ITAD Ruling No. 122-05

October 27, 2005 ITAD RULING NO. 122-05 Article 22 of the Philippines-Korea tax treaty BIR Ruling No. ITAD-82-05 SGV & Co . 6760 Ayala Avenue 1226 Makati City Attention: Atty. R.C. Vinzon Tax Services Gentlemen : This refers to your letter dated March 2, 2005, on behalf of your client, Samsung Electronics Philippines Manufacturing Corporation (SEPHIL), requesting confirmation of your opinion that the fees paid by SEPHIL to Samsung Electronics Co., Ltd. (SECL) pursuant to their Guarantee Fee Agreement are not subject to the Philippine income tax, based on the Philippines-Korea tax treaty. It represented that SECL is a foreign corporation duly organized and existing under the laws of Korea with principal address at 416 Maetan-dong, Yeongtong-gu Suwon-si, Gyeonggido, Korea; that it is engaged in the business of manufacturing television or radio receivers, sound or video recording or reproducing apparatuses; that SECL has a representative office in the Philippines and that the activities of which are limited to: (a) conducting market survey of electronic products, household appliances, semiconductor products, general telecommunications, video, computer equipments and other related products; (b) finding out the feasibility of undertaking a joint venture agreement in the Philippines; (c) acting as a communication link between its head office and the customers in the Philippines; and (d) conducting such other activities which are purely coordination work and acting as a message center between the head office and the affiliates of SECL; that SEPHIL is a corporation duly organized and existing under the laws of the Philippines and registered with the Philippine Economic Zone Authority (PEZA) with principal address at Block 6, Calamba Premiere International Park, Barangay Batino, Prinza Calamba Laguna; that it is engaged in the design, manufacture and wholesale of electronic products including but not limited to optical disk drive products, their components and parts; that on June 23, 2004, SEPHIL and SECL entered into a Guarantee Fee Agreement wherein SEPHIL undertakes to pay guarantee fees with respect to payment guarantees extended by SECL to financial institutions on loans from financial institutions such as Bank of America, Standard Chartered Bank and BNP Paribas; that a rate of 0.15% per annum of the principal for calculation of guarantee fees shall apply as the guarantee fee rate on payment guarantees, and a guarantee fee calculated on the basis of the number of settlement days shall be received (paid) subsequently; that the payment of guarantee fees shall be made in three (3) month installments on the last day of July, October, January, and April, respectively, of each year, with July 31, 2004 as the first payment date; that in the event of a delay in payment of guarantee fees by SEPHIL, SEPHIL shall pay an additional default penalty at the rate of [25% per annum or legally available maximum rate] on the guarantee fee, calculated on the basis of the number of days for which payment was delayed; that the Guarantee Fee Agreement shall be effective from April 1, 2004 to the expiration date of loans (expiration date of the guarantee period). AISHcD 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. "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 the aforequoted provision, income of a resident of Korea shall be taxable in Korea, when the type of income earned is one which is not dealt with under a specific article of the Philippines-Korea tax treaty and, thus, shall be considered as other income under Article 22 thereof. Accordingly, this Office is of the opinion and so holds that since the guarantee fees paid by SEPHIL to SECL pursuant to their Guarantee Fee Agreement are income which are not covered by a specific provision of the Philippines-Korea tax treaty other than Article 22, the same shall be taxable only in Korea and exempt from Philippine income tax. (BIR Ruling No. ITAD-82-05 dated August 16, 2005) 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 Service