ITAD Ruling No. 061-03

April 15, 2003 ITAD RULING NO. 061-03 Article 10 & 14, RP-Korea BIR Ruling No. DA-ITAD-114-00 BIR Ruling No. DA-ITAD-18-99 Sepung Industry Phils., Inc. Lot 1-B, Block 3 Phase 2 Cavite Export Processing Zone Rosario, Cavite Attention: Mr. Yoon Ji Choi VP-OIC Gentlemen : This refers to your letter dated November 15, 2002, requesting for a ruling on the applicable tax treaty rate on the dividend payments of Sepung Industry Phils. (Sepung-Phils.) to Sepung Industry Korea (Sepung-Korea), as well as on the commission paid by Sepung Phils. to Mr. Yong Han Lee. It is represented that Sepung-Korea is a non-resident foreign corporation with business address at 47-3 Wonmi-Dong, Wonmi-Ku Pucheon-Shi Kyungki-do; that it is not registered either as a corporation or as a partnership and has not been licensed to do business in the Philippines per certification issued by the Securities and Exchange Commission dated September 25, 2002; that Sepung-Phils. is a PEZA-registered enterprise with Certificate of Registration No. 94-19 issued on March 21, 1994 operating in the Cavite Export Processing Zone, Rosario, Cavite; that Sepung-Korea, a registered shareholder of Sepung-Phils., holds 13,585 shares equivalent to 99.96% of the total shareholdings of Sepung-Phils.; that on July 26, 2002, Sepung-Phils. declared cash dividends in the total amount of Three Million Six Hundred Forty Six Thousand Three Hundred Forty Nine Pesos & 85/100 (P3,646,349.85) payable on or before December 31, 2002 to Sepung-Korea; that on October 30, 2002, Sepung-Phils. and Mr. Yong Han Lee entered into an agreement whereby Mr. Lee is responsible in assisting Sepung-Phils. for the sales of remote control units abroad; that Mr. Lee is not an employee of Sepung-Phils; that he stays only 3-5 days in the Philippines in one calendar year; that Sepung-Phils will pay a commission of US$0.05 for each remote control unit sold. In reply, please be informed that Article 10 of the RP-Korea tax treaty provides as follows: "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. "3. ". . . "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" Moreover, Article 14 of the same treaty states that: "Article 14 "Independent Personal Services "1. Income derived by a resident of a Contracting State in respect of professional services or other activities of an independent character shall be taxable in that State. However, such income may be taxed in the other Contracting State: caHIAS a) if he has a fixed base regularly available to him in that other State for the purpose of performing his activities but only so much of the income as is attributable to that fixed base; or b) if his stay in that other State is for a period or periods aggregating 120 days or more in the calendar year. "2. The term 'professional services' includes especially independent scientific, literary, artistic, educational or teaching activities as well as the independent activities of physicians, lawyers, engineers, architects, dentists and accountants. Based on Article 10, the recipient of the dividends, who should be the beneficial owner thereof shall be taxed at a rate of 10% of the gross amount of the dividends if it holds directly at least 25% of the capital of the company paying the dividends. Inasmuch as Sepung-Korea directly holds more than 25% of the total shares of Sepung-Phils., the cash dividends payable by Sepung-Phils. to Sepung-Korea are subject to the preferential rate of 10% of the gross amount of the dividends. ( BIR Ruling No. DA-ITAD 114-00 dated August 29, 2000 ) As regards the commission payments made by Sepung-Phils. in favor of Mr. Lee, Article 14(1) of RP-Korea tax treaty provides that the remuneration or income derived by a Korean national in the Philippines shall be taxable in the Philippines if he stays in the latter for a period aggregating 120 days or more in a calendar. Otherwise, his remuneration or fee in respect of professional services rendered in the Philippines shall be taxable only in Korea. Accordingly, since the stay of Mr. Yong Han Lee in the Philippines is for a period of 3-5 days in a calendar year and he usually comes once a year or only as needed for some special cases, per certification dated October 25, 2002 of Mr. Yoon Ji Choi, Vice President-OIC of Sepung-Phils., then the income of Mr. Lee derived for services rendered in the Philippines is taxable only in Korea. This ruling is issued on the basis of the facts as represented. However, if upon investigation it shall be disclosed that the facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service