ITAD BIR Ruling No. 268-13

September 16, 2013 ITAD BIR RULING NO. 268-13 Article 10 (Dividends), Philippines-Korea tax treaty Philko Peroxide Corporation Unit 8-1, 8F, Citibank Center, 8741 Paseo de Roxas, Makati City 1226 Attention: Ms. Marietta D. Jardolin Authorized Representative Gentlemen : This refers to your application for tax treaty relief dated 02 May 2013 requesting confirmation that dividends paid by Philko Peroxide Corporation ("Philko-Philippines") to OCI Company Ltd. ("OCI-Korea") are subject to final withholding tax at the preferential rate of ten percent (10%) 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-Korea is a non-resident foreign corporation organized and existing under the laws of Korea based on the notarized and consularized Certificate of Residence and Certificate for Business Registration issued by the National Tax Service of Korea. The office address of OCI-Korea is at OCI Building, 50, Sogong-dong, Jung-gu, Seoul 100-718, Korea. The company OCI-Korea is engaged in the business of manufacturing and selling of a variety of chemical products, among other things based on its notarized and consularized Articles of Incorporation. OCI-Korea is not registered as a corporation or partnership in the Philippines based on the Certificate of Non-Registration of Company issued by the Securities and Exchange Commission on 16 April 2013. Philko-Philippines ,on the other hand, is a domestic corporation with office address at Unit 8-1, 8F, Citibank Center, 8741 Paseo de Roxas, Makati City 1226. TAaIDH It is further represented that OCI-Korea owns 40% of the authorized capital stock of Philko-Philippines amounting to Three Hundred Twenty Five Thousand Six Hundred (325,600) shares valued at Thirty Two Million Five Hundred Sixty Thousand Pesos (Php32,560,000.00) acquired by subscription at various dates, based on the notarized Secretary's Certificate of executed by the Corporate Secretary of Philko-Philippines . On 05 March 2013, Philko-Philippines declared cash dividends in the total amount of Twenty Million Pesos (Php20,000,000.00) to be distributed among the stockholders of record as of 31 March 2013 to be payable on 30 June 2013 based on the notarized Secretary's Certificate issued by the Corporate Secretary of Philko-Philippines . On 16 May 2013, Philko-Philippines remitted the amount of One Hundred Seventy Four Thousand Five Hundred Forty Five US Dollars and Twenty Eight Cents (US$174,545.28) based on the notarized proof of remittance from the Security Bank Corporation. 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, judicial or administrative protest, collection proceedings or judicial appeal based on the Certification of Philko-Philippines Accounting Manager Marietta D. Jardiolin. In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("NIRC of 1997") ,as amended, dividends paid to OCI-Korea are subject to income tax at the rate of 30 percent, thus: AcSHCD "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, these 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: "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: aIEDAC 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, you invoke the Philippines-Korea tax treaty. Paragraphs 1, 2 and 4 of Article 10 on Dividends thereof provide: "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. HESCcA 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." Based on the above-quoted provisions, dividends arising in the Philippines and paid to a resident of Korea may be taxed in the Philippines at a rate not to exceed (a) 10% if the company recipient of the dividends holds directly at least 25% of the capital of the company paying the dividends and (b) 25% in all other cases. Considering that OCI-Korea owns 40% of the shares in Philko-Philippines ,which is more than the 10 percent shareholding requirement to avail of the 10 percent rate, this Office is of the opinion and so holds that the dividend paid by Philko-Philippines to OCI-Korea are subject to the preferential tax rate of 10 percent of the gross amount thereof pursuant to Article 10 (2) (a) of the Philippines-Korea tax treaty, as amended. 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. cIETHa Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue n Note from the Publisher: The phrase "and (d) above" no longer appears in RA 9337, the law amending this provision.