BIR Ruling [DA-147-98]

April 20, 1998 BIR RULING [DA-147-98] Joaquin Cunanan & Co. 14th Floor, Multinational Bancorporation Centre 6805 Ayala Avenue Makati City Attention: Mr . George J . Lavadia Principal Tax and Corporate Services Department Gentlemen : This refers to your letter dated July 9, 1997 on behalf of your client, Sony Music Entertainment Philippines, Inc. (SONY-RP), requesting confirmation of your opinion that royalties paid to Sony/ATV Music Publishing, LLC (Sony/ATV) are subject to 15% final withholding tax pursuant to the most favored nation clause of the RP-US Tax Treaty in relation to the RP-West Germany Tax Treaty. It is represented that Sony Music Entertainment Philippines, Inc. (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 January 1, 1997 Sony Music (Sony-RP) entered into a Sub-Publishing Agreement with Sony/ATV, a non-resident foreign corporation organized and existing under the laws of the State of New York, USA; that pursuant to the Agreement between the parties, Sony/ATV granted to Sony-RP sub-publishing rights to all of the musical compositions in the Sony/ATV music catalog as of the date of the Agreement and other compositions which will become part of the catalog during the term of the Agreement; and that in consideration of said grant, Sony-RP agreed to pay the following: 1) mechanical royalties for original recordings and cover records; 2) Public Performance/Broadcasting Income Royalties of Publisher's share; and 3) Synchronization, print and other income royalties. In reply, please be informed that your opinion that the royalties being paid by your client to Sony/ATV are subject to 15% final withholding tax pursuant to the most favored nation clause of the RP-US Tax Treaty, in relation to 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 States 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 "(a) In the case of the United States, 15 percent of the gross amount of the royalties, and "(b) In the case of the Philippines, the least of: "(i) 25 percent of the gross amount of the royalties, "(ii) 15 percent of the gross amount of the royalties, where the royalties are paid by a corporation registered with the Philippine Board of Investments and engaged in preferred areas of activities, and "(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; and (3) The term "royalties" as used in this article means 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 films 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. "(4) . . . "(5) . . . On the other hand, Article 12 of the RP-Germany Tax Treaty provides, viz: "ARTICLE 12 ROYALTIES "(1) Royalties arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. prll "(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 per cent 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 cinematographic films or tapes for television or broadcasting, or "(b) 10 per cent of the gross amount of royalties arising from the use of, or the right to use, any patent trade mark, design or model, plan, secret formula or process, or from the use of, or the right to use, industrial, commercial, or scientific equipment, or for information concerning industrial, commercial or scientific experience. For as long as the transfer of technology, under Philippine law, is subject to approval, the limitation of the tax rate mentioned under (b) shall, in the case of royalties arising in the Republic of the Philippines, only apply if the contract giving rise to such royalties has been approved by the Philippine competent authorities. "(3) The term "royalties" as used in this Article means 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 cinematograph films or tapes for television or broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience. "(4) . . . "(5) . . . "(6) . . . Such being the case, royalties arising in the Philippines and payable to Sony/ATV by Sony-RP pursuant to the Sub-Publishing Agreement between Sony-RP and Sony/ATV are subject to the Philippine tax at the rate of 15% because this rate appears in the RP-Germany Tax Treaty pursuant to Article 13, paragraph 2(b)(iii) of the RP-US Tax Treaty. (BIR Ruling No. 002-90 dated January 4, 1990) However, the said royalty payments by Sony-RP for the right to sub-publish the musical composition of Sony/ATV music catalog shall be subject to 10% value-added tax (VAT) pursuant to then Section 102(a)(1) of the Tax Code, as amended [now Section 108(A)(1) of the Tax Code of 1997]. Furthermore, the VAT on rental and/or royalties payable to non-resident foreign corporations or owners for the sale of services and use or lease of properties in the Philippines shall be based on the contract price agreed upon by the licensor and licensee. The licensee shall be responsible for the payment of VAT on such rentals and/or royalties in behalf of the non-resident foreign corporation or owner by filing a separate VAT declaration/return for this purpose. The duly validated VAT declaration/return is sufficient evidence in claiming input tax credit by the licensee. (Sec. 4.102-1(b) of the Revenue Regulations No. 7-95) In view thereof, Sony-RP shall, before making payment of royalties to Sony/ATV, withhold and remit to this Bureau the 10% VAT due thereon, by filing a separate VAT return for and in behalf of Sony/ATV. (Sec. 4.110-3(b) of Revenue Regulations No. 7-95) (BIR Ruling No. 049-96 dated April 11, 1996) Finally, ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business are deductible from gross income pursuant to then Section 29(a)(1) of the Tax Code, as amended [now Section 34(A)(1)(a) of the Tax Code of 1997]. Thus, the royalty payments made by Sony-RP to Sony/ATV pursuant to the abovementioned Agreement to sub-publish the musical composition of Sony/ATV music catalog, specifically to manufacture records in any form and by any method derived from such Master Recordings, are considered business expenses deductible in computing the net income of Sony-RP subject to income tax. LexLib 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 ESQUIVIAS IV Deputy Commissioner (Legal & Enforcement Group)