly accumulated taxable income of corporations formed or availed of for the purpose of avoiding the income tax with respect to its shareholders or the shareholders of any other corporation, by permitting the earnings and profits of the corporation to accumulate instead of dividing them among or distributing them to the shareholders. Thus, IAET 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. Section 29 of the Tax Code of 1997 provides, viz.: "SEC. 29.
Imposition of Improperly Accumulated Earnings Tax.
— xxx
xxx
xxx
(B) Tax on Corporations 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-held corporations;
(b) Banks intermediaries; and (c) Copyright 2013
and
other
DSETac
non-bank
financial
Insurance companies.
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xxx
xxx
xxx"
Furthermore, second paragraph of Section 4 of RR No. 2-2001 entitled "Implementing the Provision on Improperly Accumulated Earnings Tax under Section 29 of the Tax Code of 1997" provides that: 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.
The same section further provides that "for purposes of determining whether the corporation is closely held corporation, insofar as such determination is based on stock ownership, 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." Based on the foregoing, this Office is of the opinion that CEBU AIR, INC. is not a publicly held corporation since 66.15% of its shareholdings is owned by CPAir Holdings, Inc. which is wholly-owned by JG Summit. Although CEBU AIR, INC. is ultimately owned by JG Summit, a corporation owned by more than 20 stockholders, CEBU AIR, INC. is still not a publicly held corporation exempt from IAET as contemplated under Section 29 (B) of the Tax Code of 1997, as amended, in relation to RR No. 2-2001. The ownership of a domestic corporation for purposes of determining whether it is a closely-held corporation or a publicly-held corporation is ultimately traced to the individual shareholders of the parent company. Thus, where at least 50% in value of the outstanding capital stock or of the total combined voting power of all classes of stock entitled to vote in a corporation is owned directly or indirectly by not more than 20 individuals, the corporation is considered a closely-held corporation. By applying the above-cited test under Section 4 of RR 2-2001, the ultimate parent company of CEBU AIR, INC., JG Summit, is not a publicly-held corporation for purposes of exemption from IAET. It is noted from the GIS of JG Summit, as above listed, that 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 not owned directly or indirectly by or for not more than twenty (20) individuals. cCTaSH
It must be observed that although the number of majority stockholders of JG Summit is more than 10, the actual number of persons who control the Copyright 2013
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company is limited to 5-6 persons. It is noteworthy that stockholders of Gokongwei Brothers Foundation who owns 29.38% of JG Summit are likewise the majority stockholders of JG Summit. Thus, if we consider CEBU AIR, INC. a publicly-held corporation, the purpose of the IAET provision will be defeated. Considering that CEBU AIR, INC. is a closely-held corporation, it can be assessed of IAET under Section 29 of the Tax Code of 1997, as amended, as implemented by RR No. 2-2001. 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.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue
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