ITAD BIR Ruling No. 158-15

June 2, 2015 ITAD BIR RULING NO. 158-15 Article 10, Philippines-Korea tax treaty SyCip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Attention: Ms. Fidela I. Reyes Partner, Tax Services Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on March 8, 2014, on behalf of STS Semiconductor & Telecommunications Co. Ltd . ("STS"), requesting confirmation that the dividends paid by Phoenix Semiconductor Philippines Corporation ( "Phoenix" ) to STS are subject to income tax in the Philippines at the rate of 10 percent, pursuant to 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 corporation organized and existing under the laws of Korea, and is a resident of Korea per Certificate of Residence issued by the Cheonan District Tax Office on June 24, 2014; that is not registered either as a corporation or as a partnership in the Philippines as shown in the Certification of Non-Registration of Company issued by the Securities and Exchange Commission dated April 30, 2014; and that, on the other hand, Phoenix is a domestic corporation duly organized and existing under the laws of the Philippines. It is also represented that on April 4, 2014, the Board of Directors of Phoenix approved a resolution declaring cash dividends in the amount of US$1,000,000.00 out of the unrestricted retained earnings of Phoenix as of December 31, 2013, in favor of all stockholders of record as of April 1, 2014 in proportion to and on the basis of, the outstanding shares of stock of Phoenix respectively held by the stockholders, payable on May 12, 2014. It is further represented that as of April 1, 2014, STS holds 2,002,644,109 shares including 5 shares registered in the name of 5 individual stockholders in trust and for the benefit of STS with par value of Php2,002,644,109.00 consisting of 100% of the total subscribed shares of Phoenix ; that STS acquired the said shares by original issuance on various dates beginning January 17, 2010 to February 13, 2012; 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 the Secretary's Certificate issued by Phoenix on April 4, 2014. 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. 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 'dividend' 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. " 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. This being the case, inasmuch as STS is a resident of Korea with no fixed place of business in the Philippines, and holds directly at least 25 percent of the capital of Phoenix (in fact, STS holds directly 100% of such capital of Phoenix ), said dividends paid by Phoenix to STS are subject to income tax at the rate of 10 percent of the gross, 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