BIR Ruling [DA-033-98]

February 3, 1998 BIR RULING [DA-033-98] Punongbayan & Araullo 6th Floor, Vernida IV Building, Alfaro St., Salcedo Village 1200 Makati City Attention: Atty . Victorino C . Mamalateo Gentlemen : This refers to your letter dated July 29, 1997 requesting confirmation of your opinion that royalty payments made by your client, WARNER MUSIC PHILIPPINES, INC . , (WARNER) to WEA INTERNATIONAL, INC . , (WEA ) under the License Agreement executed by them are subject to the lower tax rate of 15% pursuant to the "most-favored nation clause" of the RP-US Tax Treaty [Article 13(2)(b)(iii)] in relation to Article 12(2)(a) of the RP-West Germany Tax Treaty. LLjur It is represented that WARNER is a domestic corporation organized for the purpose of importing, manufacturing, selling, distributing, marketing and promoting all kinds of products and services related to music and entertainment industry; that it engages in the business of selling and/or manufacturing disc type phonograph records, analog pre-recorded magnetic sound tapes in reel-to-reel cartridge and cassette configurations and compact discs in the Philippines; that on the other hand, WEA is a non-resident foreign corporation established under the laws of the United States; that it is similarly engaged in the business of selling and/or manufacturing records, pre-recorded audio cassette tapes and compact discs in the United States; that in 1992, WARNER entered into a License Agreement with WEA, effective December 1, 1992, for a period of one (1) year, subject to annual automatic renewal for an indefinite period until such time as either party notifies the other of its desire to terminate the Agreement, that such License Agreement, among others, allows WARNER as Licensee, to sell and/or manufacture records in the Philippines by reproducing sound performances embodied upon Master Copies of the Licensed Catalogues which are owned by the Licensor, WEA; and that in consideration for the right to sell and/or manufacture records in the Philippines, WARNER pays WEA royalties as agreed upon by the parties. In reply, please be informed that your opinion that the royalty payments made by WARNER to WEA are subject to the 15% preferential rate under, Article 13(2)(b)(iii) of the RP-US Tax Treaty in relation to Article 12(2)(a) of the RP-West Germany Tax Treaty is hereby confirmed. Article 13, of the RP-US Tax Treaty provides, viz: "ARTICLE 13 ROYALTIES "(1) Royalties derived by a resident of one of the Contracting State from sources within the other Contracting State may be taxed by both Contracting States. "(2) However, the tax imposed by that other Contracting State shall not exceed xxx xxx xxx "(b) In the case of the Philippines, the least of: xxx xxx xxx "(iii) the lowest rate of Philippine tax that may be imposed on royalties of the same kind paid under similar circumstances to a resident of a third State." xxx xxx xxx "(3) The term "royalties" refer to payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work, including cinematographic film or films or tapes used for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or other like right or property, or for information concerning industrial, commercial or scientific experience. The term "royalties" also includes gains derived from the sale, exchange or other disposition of any such right or property which are contingent on the productivity, use or disposition thereof." On the other hand, Article 12(2)(a) of the RP-West Germany Tax Treaty provides: "ARTICLE 12 ROYALTIES xxx xxx xxx "(2) However, such royalties may also be taxed in the Contracting State in which they arise, and according to the law of that State, but the tax so charged shall not exceed: "(a) 15 percent of the gross amount of royalties arising from the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films or tapes for television broadcasting." Such being the case, royalties arising in the Philippines and payable to WEA by your client, WARNER, are subject to the Philippine tax at the rate of 15% because this rate appears in both the RP-West Germany Tax Treaty pursuant to Article 13, paragraph 2(b)(iii) of the RP-US Tax Treaty. (BIR Ruling No. 023-94 dated January 17, 1994) LLcd This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal & Enforcement Group