ITAD BIR Ruling No. 069-13

March 13, 2013 ITAD BIR RULING NO. 069-13 Article 10, Philippines-Korea Tax Treaty Samsung Electronics Philippines Manufacturing Corporation Blk. 6, Calamba Premiere International Park Batino, Calamba City, Laguna Attention: Mr. Chul Jung Treasurer Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on December 11, 2012, on behalf of Samsung Electronics Co. Ltd. ("SECL") , requesting confirmation that the dividend payments made by Samsung Electronics Philippines Manufacturing Corporation ("SEPMC") to SECL are subject to income tax in the Philippines at the rate of 10 percent, pursuant to the Philippines-Korea tax treaty . 1 It is represented that SECL, with address at 129, Samsung-ro, Yeongton-gu Suwon-si, Gyeonggi-do, Korea, is a corporation organized and existing under the laws of Korea, and is a resident of Korea per Certification for Business Registration issued by the Dongsuwon District Tax Office on November 27, 2012; that SECL was issued License No. 1298 on April 4, 1990 by the Securities and Exchange Commission to establish a Philippine Representative Office; that per Certification issued by SECL on July 26, 2012, SECL resolved to officially close its Representative Office in the Philippines effective on July 26, 2012; and that, on the other hand, SEPMC is a domestic corporation duly organized and existing under the laws of the Philippines with principal address located at Blk. 6 CPIP, Batino, Calamba City, Laguna. It is also represented that on December 3, 2012, at the special meeting of the Board of Directors of SEPMC, a resolution was approved declaring cash dividends totaling US$23,000,000.00 from the unappropriated retained earnings as of December 3, 2012 payable on December 28, 2012 to the stockholders of record as of October 31, 2012; and that dividends were remitted by SEPMC to SECL on December 28, 2012 as evidenced by a Certification issued by the Bank of America Merril Lynch dated January 3, 2013. It is further represented that as of December 6, 2012, SECL is the owner of 9,875,810 shares of the par value of P100 per share worth P987,581,000 and the said ownership comprises 99.99% of the total outstanding capital stock of SEPMC based on the Secretary's Certificate issued by SEPMC on December 10, 2012. CSTcEI It is finally represented that the dividends subject of the herein application 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 sworn certification issued by SEPMC on December 10, 2012. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 (Tax Code of 1997), as amended, applies, in general, to dividends derived in the Philippines 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, rents, royalties . . .: 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 relation thereto, Article 10 of the Philippines-Korea tax treaty may apply to the instant case. It 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. HCacTI 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." 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 SECL holds directly at least 25 percent of the capital of SEPMC (in fact, SECL holds directly 99.99% of such capital of SEPMC), such dividends paid by SEPMC to SECL 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. 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 Footnotes 1. 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.