ITAD BIR Ruling No. 056-11

February 18, 2011 ITAD BIR RULING NO. 056-11 Article 10 (Dividends) Philippines-Korea tax treaty; BIR Ruling No. ITAD 58-10 KEPCO International Philippines, Inc. 18th Floor, Citibank Tower 8741 Paseo de Roxas Makati City Attention: Atty. Ricardo A. Galano III Corporate Counsel Gentlemen : This refers to your application for tax treaty relief dated April 14, 2010 requesting confirmation that dividends paid by KEPCO International Philippines, Inc. ("KEPCO International") to Korea Electric Power Corporation ("KEPCO") are subject to income tax in the Philippines at the 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") . IHDCcT Basic Facts It is represented that KEPCO is a foreign corporation organized and existing under the laws of Korea and is a resident of Korea, based on the Certification of Residence issued by the National Tax Administration of Korea on January 22, 2010; that KEPCO is situated at 167 Samseong-Dong, Gangnam-Gu, Seoul 135-791, Korea; that KEPCO is not registered as a corporation or as a partnership in the Philippines, based on the Certification of Non-Registration issued by the Securities and Exchange Commission ("SEC") on December 28, 2009; and that, on the other hand, KEPCO International is a domestic corporation, situated at the 18th Floor, Citibank Tower, 8741 Paseo de Roxas, Makati City 1227, Philippines. It is further represented that on April 13, 2010, the Board of Directors of KEPCO International , at its special meeting, approved a resolution authorizing KEPCO International to declare cash dividends to KEPCO amounting to US$5,450,000.00, and to be paid on April 29, 2010, based on the Certificate issued by the Corporate Secretary of KEPCO International on April 13, 2010; that as of the date of declaration of the dividends on April 13, 2010, and at present, KEPCO is the registered owner of 807,395 authorized, subscribed, and paid-up shares of stock of KEPCO International , with a par value of PHP10.00 each, and representing a percentage of ownership of 99.9% in KEPCO International , based on the Certification issued by the same Corporate Secretary on April 13, 2010. It is finally represented that the dividends subject of the application for tax treaty relief are not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal, based on another Certification issued by the same Assistant Corporate Secretary on April 13, 2010. Ruling In reply, please be informed that paragraphs 1, 2 and 3, Article 10 of the Philippines-Korea tax treaty provide: "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: TaDSCA 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. 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." Based on the foregoing provisions, dividends paid by a company resident of the Philippines to a resident of Korea may be taxed in Korea. However, such dividends may also be taxed in the Philippines, but the rate of income tax that may be imposed thereon 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 percent of the capital of the company paying the dividends, (b) 10 percent of the gross amount of the dividends if the dividends are paid by a domestic company, registered with the Board of Investments, and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines, and (c) 25 percent of the gross amount of the dividends in all other cases. Accordingly, inasmuch as KEPCO holds directly at least 25 percent of the capital of KEPCO International (in fact, KEPCO holds directly 99.9% of such capital of KEPCO International ), such dividends paid by KEPCO International to KEPCO are subject to income tax at the rate of 10 percent of the gross amount thereof, pursuant to paragraph 2 (a), Article 10 of the Philippines-Korea tax treaty. (BIR Ruling No. ITAD 58-10 dated October 26, 2010) 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