BIR Ruling [DA-146-98]

April 20, 1998 BIR RULING [DA-146-98] Joaquin Cunanan & Co. 14F Multinational Bancorporation Centre 6805 Ayala Avenue Makati City Attention: Mr . George J . Lavadia Principal Tax and Corporate Services Gentlemen : This refers to your letter dated September 22, 1997 requesting on behalf of your client, SONY MUSIC ENTERTAINMENT PHILIPPINES, INC. (SONY-RP), for a confirmation of your opinion that the royalty payments made by your client to SONY CORPORATION of AMERICA (SONY-US), are subject to the preferential tax rate of 15% pursuant to the "most favored nation" clause of the RP-US Tax Treaty and that said payments are considered as deductible expenses under the then Section 29(a)(1) of the Tax Code, as amended. [now Section 34 (A)(1)(a) of the Tax Code of 1997] aisadc It is represented that SONY-RP is a domestic corporation duly organized and existing under the laws of the Philippines; that it is engaged in the business of development, production, origination, licensing, importation, marketing, rental, and sale (on wholesale basis only) of records, cassette tapes, compact discs, laser discs, computer software, and other audio and audio-visual carriers for entertainment and education, musical copyrights and music publishing in any media, among others; that on October 1, 1995, SONY-RP entered into a Royalty Matrix Agreement with SONY-US, a non-resident foreign corporation organized and existing under the laws of the State of New York, USA; that pursuant to the said agreement, SONY-US grants to SONY-RP the exclusive license, under copyright and otherwise, to exploit the SONY Catalog Master Recordings, specifically the license to manufacture Phonograph records in any form and by any method derived from the Sony Master Recordings in any medium and in any manner, including but not limited to use in audiovisual works or to exploit, manufacture, sell, transfer or otherwise deal in the Sony Audiovisual Records and/or to reproduce, print, publish and disseminate in any medium, the names, portraits, pictures and likeness of Sony Artists in connection with the Sony Master recordings and Videos; that in consideration of said grant, SONY-RP agreed to pay the SONY-US the following: 1) Royalties on Sony-RP's sales of the Sony Music Catalog; 2) Synchronization Fees; and 3) Video Royalties and that the Bureau of Patents, Trademarks and Technology Transfer in its letter dated August 14, 1997, ruled that the Royalty Matrix Agreement between SONY-RP and SONY-US is not a technology transfer agreement since it involves copyright license, i.e., license to use and exploit the Sony Music Catalog for songs/records/albums/CD's to be marketed and sold in the Philippines, and therefore, registration of said agreement is not required. In reply, please be informed that your request is hereby granted. Under the most favored nation provision of the RP-US Tax Treaty [Article 13, paragraph 2(b)(iii)] the tax imposable on royalties derived by a resident of the United States from sources within the Philippines shall be the lowest rate of Philippine tax that may be imposed on royalties of the same kind paid under similar circumstances to a resident of the third state. Article 12, paragraph 2(a) of the RP-West Germany Tax Treaty, effective January 1, 1985, provides that royalties arising in the Philippines and paid to a resident of West Germany may also be taxed in the Philippines, but the tax so charged shall not exceed 15% 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 or broadcasting. Such being the case, royalties arising in the Philippines and payable to SONY-US by SONY-RP, are subject to the Philippine tax rate of 15% because this rate appears in the RP-West Germany Tax Treaty. The said tax shall be withheld and paid in the same manner and subject to the same conditions as provided for under then Sections 25(b) and 50(a) of the Tax Code, as amended. [now Sections 28(B) and 57(A) of the Tax Code of 1997] Moreover, the royalty payments made to SONY-US for the privilege to use the copyright license to use and exploit the Sony Music Catalog for songs/records/albums/CD's shall be subject to the 10% value-added tax (VAT) imposed under the then Section 102 (a)(1) in relation to then Section 99, both of the Tax Code, as amended, based on the contract price agreed upon by the parties. SONY-RP, being the licensee, shall be responsible for the payment of VAT on such royalty payments in behalf of SONY-US by filing a separate VAT declaration/return. The said VAT declaration/return can be used by your client as evidence in claiming input tax credit. (BIR Ruling No. 49-96 dated April 11, 1996) 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. cdll Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal and Enforcement Group)