BIR Ruling [DA-049-97]

January 30, 1997 BIR RULING [DA-049-97] Alba Ledesma & Co. 7th Floor Don Chua Lamko Bldg., H.V. dela Costa St. cor. Alfaro St., Salcedo Village, Makati City Attention: Mr . Alba Ledesma Gentlemen : This refers to your letter dated June 20, 1996 stating that your client, Golden Donuts, Inc. (GDI) is the exclusive licensee in the Philippines of all rights to license and operate in the Philippines donut shops utilizing the Dunkin Donuts System; that under the license agreement between Dunkin Donuts of America, Inc. (GDA) and GDI, the former granted to the latter (a) the exclusive right to license other entities (hereinafter referred to in the aggregate as "Franchisees") to use the system, and (b) the right to use the system in the Philippines in the operation of its own donut parlor restaurants; that by virtue of the rights conferred to it, GDI entered into a dealership agreement with various franchisees, which granted the said franchisees the license to operate donut parlor restaurants and to use the system; that under the typical GDI Dealership Agreement, a franchise is granted, for a varying period, the right to use service mark and trade mark "Dunkin Donut" and the trade name and style, and conduct a Dunkin Donut business at the designated location; that the franchisor, GDI, is obligated under the Dealership Agreement to provide specifies initial service and training in the operation of Dunkin Donut parlor business and certain continuing services to each franchisee; that the franchisees are required to adopt and maintain certain business procedures and conduct a high quality Dunkin Donut parlor in accordance with the "Dunkin Donut's System Standards"; that GDI receives a certain percentage of the franchisees' gross sales as franchise fee; that in order to ensure consumer awareness of the Dunkin Donut parlor, the Dealership Agreement requires that the franchisee contribute to a National Advertising Fund (NAF) an amount equivalent to 5% of their net sales; that since franchisees have no central organization of their own, and realizing the impracticality and possible inequity of having the national advertisement carried out individually by the franchisees, it was agreed that the franchisees' contributions to the NAF shall be made to GDI who shall then take charge in national advertising and the management of the NAF; and that the contributions shall be accounted for separately in the books of GDI and shall be maintained in a separate bank account. In connection therewith, you are requesting confirmation of your opinion to the effect that GDI's receipt of the National Advertising Fund (NAF) contribution from its franchisees which are to be used solely for national advertising and advertising related expenses constitutes a trust fund and therefore do not form part of GDI's taxable income subject to income tax. In reply, please be informed that your opinion is hereby confirmed. GDI's receipt of the NAF contribution from its franchisees which are merely held in trust and could realized no gain or profit as a result of its receipt but which is to be used solely for national advertising and advertising related expenses for the benefit of the said franchisees are not includible in GDI's gross income; hence GDI is not subject to income tax thereon. (BIR Ruling No. 103-94 dated May 16, 1994) cdta Very truly yours, ALICIA P. CLEMENO Assistant Commissioner (Legal Service) By: ALICIA L. TOMACRUZ Head Revenue Executive Assistant (Legal Service)