BIR Ruling [DA-143-96]

April 10, 1996 BIR RULING [DA-143-96] Joaquin Cunanan & Co. 8th Floor, BA-Lepanto Building 8747 Paseo de Roxas Makati City Attention: Atty. George J. Lavadia Principal Gentlemen : This refers to your letter dated November 29, 1995 requesting in behalf of your client, Fun Characters, Inc. (FCI) for a confirmation of your opinion that your client's receipt of Common Marketing Fund (CMF) contributions from its sub-licensees for national advertising and advertising related expenses constitutes a trust fund and therefore do not form part of the taxable income of your client subject to income tax. It is represented that FCI is a domestic corporation which was granted a non-exclusive right to license third parties in the Philippines to use certain materials of Walt Disney Company, a corporation organized and existing under the laws of the State of Delaware, USA, in a number of merchandising activities; that by virtue thereof, FCI sublicensed various entities in the Philippines to, among others, manufacture, distribute, and/or sell certain Walt Disney Products; that in order to ensure consumer awareness of the Walt Disney Products, the licensees are required to contribute to a Common Marketing Fund Payment equivalent to 3% of their net invoice billings; that since the licensees have no central organization of their own, it is impractical and inequitable to have the national advertisement carried out individually by the sub-licensees, thus it was agreed that the licensee's contribution to the CMF shall be made to FCI which shall take charge in the national advertising and management of the CMF; that the contributions to said fund are accounted for separately in the books of FCI and are maintained in a separate bank account; and that the CMF shall be held by FCI in trust used exclusively in promoting Walt Disney Products. CASTDI In reply thereto, please be informed that your opinion is hereby confirmed, FCI's receipt of the CMF contributions from its sub-licensees which are merely held in trust and could realize 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 sub-licensees are not includible in FCI's gross income; hence FCI is not subject to income tax thereon. (See Ford Dealers Advertising Fund vs. Commissioner (SS TC 761, 29 AFTR 2d-539, 456 cited in BIR Ruling No. 103-94 dated May 16, 1994) Very truly yours, (SGD.) ALICIA P. CLEMENO Assistant Commissioner (Legal Service)