ITAD BIR Ruling No. 030-16

March 17, 2016 ITAD BIR RULING NO. 030-16 Article 10 (Dividends), Philippines-Korea tax treaty SGV & Co. 6760 Ayala Avenue 1226 Makati City Attention: Fabian K. Delos Santos Partner, Tax Services Gentlemen : This refers to your tax treaty relief application filed on October 20, 2014 requesting confirmation that the dividend paid by Cheil Integrated Marketing Philippines, Inc. ("Cheil Integrated") to Cheil Worldwide, Inc. ("Cheil Worldwide") is subject to a preferential tax rate of 10 percent pursuant to the Convention between the Republic of the Philippines and the Republic of Korea for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Korea tax treaty"). It is represented that Cheil Worldwide is a foreign corporation and a resident of Korea based on its Articles of Incorporation and the Certificate of Residence issued by the Yongsan District Tax Office in Korea on May 22, 2014; that Cheil Worldwide is not registered as a corporation or partnership in the Philippines as evidenced by Certification of Non-Registration of Company issued by the Securities and Exchange Commission on September 15, 2014; and that, on the other hand, Cheil Integrated is a domestic corporation organized and existing under Philippine laws. It is further represented that Cheil Worldwide is the registered owner of 82,995 common shares of stock (excluding five assigned shares) representing 100% of the issued and outstanding shares of stock of Cheil Integrated ; that on September 1, 2014, the Board of Directors of Cheil Integrated has declared cash dividends of P16,600,000.00 out of the cumulative retained earnings of 2013 to all stockholders of record as of September 1, 2014, payable on or October 31, 2014. It is finally represented, per sworn statement dated September 26, 2014, that the issue subject of the above request is not under any investigation or on-going audit, administrative protest, claim for refund or issuance of tax credit certificate, collection proceedings, or a judicial appeal. In reply, please be informed that under Section 42 (A) (2) (a) of the National Internal Revenue Code of 1997 ("Tax Code") , as amended, dividends are considered derived in the Philippines if paid by a domestic corporation, to wit: "SEC. 42. Income from Sources within the Philippines . (A) Gross Income from Sources within the Philippines. The following items of gross income shall be treated as gross income from sources within the Philippines: xxx xxx xxx (2) Dividends. The amount received as dividends: (a) From a domestic corporation; and" Moreover, under Section 28 (B) (1) of the Tax Code, dividends paid to a foreign corporation not engaged in trade or business in the Philippines are subject to income tax at the rate of 30 percent, to wit: "SEC. 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 interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains subject to tax under subparagraph 5(c) and (d) above: n Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." CAIHTE However, under Section 32 (B) (5) of the Tax Code, such dividends exempt or partially exempt to the extent required by any treaty obligation on the Philippines, to wit: "SEC. 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." In this particular case, you invoke the Philippines-Korea tax treaty. Paragraphs 1 and 2, Article 10 thereof provides: "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. 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." Based on the above provisions, dividends arising in the Philippines and paid to a resident of Korea may be taxed in the Philippines at a rate not to exceed 10 percent if the recipient is a company (excluding partnership) which owns directly at least 25 percent of the capital of the company paying the dividends, and 25 percent in all other cases. This being the case, considering that Cheil Worldwide is a company that owns directly at least 25 percent of the capital of Cheil Integrated where Cheil Worldwide actually holds 100 percent of the common shares of Cheil Integrated , such dividend paid by Cheil Integrated to Cheil Worldwide shall be subject to income tax at the rate of 10 percent, pursuant to paragraph 2 (a), Article 10 of the Philippines-Korea tax treaty. This ruling is issued on the basis of 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, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue n Note from the Publisher: Copied verbatim from the official document. The phrase "and (d) above" no longer appears in RA 9337, the law amending this provision.