ITAD BIR Ruling No. 169-14

September 18, 2014 ITAD BIR RULING NO. 169-14 Article 10, Philippines-Korea tax treaty Philippine BXT Corporation M.L. Quezon Highway, Maribago Lapu-Lapu City 6015 Attention: Jason S. Uy Treasurer/CEO Gentlemen : This refers to your tax treaty relief application dated September 3, 2013 requesting for confirmation that dividends paid by Philippine BXT Corporation ("Phil BXT") to Sanno Development Co., Ltd. ("Sanno Korea") are subject to a preferential tax rate of 25 percent pursuant to the Convention between the Republic of the Philippines and 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 Sanno Korea is a foreign corporation organized and existing under the laws of Korea with its principal office address at 604 Victoria B/D, 705-1, Yeoksam-dong, Gangnam-gu, Seoul, Korea; that Sanno Korea is not registered as a corporation or partnership in the Philippines based on the Certification issued by the Securities and Exchange Commission on August 12, 2013; and that on the other hand, Phil BXT is a domestic corporation with principal address at the M.L. Quezon Highway, Maribago, Lapu-Lapu City. It is further represented that on July 19, 2013 the Board of Directors of Phil BXT declared cash dividends in the amount of One Hundred Eight Million Four Hundred Eighty Six Thousand Pesos (PhP108,486,000.00) out of the unrestricted retained earnings of the Corporation as of June 30, 2013, based on the Certificate issued by the Corporate Secretary of Phil BXT on August 2, 2013; that Sanno Korea owns Forty Six Thousand One Hundred Sixteen (46,116) shares of stock or 6.37% of the entire stockholdings of Phil BXT with a total par value of Forty Six Million One Hundred Sixteen Thousand Pesos (PhP46,116,000.00) computed at One Thousand Pesos (PhP1,000.00) per share, acquired since September 7, 2011 based on the Certification issued by the Corporate Secretary of Phil BXT on August 2, 2013; and that based on the Certification issued by BDO Mactan-Epza Branch, such dividends was remitted to Sanno Korea on September 12, 2013. ITScHa 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 Sanno Korea , being a foreign corporation not engaged in trade or business in the Philippines, are subject to income tax at the rate 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 . . ., dividends, . . .: 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 Code provides that such dividends may be exempt from income tax 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. ATICcS xxx xxx xxx" In this particular case, you invoke the Philippines-Korea tax treaty. Paragraphs 1, 2 and 3, Article 10 thereof provide: "Article 10 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 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. xxx xxx xxx" Based on the foregoing, the Philippines may tax the dividends paid by a company which is a resident thereof to a company which is a resident of Korea at a rate not exceeding 10 percent if the last mentioned company holds directly at least 25 percent of the voting shares of the company paying the dividends. In all other cases, the 25 percent rate shall apply. TaDIHc In the instant case, considering that Sanno Korea holds 6.37 percent of the total shares of Phil BXT, this Office is of the opinion and so holds that such dividend paid by Phil BXT to Sanno Korea is subject to income tax at a preferential rate of 25 percent based on the gross amount thereof, pursuant to paragraph 2 (b), 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