ITAD BIR Ruling No. 117-11

April 11, 2011 ITAD BIR RULING NO. 117-11 Article 10 Philippines-Korea tax treaty; BIR Ruling No. ITAD 56-11; BIR Ruling No. ITAD 58-10 Philko Peroxide Corporation Unit 1106, 88 Corporate Center Sedeo corner Valero Streets Salcedo Village, Makati City Attention: Marietta D. Jardiolin Accounting Manager Madam : This refers to your letter dated April 21, 2010, on behalf of OCI Company Ltd. ("OCI") , requesting confirmation that dividends to be paid by Philko Peroxide Corporation ("Philko Peroxide") to OCI are subject to income tax at a preferential rate of 10 percent 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") . SCDaE It is represented that OCI is a foreign corporation organized and existing under the laws of Korea based on the Certificate for Business Registration issued by the Namdaemun District Tax Office in Korea on April 1, 2010; that OCI is situated at OCI Building, 50 Sogong-dong, Jung-gu, Seoul, Korea; that OCI is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration issued by the Securities and Exchange Commission on April 20, 2010; and that, on the other hand, Philko Peroxide is a domestic corporation situated at Unit 1106, 88 Corporate Center, Sedeo corner Valero Streets, Salcedo Village Makati City, Philippines. It is further represented that on February 23, 2010, the Board of Directors of Philko Peroxide, at its meeting, declared cash dividends amounting to Php20,000,000.00 in favor of the stockholders of record of Philko Peroxide as of March 1, 2010, based on the Certificate issued by the Corporate Secretary of Philko Peroxide on April 7, 2010; that the dividends will be taken out of the unrestricted retained earnings of Philko Peroxide as of December 31, 2009, and payable on or before May 30, 2010: that in the case of OCI, the dividends are payable fifteen days from the date of filing of its application for tax treaty relief at the Bureau of Internal Revenue or on May 6, 2010; that OCI owns 296,000 common shares of stock of Philko Peroxide with a par value of Php100 per share, which represent 40 percent of the total shares of Philko Peroxide. It is finally represented that the dividend subject of this ruling is 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 the Certification issued by the Accounting Manager of Philko Peroxide on May 26, 2010. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("Tax Code") , as amended, provides that dividends paid to OCI, being a foreign corporation not engaged in trade or business in the Philippines, are subject to income tax at the rate of 30 percent, thus: "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 Code provides that such dividends may be exempt or subject to a reduced rate to the extent required by any treaty obligation on the Philippines, thus: "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. aITECD xxx xxx xxx" With respect to a treaty, you invoke the Philippine-Korea tax treaty. Paragraphs 1, 2 and 3, Article 10 thereof 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: 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. xxx xxx xxx" Based on the aforequoted provisions, dividends arising in the Philippines and paid to a resident of Korea may be taxed in the Philippines at a rate not to exceed: (a) 10 percent if the company recipient of the dividends holds directly at least 25 percent of the capital of the company paying the dividends; (b) 10 percent if the domestic company paying the dividends is registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentive laws of the Philippines; and (c) 25 percent in all other cases. Accordingly, since OCI holds directly at least 25 percent of the capital of Philko Peroxide (in fact, it holds 40 percent of such capital), such dividends paid by Philko Peroxide to OCI are subject to a preferential rate of 10 percent based on the gross amount thereof, pursuant to paragraph 2 (a), Article 10 of the Philippines-Korea tax treaty. (BIR Ruling No. ITAD 56-11 dated February 8, 2011; BIR Ruling No. ITAD 58-10 dated October 26, 2010) 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. SCHTac Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue