DA ITAD BIR Ruling No. 122-06

October 13, 2006 DA ITAD BIR RULING NO. 122-06 Article 10, Philippines-Korea tax treaty; BIR Ruling No. DA-ITAD-114-00 KEPCO Ilijan Corporation 18/F Citibank Tower 8741 Paseo de Roxas Makati City 1227 Philippines Attention: Mr. Ricardo A. Galano III Corporate Counsel Gentlemen : This refers to your application for relief from double taxation dated June 7, 2006, requesting confirmation of your opinion that the dividends paid by KEPCO International Philippines, Inc. (KIPI) to Korea Electric Power Corporation (KEPCO) are subject to the preferential tax rate of 10% pursuant to the Philippines-Korea tax treaty. It is represented that KEPCO is a nonresident foreign corporation duly organized and existing under the laws of Korea with business address at 167 Samseong-Deong, Gangnam-Gu, Seoul 135-791, Korea; that it is not registered either as a corporation or as a partnership in the Philippines per certification issued by the Securities and Exchange Commission dated May 29, 2006; that KIPI is a domestic corporation with office address at 18th Floor Citibank Tower, 8741 Paseo de Roxas, Makati City, Philippines; that as of May 4, 2004, KEPCO is the registered owner of Eight Hundred Seven Thousand Three Hundred Ninety Five (807,395) of the authorized, subscribed and paid-up shares of KIPI with a par value of Ten Pesos (PhP10.00) representing a percentage ownership of 99.9% of the outstanding shares of KIPI as shown in the certification issued by the Corporate Secretary of KIPI dated June 2, 2006; that on April 29, 2004 the Board of Directors of KIPI declared cash dividends in the amount of Eight Million Two Hundred Sixty Two Thousand Dollars ($8,262,000.00), net of 10% withholding of Nine Hundred Eighteen Thousand Dollars ($918,000.00) to KEPCO, payable on May 4, 2004; and that the issue/s or transaction subject of the above request for ruling is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or a judicial appeal of the taxpayer/s involved. In reply, please be informed that Article 10 of the Philippines-Korea tax treaty provides as follows: "Article 10 Dividends 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. cHDAIS 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 per cent 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. xxx xxx xxx 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 profit, 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. xxx xxx xxx" Based on the above-cited provisions, the 10 percent preferential tax rate on dividends apply whenever the beneficial owner of the dividends owns directly at least 25 percent of the capital of the paying company. In all other cases, the 25 percent preferential tax rate applies. Such being the case and considering that KEPCO holds 99.9% of the authorized, subscribed and paid-up shares of KIPI, this Office is of the opinion and so holds that the dividend payments by KIPI to KEPCO shall be subject to the preferential tax rate of 10 percent, based on the gross amount thereof, pursuant to Article 10(2)(a) of the Philippines-Korea tax treaty. ( BIR Ruling No. ITAD 114-00 dated August 29, 2000 ) 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service