BIR Ruling [DA-186-98]

May 12, 1998 BIR RULING [DA-186-98] PunongBayan & Araullo 6th Floor, Vernida IV Bldg. Alfaro St., Salcedo Village Makati City Attention: Atty . Vic C . Mamalateo Gentlemen : This refers to your letter dated October 24, 1997 requesting on behalf of your client, Warner Bros. (F.E.), Inc. (Warner) for confirmation of your opinion that the royalty payments made by Warner to Warner Bros. (W.B.), a division of Time Warner Entertainment Company, L.P. under its Franchise Agreement (Agreement) are subject to the lower tax rate of 10% pursuant to the "most favored nation clause" [Article 13(2)(b)(iii)] of the RP-US Tax Treaty in relation to RP-Denmark Tax Treaty. prcd It is represented that Warner, a Philippine branch with principal office address at Room 3111, PPL Building, 1000 United Nations Avenue, Metro Manila entered into a Franchise Agreement on December 1, 1996 effective for one (1) year with W.B., a division of Time Warner which is a non-resident US Corporation with office address at 4000 Warner Boulevard, Burbank, California, U.S.A.; that pursuant to the said Agreement, Warner shall have the following rights: (a) the sole and exclusive right to distribute, advertise, promote and publicize the Theatrical Picture and Trailers thereof, (b) the sole and exclusive right to manufacture and sell Devices containing copies of the Homevideo Pictures and to exploit the Devices for the intended purpose of Homevideo Use by consumers in their places of dwelling in such manner that viewing schedules and viewing frequency may be freely controlled by consumers; and (c) the non-exclusive right, license and privilege to distribute, sell, advertise, merchandise, manufacture, publish, retail and otherwise engaged in any form of exploitation or use of the properties of W.B.; and that in consideration of the rights granted to Warner, the latter shall pay W.B. royalties equal to the percentage of Combined Gross Receipts accrued in each year of the term from and after December 1, 1996, less 100% of the aggregate Combined Allowable Distribution Expenses. In reply, please be informed that your opinion is hereby confirmed. Under the most favored nation provision of the RP-US Tax Treaty [Article 13(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 VIII, paragraph (1) of the RP-Sweden and Article IX, paragraph (1) of the RP-Denmark Tax Treaties provide that income which a resident or corporation of Sweden and Denmark derives from rentals or other amounts paid by a resident or corporation of the Philippines as consideration for the rise of, or the right to use, motion picture films, films or tapes for radio or television broadcasting, may be taxed in the Philippines at ten percent (10%) of the gross rentals or amounts paid. Such being the case, the royalties payable by Warner to W.B., a division of Time Warner Entertainment Company, L.P. for the rights granted under the aforementioned Agreement shall be subject to the Philippine tax at the rate of 10% because this rate appears in the RP-Sweden and RP-Denmark Tax Treaties. The said tax shall be withheld and paid in the same manner and subject to the same conditions as provided in Section 57(b) of the Tax Code of 1997. (BIR Ruling No. 89-88 dated March 8, 1988) Moreover, the remittance by Warner to W.B., a division of Time Warner Entertainment Company, L.P. of the said royalties shall be subject to the 10% value-added tax pursuant to Section 108(A)(7) 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 in claiming input tax credit by the licensee. (Sec. 4.102-1(b), Revenue Regulations No. 7-95) In view thereof, Warner shall, before making payment of royalties to W.B., a division of Time Warner Entertainment Company, L.P. withhold and remit to this Bureau the 10% VAT due thereon, by filing a separate VAT return for and in behalf of W.B. (Sec., 4.110-3(b), Revenue Regulations No. 7-95) 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. aisadc Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV (Deputy Commissioner) (Legal & Enforcement Group)