ITAD BIR Ruling No. 320-11

December 15, 2011 ITAD BIR RULING NO. 320-11 Article 10, Philippines-Korea tax treaty; BIR Ruling No. ITAD-213-11 KEPCO Philippines Corporation 18th Floor, Citibank Tower 8741 Paseo de Roxas Makati City 1227 Attention: Ricardo A. Galano III Corporate Counsel Gentlemen : This refers to your Tax Treaty Relief Application (TTRA) filed on April 30, 2010, requesting confirmation that the dividend payments by KEPCO Philippines Corporation ("KIPI") to Korea Electric Power Corporation ("KEPCO") are subject to 10 percent final withholding tax rate 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") . It is represented that KEPCO is a corporation organized and existing under the laws of Korea with office address at 167 Samseong-Dong, Gangnam-Gu, Seoul 135-791, Korea and is a resident of thereof for tax treaty purposes based on the Certification of Residence issued by the Commissioner of National Tax Administration on April 14, 2010; and that, on the other hand, KIPI is a corporation organized and existing under the laws of the Philippines with office address at 18th Floor, Citibank Tower, Paseo de Roxas, Salcedo Village, Makati City. It is further represented that at the special meeting of the Board of Directors of KIPI on April 30, 2010, a resolution was passed and approved declaring cash dividends in the amount of $6,630,000.00 (inclusive of applicable taxes), to be paid on May 17, 2010; that, per the Certification issued by the Corporate Secretary of KIPI, at the time of the declaration of the dividends, KEPCO is the registered owner of 807,395 of the authorized, subscribed and paid-up shares of KIPI with a par value of P10.00 representing a percentage ownership of 99.9% thereof. It is finally represented, per Certification dated April 30, 2010 issued by KIPI, that the issue or transaction subject of this request for 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. DCAHcT In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (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 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%)." EAICTS 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." Thus, Article 10 of the Philippines-Korea tax treaty, which you invoked, may apply to the instant case. It provides. "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 cIEHAC 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 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 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; and (b) 25 percent of the gross amount of the dividends in all other cases. aDHCEA Accordingly, inasmuch as KEPCO holds directly 99.9% of the authorized, subscribed and paid-up shares of KIPI, such dividends paid by KIPI to KEPCO are subject to income tax at the rate of 10 percent of the gross amount thereof, pursuant to Article 10 (2) (a) of the Philippines-Korea tax treaty. (BIR Ruling No. ITAD-213-11 dated August 15, 2011) 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