ITAD BIR Ruling No. 072-11

March 2, 2011 ITAD BIR RULING NO. 072-11 Article 22, Philippines-Korea tax treaty; BIR Ruling No. ITAD-82-05; BIR Ruling No. ITAD-104-05; BIR Ruling No. ITAD-122-05 Kepco Philippines Corporation 18th Floor, Citibank Tower 8741 Paseo de Roxas Makati City Attention: Jung-In Kim Treasurer Gentlemen : This refers to your letter dated May 12, 2008, requesting for a ruling that the guarantee fee payments made by KEPCO SPC Power Corporation (KSPC) to Korea Electric Power Corporation (KEPCO) under a Guarantee Fee Agreement are exempt from income tax in the Philippines pursuant to Article 22 of the Philippines-Korea tax treaty. CAScIH It is represented that KEPCO is a nonresident corporation organized and existing under the laws of Korea with principal address at 167 Samseong, 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 8, 2008; that on the other hand, KSPC is a corporation organized and existing under the laws of the Philippines with principal address at 7th Floor, Cebu Holdings Center, Cebu Business Park, Cebu City, and owns the 2 X 100 CFBC Coal Fired Base Load Power Plant (Project) located at Naga City, Province of Cebu. It is further represented that on January 3, 2008, KEPCO and KSPC entered into a Guarantee Fee Agreement (Agreement), whereby in order to finance a portion of the costs of the Project until the first drawdown under the Project Loan, KSPC entered into a Loan Agreement for the borrowing of One Hundred Million US Dollars (USD100,000,000) with the Export-Import Bank of Korea (K-EXIM) on January 3, 2008; that KEPCO whose outstanding senior unsecured long-term debt is rated "A1 by Moody's" and "A by S&P" as of December 31, 2007, extended payment guarantees to K-EXIM to facilitate the borrowing and to secure the loan at a lower interest rate; that in consideration of the provision of the payment guarantees by KEPCO, KSPC agrees to pay KEPCO a guarantee fee of 1% per annum of the principal outstanding under the Loan Agreement and that it will be paid on the same Interest Payment Dates under the Loan Agreement for the relevant period; and that the issue or transaction subject of this request for ruling is not under investigation, on-going audit, administrative protest, claims for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal per Sworn Statement issued by KSPC dated May 12, 2008. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (Tax Code) of 1997, as amended, applies in general to income received by a nonresident foreign corporation which 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 interest, 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): Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." cDEICH 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" Thus, Article 22 of the Philippines-Korea tax treaty, which you have invoked, may apply to your instant request for relief. It provides: "Article 22 Other Income 1. Items of income of a resident of a Contracting State wherever arising, not dealt with in the foregoing Articles of this Convention shall be taxable only in that State. 2. The provisions of paragraph 1 shall not apply to income, other than income from immovable property as defined in paragraph 2 of Article 6, if the recipient of such income being a resident of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right or property in respect of which the income is paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply." Based on the aforequoted provisions, income of a resident of Korea shall be taxable in Korea, when the type of income earned is one which is not dealt with under provisions of the Philippines-Korea tax treaty other than Article 22. Accordingly, since the guarantee fees paid by KSPC to KEPCO under their Guarantee Agreement are income which are not covered by provisions of the Philippines-Korea tax treaty other than Article 22 (Other Income), the same shall not be subject to tax in the Philippines (BIR Ruling No. ITAD-82-05 dated August 16, 2005; BIR Ruling No. ITAD-104-05 dated September 19, 2005; BIR Ruling No. ITAD-122-05 dated October 27, 2005) EDATSC This ruling is issued on the basis of the foregoing facts as represented. However, if upon * 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