ITAD Ruling No. 121-03

August 11, 2003 ITAD RULING NO. 121-03 Art. 11, RP-Thailand tax treaty NIRC of 1997 BIR Ruling No. DA-ITAD-53-03 Samsung Electro-Mechanics Philippines Corporation Blk 5, Calamba Premiere, International Park Bgy., Batino, Prinza, Calamba, Laguna Attention: Mr. Dae Sick Choi General Manager Gentlemen : This refers to your application for relief from double taxation dated August 28, 2002, requesting for a preferential rate of 15% on the dividend to be remitted by Samsung Electro-Mechanics Philippines Corp (SEMPHIL) to Samsung Electro-Mechanics Thailand. Co., Ltd. (SEMTHAI), pursuant to the RP-Thailand tax treaty. It is represented that SEMTHAI is a corporation organized and existing under the laws of Thailand with principal address at Wellgrow Industrial Estate 93 Moo, 5t Bangsamak, A. Bangpakong, Chacheungsao 24180, Thailand; that it is not registered either as a corporation or as a partnership and has not been licensed to do business in the Philippines as certified by the Securities and Exchange Commission dated May 23, 2002; that SEMPHIL is a corporation organized and existing under the laws of the Philippines and registered with the Philippine Economic Zone Authority (PEZA), with principal address at Blk 5, CPIP, Batino, Prinza, Calamba, Laguna; that SEMTHAI holds a total of 273,043 shares with a par value of P136,521,500 with the percentage ownership of 6.32% of the outstanding capital stock of SEMPHIL per SEMPHIL Secretary's Certificate dated August 14, 2002; and that on a Special meeting of the Board of Directors of SEMPHIL held on May 10, 2002, it was resolved that the amount of US$ 9 Million or its peso equivalent based on the exchange rate prevailing at the time of payment is declared as cash dividend to be shared according to each individual shareholdings of stockholders of record as of the date of meeting payable on or before May 31, 2002. In reply, please be informed that Article 11 of the RP-Thailand tax treaty provides: "Article 11 "Dividends "1. Dividends paid by a company which is a resident of a Contracting State may be taxed in that other State. "2. However, such dividends may 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 of the dividends is a company which holds directly at least 15 percent of voting shares of the company paying the dividends, the tax so charged so charged shall not exceed: "(a) 15 per cent of the gross amount of the dividends if the company paying the dividends is a Philippine company or if the company paying the dividends is a Thai company engaged in an industrial undertaking; "(b) 20 per cent of the gross amount of the dividends if the company paying the dividends is a Thai company not engaged in an industrial undertaking. "3. . . . "4. The term "dividends" as used in this Article means income from shares, "jouissance " shares or "jouissance" rights, mining shares, founder's shares or other rights, not being debt-claims, participating in profits as well as income assimilated to income from shares by the taxation law of the State of which the company making the distribution is a resident. "xxx xxx xxx" Based on the aforequoted provisions, the dividends paid by a Philippine company to a Thai company are subject to the preferential tax rate of 15% while the dividends paid by a Thai company to a Philippine company are' subject to 15% if the former is engaged in an industrial undertaking or 20% if not so engaged. However, these preferential tax rates are applicable only when the recipient of the dividends holds directly at least 15 percent of the voting shares of the company paying the dividends. Relative to the above, it will be noted that SEMTHAI holds only 6.32% of the outstanding capital stock of SEMPHIL, wanting of the required 15% holding percentage of the voting share under the aforecited Article. Therefore, contrary to your request for a preferential tax treaty rate, this Office is of the opinion and so holds that the dividend payment by SEMPHIL to SEMTHAI is subject to the 32% withholding tax rate based on the gross amount thereof imposed under Section 28(B)(1) of the 1997 Tax Code. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service