DA ITAD BIR Ruling No. 092-08

November 6, 2008 DA ITAD BIR RULING NO. 092-08 Article 10, Philippines-Korea tax treaty; BIR Ruling No. DA-ITAD-122-06 KEPCO Philippines Corporation KEPCO Ilijan Corporation 18th Floor, Citibank Tower 8741 Paseo de Roxas Makati City 1227 Philippines Attention: Jung-in Kim General Manager Gentlemen : This refers to your letter dated 23 August 2007 requesting confirmation that the dividend payments of KEPCO International Philippines, Inc. (KIPI) to Korea Electric Power Corporation (KEPCO) are subject to a 10% preferential tax rate pursuant to Article 10 of the Philippines-Korea tax treaty. ECaTDc It is represented that KEPCO is a corporation duly organized and existing under the laws of Korea, with address at 167 Samseong-Dong, Gangnam-Gu, Seoul 135-791, Korea as confirmed by the Certification of Residence issued by the Director of Samseong District Tax Office on July 24, 2007; that it is not registered either as a corporation or as a partnership licensed to do business in the Philippines per certification issued by the Securities and Exchange Commission dated August 30, 2007; that KIPI is a domestic corporation with office address at 18th Floor, Citibank Tower, 8741 Paseo de Roxas, Makati City 1227, Philippines. It is further represented that on 29 June 2007, KIPI's Board of Directors approved the declaration of cash dividends in the amount of Twenty-Nine Million Two Hundred Seven Thousand Two Hundred Sixty-Five US Dollars (US$29,207,265.00), payable to KEPCO and to be paid in August 2007; that as of 16 February 2000 to the present, KEPCO is the stockholder of record of Eight Hundred Seven Thousand Nine Hundred Thirty-Five (807,935) of the authorized, subscribed and paid up shares of KIPI with a par value of Ten Peso (PhP10.00) per share for a total par value of Eight Million Seventy-Three Thousand Nine Hundred Fifty Pesos (Php8,073,950.00), representing a percentage of ownership of 99.9% in KIPI, per certificate issued by the Corporate Secretary of KIPI dated 29 August 2007; and that the issue/s or transaction subject of the above request for ruling is not under investigation neither is it subject of an on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings nor a judicial appeal. DCTSEA In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (Tax Code) of 1997 as amended, applies in general to dividends received by a nonresident foreign corporation in the Philippines. It provides: "Section 28. Rates of Income Tax on Foreign Corporations. xxx xxx xxx (B) Tax on Nonresident Foreign Corporation. (1) In General. Except as otherwise provided in this Code, a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to thirty-five percent (35%) of the gross income received during each taxable year from all sources within the Philippines, such as . . ., dividends, . . .: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%). cTADCH xxx xxx xxx" However, Section 32 (B) (5) of the Tax Code of 1997, as amended provides: "Section 32. Gross Income. xxx xxx xxx (B) Exclusions from Gross Income. The following items shall not be included in gross income and shall be exempt from taxation under this Title: xxx xxx xxx (5) Income Exempt under Treaty. Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines. HDAaIc xxx xxx xxx" In accordance with the foregoing, the provisions of the Philippines-Korea tax treaty may be applied to the instant case, Article 10 of which provides: "ARTICLE 10 1. Dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other State. 2. However, such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident and according to the laws of that State, but if the recipient is the beneficial owner of the dividends the tax so charged shall not exceed: a) 10 percent of the gross amount of the dividends if the beneficial owner is a company (other than a partnership) which holds directly at least 25 per cent of the capital of the company paying the dividends; and b) 25 per cent of the gross amount of the dividends in all other cases. aSTAcH This paragraph shall not affect the taxation of the company in respect of the profits out of which the dividends are paid. 3. Notwithstanding the provisions of paragraph 2 hereof, the amount of tax imposed by the Philippines on the dividends paid by a company, being a resident of the Philippines, registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines to a resident of Korea, who is the beneficial owner of the dividends, shall not exceed 10 per cent of the gross amount of the dividends. 4. The term 'dividends' as used in this Article means income from shares, 'jouissance' shares or 'jouissance' rights, mining shares, founders' shares or other rights, not being debt-claims, participating in profits, as well as income from other corporate rights which is subjected to the same taxation treatment as income from shares by the laws of the State of which the company making the distribution is a resident. aATESD xxx xxx xxx" Based on the aforequoted provisions, the Philippines may tax the dividends paid by a Philippine company to a company which is a resident of Korea at a rate not exceeding 10% of the gross amount of dividends if the latter holds at least 25% the capital of the company paying the dividends. In all other cases, the 25% preferential tax rate on gross dividends shall apply. Considering that KEPCO holds 99.9% of the authorized, subscribed and paid up shares of KIPI, as shown in the Certification issued by the Corporate Secretary of KIPI dated 29 August 2007, the dividends paid to KEPCO by KIPI are subject to 10% preferential tax rate pursuant to Article 10 (2) (a) of the Philippines-Korea tax treaty. (BIR Ruling No. DA-ITAD-122-06 dated October 13, 2006) This ruling is issued based on the facts as represented. However, if upon investigation it shall be disclosed that the actual facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. aEcDTC Very truly yours, Commissioner of Internal Revenue By: (SGD.) GREGORIO V. CABANTAC Deputy Commissioner