ITAD BIR Ruling No. 282-13

September 20, 2013 ITAD BIR RULING NO. 282-13 Article 10 (Dividends), Philippines-Korea tax treaty Kepco Philippines Holdings, Inc. 18th Floor Citibank Tower 8741 Paseo de Roxas Salcedo Village Makati City Attention: Atty. Ricardo Galano III Legal Counsel Gentlemen : This refers to your tax treaty application ("TTRA") filed on July 8, 2013, requesting confirmation that dividend paid by Korea Electric Power Corporation Philippines Holdings, Inc. ("KPHI") to Korea Electric Power Corporation ("KEPCO") is subject to income tax at the rate of 10% pursuant to the Convention between the Government of the Republic of the Philippines and the Government of the Republic of Korea with respect to Taxes on Income ("Philippines-Korea" tax treaty) . KEPCO is a non-resident foreign corporation organized and existing under the laws of Korea. It is a resident thereof within the meaning of Article 4 of the Convention for the avoidance of double taxation between the Philippines and Korea, with principal address at 167 Samsung Dong, Gangnam-Gu, Seoul, Korea 135-791. It is not registered as a corporation or a partnership in the Philippines per certification of non-registration issued by the Securities and Exchange Commission on January 11, 2013. On the other hand, KPHI is a domestic corporation duly organized and existing under the laws of the Philippines with principal address at 18th Floor Citibank Tower, 8741 Paseo de Roxas, Salcedo Village, Makati City. It is represented that KEPCO is the registered owner of Ten Million Seven Hundred Eighty-Four Thousand Nine Hundred Ninety-Five (10,784,995) authorized, subscribed and paid-up shares of KPHI constituting 99.9% percent of ownership in KPHI; that on July 4, 2013 the Board of Directors of KPHI has declared cash dividends in the amount of US$320,000.00 inclusive of applicable taxes to be paid on or before July 10, 2013; and that on July 10, 2013 KPHI through Korea Exchange Bank (Manila Branch) has transmitted the amount of Two Hundred Eighty-Eight Thousand US Dollars (USD288,000) representing the payment of dividend to KEPCO. EHaCID It is further represented, per sworn certification dated July 8, 2013, that the issue subject of the above request is not under any investigation or on-going audit, administrative protest, claim for refund or issuance of tax credit certificate, collection proceedings, or a judicial appeal. 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 KEPCO are subject to income tax at the rate of 30 percent, thus: "SEC. 28. Rates of Income Tax on Foreign Corporations . xxx xxx xxx (B) Tax on Non-resident 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: * 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 in the Philippines, thus: HADTEC "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, you invoke paragraphs 1 & 2 of Article 10 of the Philippines-Korea tax treaty, which 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: ITCHSa 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. xxx xxx xxx" Under paragraph 2 above, 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 percent if the recipient of the dividends is a company other than a partnership which owns directly at least twenty five percent (25%) of the capital of the company paying the dividends; and (b) 25 percent in all other cases. DTCSHA Accordingly, considering that KEPCO, a registered company in Korea directly holds 10,784,995 common shares , constituting 99.9% percent of the stocks of KPHI which is more than 25% of the issued and outstanding stocks of the latter, this Office is of the opinion and so holds that the dividend paid by KPHI to KEPCO is subject to income tax at the rate of ten percent (10%) of the gross amount of the dividend, pursuant to Article 10 (2) (a) of the Philippines-Korea tax treaty. 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