ITAD Ruling No. 104-05

September 19, 2005 ITAD RULING NO. 104-05 Art. 22 of the Philippines-Korea Tax Treaty BIR Ruling No. ITAD-82-05 LG Electronics Philippines, Inc. 15 Francisco Legaspi Street Maybunga, Pasig City, Philippines Attention: Mr. Hyun Ho Ha, Chief Finance Officer Ms. Marycel Roxas, Assistant Manager-ACD Gentlemen : This refers to your letter dated February 14, 2005, requesting for a ruling on the guaranty fee paid by LG Electronics, Inc. Philippines (LGEPH) to LG Electronics, Inc. Korea (LGEK) pursuant to Article 22 of the Philippines-Korea tax treaty. It is represented that LGEK is a corporation organized and existing under the laws of Korea with principal address at 20, Yeouido-dong, Yeongdeungpo-gu, Seoul, Korea; that it is not registered either as a corporation or as a partnership licensed to do business in the Philippines per certification issued by the Securities and Exchange Commission dated August December 10, 2004; that LGEPH is a corporation organized and existing under the laws of the Philippines with principal address at 15 Francisco Legaspi St., Bo. Maybunga, Pasig City; that LGEPH obtained loans from HSBC, KEB, Metrobank and Bank of the Philippine Islands; that each of the said loans was guaranteed by LGEK under separate Payment Guarantee Fee Agreement (Guarantee Agreements), executed by and between LGEPH and LGEK on November 22, 2004; and that under each of the said Guarantee Agreements, LGEPH agreed to pay LGEK a guarantee fee for the latter's agreement to guaranty the said loans. In reply thereto, please be informed that Article 22 of the Philippines-Korea tax treaty provides as follows: "Article 22 Other Income "1. Items of income of a resident of a Contracting State, wherever arising, not dealt with in the foregoing Articles of this Convention shall be taxable only in that State. aCHDAE "2. The provisions of paragraph 1 shall not apply to income, other than income from immovable property as defined in paragraph 2 of Article 6, if the recipient of such income being a resident of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right or property in respect of which the income is paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply. "xxx xxx xxx" Based on paragraph 1, as aforequoted, a Korean resident is taxable only in Korea for his income arising in the Philippines when such income is not covered under any of the following Articles of the Philippines-Korea tax treaty, namely: (1) Income from Immovable Property; (2) Business Profits; (3) Shipping and Air Transport; (4) Dividends; (5) Royalties; (6) Interest; (7) Capital Gains; (8) Dependent Personal Services; (9) Independent Personal Services; (10) Directors' Fees; (11) Artistes and Athletes; (12) Pensions and Annuities; (13) Government Service; (14) Students and Apprentices; and (15) Professors and Teachers and is considered as "Other Income" under Article 22 of the said treaty. Accordingly, since the guarantee fees paid by LGEPH to LGEK under the above-mentioned Guarantee Agreements are income which are not covered by a specific article of the Philippines-Korea tax treaty, this Office is of the opinion and so holds that the same are considered "Other Income" and shall be taxable only in Korea. (DA-BIR Ruling ITAD-82-05 dated August 16, 2005) HAIDcE 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, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal and Inspection Group