ITAD BIR Ruling No. 213-11

August 15, 2011 ITAD BIR RULING NO. 213-11 Article 10, Philippines-Korea Tax Treaty; BIR Ruling No. ITAD-056-11; BIR Ruling No. ITAD-58-10; BIR Ruling No. 559-88 Philko Peroxide Corporation Unit 1106, 88 Corporate Center Sedeno Cor. Valero Street Salcedo Village Makati City Attention: Ms. Marietta D. Jardiolin Accounting Manager Gentlemen : This refers to your application for tax treaty relief dated April 20, 2011, filed on behalf of OCI Company Ltd. ("OCI"), requesting confirmation that the dividend payments made by Philko Peroxide Corporation ("Philko") to OCI 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 OCI, with address at 50, Song-dong, Jung-gu, Seoul, Korea, is a corporation organized and existing under the laws of Korea, and is a resident of Korea per Certification of Business Registration issued by the Namdaemun District Tax Office on June 20, 2011; that OCI 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 on April 8, 2011; and that, on the other hand, Philko is a domestic corporation duly organized and existing under the laws of the Philippines with office address located at Unit 1106, 88 Corporate Center Sedeno Cor. Valero St. Salcedo Village, Makati City. ITAaCc It is also represented that on February 22, 2011, the Board of Directors of Philko, at its meeting, approved a resolution declaring a cash dividends in the amount of Seven Million Four Hundred Pesos (Php7,400,000.00) from Philko's unrestricted retained earnings for the year end December 31, 2010 in favor of all the stockholders as of March 1, 2011, payable in full and in cash on or before March 30, 2011, provided that in case of OCI, payment of dividends due to it shall be made 15 days after it shall have filed its TTRA pursuant to the Philippines-Korea Tax Treaty. It is further represented that as of March 1, 2011, OCI is a stockholder of record of 296,000 shares (inclusive of 2 qualifying shares held by its nominees) with a total par value of Php29,600,000.00, representing 40% ownership in Philko based on the Secretary's Certification on April 18, 2011. It is finally represented that the dividends subject of the application for tax treaty relief 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 Certification issued by the Accounting Manager of Philko on March 23, 2011. 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%). HEIcDT 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, the provisions of the Philippines-Korea tax treaty may apply to the instant case. Its Article 10 provides that: "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. CaHcET 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." 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. Accordingly, inasmuch as OCI holds directly at least 25 percent of the capital of Philko (in fact, OCI holds directly 40% of such capital of Philko ), such dividends paid by Philko to OCI are subject to income tax at the rate of 10 percent of the gross amount thereof, pursuant to paragraph 2 (a), Article 10 of the Philippines-Korea tax treaty. ( BIR Ruling No. ITAD 58-10 dated October 26, 2010; BIR Ruling No. 559-88 dated November 24, 1988 ) 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. CAIHTE Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue