ITAD BIR Ruling No. 192-13

July 9, 2013 ITAD BIR RULING NO. 192-13 Article 10, Philippines-Korea tax treaty Samsung Electronics Philippines Manufacturing Corporation Block 6, CPIP Batino Calamba City, Laguna Attention: Mr. In Chul Jung Chief Financial Officer Gentlemen : This refers to your tax treaty relief application filed on September 26, 2012, requesting confirmation that dividends paid to Samsung Electronics Company, Limited ("Samsung") by Samsung Electronics Philippines Manufacturing Corporation ("Samsung-Philippines") are subject to a preferential tax 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 Samsung is a foreign corporation organized and existing under the laws of Korea and is a resident thereof based on the Certificate of Residence issued by Dongsuwon District Tax Office on August 20, 2012; that Samsung is situated at 416 Maetan-3 Dong Yeoungtong-Gu, Suwon Gyeonggi-Do, Korea; that Samsung is licensed to engage in business in the Philippines since April 4, 1990, under Securities and Exchange Commission (SEC) No. F000001298 and, to date, Samsung has not filed a petition to withdraw or cancel such license, based on the Certificate of Corporate Filing/Information issued by the Securities and Exchange Commission ("SEC") on August 14, 2012; and that, on the other hand, Samsung-Philippines is a domestic corporation situated at Block 6, CPIP Batino, Calamba City, Laguna, Philippines. It is further represented, that on September 18, 2012, the Board of Directors of Samsung-Philippines , at its meeting, declared cash dividends amounting to US$43,000,000.00 in favor of the stockholders of record of Samsung-Philippines as of June 30, 2012, to be paid on October 15, 2012; that Samsung is the legal and beneficial owner of 9,875,810 shares constituting 99.99 percent of the entire stockholdings of Samsung-Philippines. It is further represented that Samsung decided to officially close its Representative Office in the Philippines situated at 1535 M. Adriatico Street, Malate, Manila effective July 26, 2012 based on the Certification issued by the VP Global Management Team of Samsung and on the Affidavit of Publication. ECaAHS It is finally represented that the dividends subject of this ruling 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 Certification issued by the Chief Financial Officer of Samsung-Philippines on September 26, 2012. 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 Samsung , 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 interests, 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%). 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. xxx xxx xxx" With respect to a tax treaty, you invoke the Philippines-Korea tax treaty. Paragraphs 1, 2, and 3, Article 10 thereof provide: EAIaHD " 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 paid to a resident of Korea may be taxed in the Philippines at a rate not to exceed: (a) 10 percent of the gross amount of dividends if the company recipient of the dividends holds directly at least 25 percent of the company paying the dividends; (b) 10 percent of the gross amount of the dividends if the domestic company paying the dividends is registered with the Board of Investments and engaged in preferred areas of investments under the investment incentives laws of the Philippines; and (c) 25 percent of the gross amount of the dividends in all other cases. Accordingly, considering that Samsung holds directly at least 99.99 percent of the total shares of stock of Samsung-Philippines , such dividends paid by Samsung-Philippines to Samsung are subject to income tax at the reduced rate of 10 percent of the gross amount thereof, pursuant to paragraph 2 (a), Article 10 of the Philippines-Korea tax treaty. aAIcEH 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