ITAD BIR Ruling No. 168-15

June 2, 2015 ITAD BIR RULING NO. 168-15 Article 10, Philippines-Korea tax treaty POSCO-Philippine Manila Processing Center, Inc. First Philippine Industrial Park Lot 22A Barangay Ulango Tanauan City, Batangas Attention: Erwina Christie P. Sibayan Admin Manager Gentlemen : This refers to your tax treaty relief application filed on July 24, 2014, requesting confirmation that the dividend payment of POSCO-PHILIPPINE MANILA PROCESSING CENTER, INC. ("POSCO-Phil") to POSCO Processing & Service Co., Ltd. ("POSCO-Korea") is 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 POSCO-Korea is a corporation organized and existing under the laws of Korea and is a resident thereof within the meaning of the Philippines-Korea tax treaty per the Certificate of Residence issued on July 29, 2013 by the National Tax Administration 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 July 22, 2014; and that, on the other hand, POSCO-Phil is a corporation organized and existing under the laws of the Philippines. It is further represented that at the Annual Board Meeting of POSCO-Phil held on June 20, 2014, the Board of Directors of POSCO-Phil approved the distribution by way of cash dividend to its major stockholder who are listed as owners of more than 10% of POSCO-Phil 's common shares on its books as of December 31, 2013, computed as 20% of the net income of 2013 or in the amount of USD132,679.00, payable not later than October 30, 2014; that based on the Secretary's Certificate issued by POSCO-Phil dated July 8, 2014, POSCO-Korea has shareholdings of 3,233,444 common shares which represent 100% ownership in POSCO-Phil. It is finally represented, per Affidavit/Sworn Statement dated July 1, 2014 issued by POSCO-Phil , 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. 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 POSCO-Korea is a company resident of Korea with no fixed place of business in the Philippines which holds directly 100 percent ownership in POSCO-Phil , such dividend paid by POSCO-Phil to POSCO-Korea is 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. 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