ITAD BIR Ruling No. 058-10

October 26, 2010 ITAD BIR RULING NO. 058-10 Section 28 (B) (1) in relation to Section 32 (B) (5) of the Tax Code of 1997, as amended; Article 10, Philippines-Korea tax treaty; BIR Ruling No. 559-88; BIR Ruling No. DA-ITAD-114-00; BIR Ruling No. DA-ITAD-061-03; BIR Ruling No. DA-ITAD-122-06; BIR Ruling No. DA-ITAD-092-08 KEPCO Philippines Corporation KEPCO Ilijan Corporation 18th Floor, Citibank Tower 8741 Paseo de Roxas, Makati City Attention: Mr. Jung Ju Kim General Manager, Finance Group Atty. Ricardo A. Galano III Corporate Counsel Gentlemen : This refers to your letter dated October 27, 2009, requesting confirmation that the dividend payments of KEPCO Philippines Holdings, Inc. (KPHI) to Korea Electric Power Corporation (KEPCO) are subject to a 10 percent preferential tax rate pursuant to Article 10 of 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 KEPCO is a tax resident of Korea, as confirmed by the Certification of Residence issued by the Director of Samseong District Tax Office on September 17, 2009; that its business address is at 167 Samseong-Dong, 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 October 19, 2009; and that KPHI 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 April 3, 2009, KPHI's Board of Directors approved the declaration of cash dividends in the amount of Nine Hundred Thousand US Dollars (US$900,000.00) or Forty-Nine Million Eight Hundred Seventy Thousand Pesos (Php49,870,000.00), payable to KEPCO not later than the end of 2009; that on July 24, 2009, KPHI's Board of Directors approved the declaration of cash dividends in the amount of Seventy-Eight Million Four Hundred Four Thousand Seven Hundred Fourty-Seven and 7/100 Pesos (Php78,404,747.07), payable to KEPCO on July 29, 2009; that at the time of the declaration of the cash dividends up to the present, KEPCO is the stockholder of record of Ten Million Seven Hundred Eighty-Four Thousand Nine Hundred Ninety-Five (10,784,995) of the authorized, subscribed and paid up shares of KPHI with a par value of One Peso (Php1.00) per share for a total par value of Ten Million Seven Hundred Eighty-Four Thousand Nine Hundred Ninety-Five Pesos (Php10,784,995.00), representing a percentage of ownership of 99.9% in KPHI, per certificate issued by the Corporate Secretary of KPHI dated October 27, 2009; and that the issue/s or transaction subject of the request for ruling is not under investigation nor subject of an on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings or a judicial appeal. HIaSDc In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (Tax Code) of 1997, as amended, applies to dividends received by a nonresident foreign corporation. 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%). 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. xxx xxx xxx" In accordance with the foregoing, Article 10 of the Philippines-Korea tax treaty, which you invoke in your request for treaty relief, may apply to the subject dividends. It 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 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. 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. ADTCaI xxx xxx xxx" Based on the aforequoted provisions, the Philippines may tax dividends paid by a Philippine company to a company which is a resident of Korea at a rate not exceeding 10 percent of the gross amount of the dividends if the latter holds at least 25 percent of the capital of the company paying the dividends. In all other cases, the 25 percent preferential tax rate on gross dividends shall apply. In the instant case, considering that KEPCO holds 99.9% of the authorized, subscribed and paid up shares of KPHI, as shown in the Certification issued by the Corporate Secretary of KPHI dated August 29, 2007, the dividends paid to KEPCO by KPHI are subject to 10% preferential tax rate pursuant to Article 10 (2) (a) of the Philippines-Korea tax treaty. (BIR Ruling No. 559-88 dated November 24, 1988; BIR Ruling No. DA-ITAD-114-00 dated August 29, 2000; BIR Ruling No. DA-ITAD-061-03 dated April 15, 2003; BIR Ruling No. DA-ITAD-122-06 dated October 13, 2006; BIR Ruling No. DA-ITAD-092-08 dated November 6, 2008) 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, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue