ITAD BIR Ruling No. 072-16

April 5, 2016 ITAD BIR RULING NO. 072-16 Article 10, Philippines-Korea tax treaty SGV & Co. 6760 Ayala Avenue 1226 Makati City Attention: Atty. Fidela I. Reyes Partner, Tax Services Gentlemen : This refers to your tax treaty relief application filed on April 17, 2015, on behalf of STS Semiconductor & Telecommunications Co., Ltd. ("STS") , requesting confirmation that dividends paid by Phoenix Semiconductor Philippines Corp. ("Phoenix") to STS are subject to 10 percent final withholding 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 STS is a resident corporation in Korea for purposes of Korean taxation based on the Certificate of Residence issued on March 26, 2015 by the National Tax Service of Korea; that it is not registered as a corporation or as a partnership in the Philippines per Certification of Non-Registration of Company issued by the Securities and Exchange Commission dated March 23, 2015; and that, on the other hand, Phoenix is a corporation organized and existing under the laws of the Philippines. It is further represented that at the meeting of the Board of Directors of Phoenix held on March 3, 2015, the Board of Directors of Phoenix declared cash dividends in the amount of US$11,700,000 (or US$0.0054 per share) out of its unrestricted retained earnings as of December 31, 2014 based on Phoenix 's audited financial statements as of December 31, 2014, in favor of all stockholders of record as of April 2, 2015, payable on April 22, 2015; that as of April 2, 2015, STS holds 1,840,264,104 (inclusive of five [5] shares held by its nominee directors) with a total par value of PhP1,840,264,104.00, which represents 85 percent ownership in Phoenix ; and that the shares were acquired by STS since February 13, 2012. It is finally represented, per Corporate Secretary's Certificate dated April 4, 2015 issued by Phoenix , 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. IDaEHC 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 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 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%)." 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." Thus, Article 10 of the Philippines-Korea tax treaty, which you invoked, 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. 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. xxx xxx xxx 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. 5. The provisions of paragraphs 1, 2 and 3 shall not apply if the beneficial owner of the dividends, being a resident of a Contracting State, carries on business in the other Contracting State of which the company paying the dividends is a resident, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the holding in respect of which the dividends are 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. xxx xxx xxx" Based on the foregoing provisions, dividends paid by a company resident of the Philippines to a resident of Korea which does not carry on business in the Philippines through a fixed place of business therein, 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; and (b) 25 percent of the gross amount of the dividends in all other cases. Accordingly, inasmuch as STS is a resident of Korea with no fixed place of business in the Philippines which holds directly 85 percent ownership in Phoenix , such dividends paid by Phoenix to STS are subject to income tax at the rate of 10 percent of the gross amount thereof pursuant to Article 10 (2) (a) of the Philippines-Korea tax treaty. DTCSHA This ruling is issued on the basis of the foregoing 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