ITAD BIR Ruling No. 196-14

September 22, 2014 ITAD BIR RULING NO. 196-14 Article 10 (Dividends); Philippines-Korea tax treaty Sycip Gorres Velayo and Co. 6760 Ayala Avenue Makati City Attention: Atty. Fabian K. Delos Santos Partner, Tax Services Gentlemen : This refers to your tax treaty relief application filed on September 3, 2013 requesting confirmation that dividends paid by Philippine BXT Corporation ("Philippine BXT") to BXT Resort Development Corporation ("BXT Resort") are subject to 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 BXT Resort is a foreign corporation and a resident of Korea based on its Articles of Incorporation and Certificate of Residence issued by the Seocho District Tax Office in Korea on July 29, 2013; that BXT Resort is situated at 4th Floor Jisan B/D, Seocho-dong, 109, Seocho-daero 46-gil, Seocho-gu, Seoul, Korea; that it is not registered as a corporation or partnership in the Philippines as evidenced by the Certification of Non-Registration of Company issued by the Securities and Exchange Commission on August 12, 2013; and that, on the other hand, Philippine BXT is a domestic corporation situated at M.L. Quezon Highway, Barangay Maribago, Lapu-lapu City, Cebu, Philippines. It is further represented, based on the Corporate Secretary's Certificate issued on August 2, 2013, that the Board of Directors of Philippine BXT, during a meeting on July 19, 2013, unanimously approved the declaration of cash dividends amounting P150.00 per share or an amount aggregating P108,486,000.00 in favor of the corporation's stockholders of record as of June 30, 2013; that as of April 23, 2012, BXT Resort holds 26.54 percent of the total outstanding capital stock of Philippine BXT, each share with a par value of P1,000.00, as described below: STaAcC Acquisition Number Acquisition Cost Par Value Mode of Date of Shares of Shares Acquisition Apr. 7, 2011 6,389 P6,389,000.00 P6,389,000.00 By subscription Apr. 8, 2011 103,999 136,238,690.00 103,999,000.00 By sale Sep. 7, 2011 37,856 37,856,000.00 37,856,000.00 By sale Apr. 23, 2012 30,609 36,730,800.00 30,609,000.00 By sale Apr. 23, 2012 8,080 8,080,000.00 8,080,000.00 By sale Apr. 23, 2012 5,055 6,622,050.00 5,055,000.00 By sale Total P191,988 P231,916,540.00 P191,988,000.00 ======== ============= ============= Based on the Certification issued by Banco de Oro Unibank, Inc. ("BDO") on October 23, 2013, dividend amounting US$585,593.76 were remitted by Philippine BXT to BXT Resort on September 17, 2013. In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997 (" Tax Code "), as amended, dividends paid to a foreign corporation not engaged in trade or business in the Philippines are subject to income tax at the rate of 30 percent, to wit: "SEC. 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) and (d) above: n Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." However, under Section 32 (B) (5) of the Tax Code, such dividends are exempt or partially exempt to the extent required by any treaty obligation on the Philippines, to wit: EIAHcC "SEC. 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." For this purpose, paragraphs 1 and 2, Article 10 of the Philippines-Korea tax treaty provide relief to dividends paid to a resident of Korea, to wit: "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." Based on the above provisions, such dividends may be taxed in the Philippines at a rate not to exceed 10 percent if the recipient is a company (excluding partnership) which owns directly at least 25 percent of the capital of the company paying the dividends, and 25 percent in all other cases. Accordingly, considering that BXT Resort owns directly 26.54 percent of the capital of Philippine BXT, which is more than the required 25 percent holding, such dividend paid by Philippine BXT to BXT Resort are subject to income tax at the rate of 10 percent, pursuant to paragraph 2 (a), Article 10 of the Philippines-Korea tax treaty. aHICDc 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 Footnotes n Note from the Publisher: The phrase "and (d) above" no longer appears in RA 9337, the law amending this provision.