BIR Ruling

June 27, 1969 Sycip, Gorres, Velayo & Co. Certified Public Accountants P.O. Box 589, Manila Attention: Mr . B . V . Abela Tax Division Gentlemen : This refers to your letters dated April 23 and 29, 1969 stating the following: cdt "X Company, a duly established and bona fide manufacturer of phonograph records in the Philippines, intends to enter a licensing agreement with Z Company in the United States for the right to manufacture in the Philippines certain records in consideration of the payment of royalty to Z Company. In order to increase the volume of sales on these records manufactured by X Company, it is interested in selecting an exclusive dealer who has a well-established reputation and goodwill in the Philippines. For this purpose, X Company intends to enter into an exclusive dealership contract with Y Company. Y Company has the necessary sales personnel and advertising know-how in order to promote the sales of these records. To enhance the marketability of the records, Y Company has suggested that the covers of the records should display prominently the name of Y Company and thereby take advantage of the tremendous goodwill enjoyed by the latter in the Philippines. Y Company is the distributor in the Philippines of a very popular magazine and has earned a worldwide reputation for turning out high-quality educational magazines, books and other reading materials. Y Company will import the records packaging materials and pay the corresponding customs duties and advance sales tax on the importation. The cost of packaging materials will thereby be part of the cost of marketing which is legitimately to be borne by the dealer, Y Company. X Company will invoice the manufactured phonograph records at an agreed selling price. It will place the records in the packaging materials supplied by Y Company and deliver the packaged products to Y Company. In turn, Y Company will sell these packaged phonograph records to its retail outlets. "We wish to inform you that X Company and Y Company are unrelated parties, and are owned, managed and operated independently of each other. The stockholders, directors and officers of each company are different from the other. We also wish to confirm that all the transactions among these firms subject of our request would be at arms length. "We request for your confirmation that, under the foregoing facts, X Company is the bona fide manufacturer of the phonograph records and the manufacturer's sales tax will be imposed on its selling price to Y Company. Y Company will be considered a dealer in locally manufactured merchandise and will be subject to the graduated fixed tax imposed under Section 182(A)(2) of the Tax Code." In reply, I have the honor to inform you that the sales of X Company to Y Company may be recognized for purposes of the sales tax imposed in Section 185(g) of the Tax Code, if, as represented, the transaction between the two companies is bona fide and at arm's length. However, if later it shall be found out that Y is a mere subsidiary or conduit of X, the tax shall be based on the selling price of Y to the public. aisadc Very truly yours, (SGD.) MISAEL P. VERA Commissioner of Internal Revenue