ITAD BIR Ruling No. 264-11

November 10, 2011 ITAD BIR RULING NO. 264-11 Article 10, Philippines-Korea tax treaty; BIR Ruling No. ITAD 058-10; BIR Ruling No. DA-ITAD 092-08; BIR Ruling No. DA-ITAD 122-06; BIR Ruling No. DA-ITAD 061-03; BIR Ruling No. DA-ITAD 144-00 Samsung Electronics Philippines Manufacturing Corporation Block 6, Calamba Premiere International Park, Barangay Batino, Calamba City, Laguna, Philippines Attention: Sang Ho Park Chief Financial Officer Gentlemen : This refers to your Tax Treaty Relief Application (TTRA) filed on March 24, 2011 on behalf of Samsung Electronics Co., Ltd. ("Samsung Ltd.") requesting for a ruling that the dividend payments of Samsung Electronics Philippines Manufacturing Corporation ("Samsung Philippines") to Samsung Ltd. are subject to the preferential withholding tax rate of 10 percent 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") . 1 It is represented that Samsung Ltd. is a corporation duly organized and existing under the laws of the Republic of Korea with principal business address at 416 Maetan-dong Yeoungtong-Gu Suwon Gyeonggi-do per its Articles of Incorporation; that it is a fiscal resident in the Republic of Korea for purposes of taxation as certified by the director of Dongsuwon District Tax Office of the National Tax Administration of the Republic of Korea on March 10, 2011; that it was licensed to establish a representative office in the Philippines on April 4, 1990 and to date, no petition for the withdrawal or cancellation of such license has been filed by Samsung Ltd. based on the Certification issued by the Philippine Securities and Exchange Commission on March 15, 2011; and that Samsung Philippines, on the other hand, is a PEZA-registered domestic corporation duly organized and existing under Philippine laws with principal office and place of business at Blk. 6 Calamba Premiere International Park, Calamba, Laguna, Philippines. SEHACI It is further represented that on January 11, 2011, the Board of Directors of Samsung Philippines declared from the surplus profit of Samsung Philippines the amount of US$50,000,000 as cash dividends payable on or before April 30, 2011 to the stockholders of record as of December 31, 2010; that as per certification issued by the Corporate Secretary of Samsung Philippines, Samsung Ltd. holds 9,875,810 common shares constituting 99.99% of the outstanding capital stock of Samsung Philippines as of January 11, 2011; and that the issue or transaction subject of this request or 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 as per certification issued by the Chief Financial Officer of Samsung Philippines on March 25, 2011. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code ("NIRC") of 1997, as amended, applies, in general, to dividends derived in the Philippines by a nonresident foreign corporation. It states: "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%)." IESAac However, under Section 32 (B) (5) of the NIRC of 1997, as amended, such income derived by foreign corporations in the Philippines may be exempt from income tax or partially exempt if subject to reduced rate only pursuant to a treaty obligation binding upon the Philippine government. It 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." Hence, the provisions of Article 10 of the Philippines-Korea tax treaty, which you invoked, may apply. "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. TEDaAc 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. CAIaDT 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. 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 aforequoted provisions, the Philippines may tax dividends paid by a Philippine company to a company which is a resident of the Republic of Korea at a rate not exceeding 10 percent of the gross amount of the dividends if the latter holds at least 25 percent of the capital of the company paying the dividends. In all other cases, the 25 percent preferential tax rate on gross dividends shall apply. IcaHTA In the instant case, considering that Samsung Ltd. holds 99.99% of the total outstanding shares of Samsung Philippines as shown in the Certification issued by the Corporate Secretary of Samsung Philippines , the dividends paid to Samsung Ltd. by Samsung Philippines are subject to the 10 percent preferential tax rate pursuant to Article 10 (2) (a) of the Philippines-Korea tax treaty. (BIR Ruling No. ITAD 058-10 dated October 26, 2010; BIR Ruling No. DA-ITAD-114-00 dated August 29, 2000; BIR Ruling No. DA-ITAD-061-03 dated April 15, 2003; BIR Ruling No. DA-ITAD-122-06 dated October 13, 2006; BIR Ruling No. DA-ITAD-092-08 dated November 6, 2008) 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 Footnotes 1. Signed on February 21, 1984 and effective as of November 10, 1986.