Punongbayan & Araullo

June 13, 2008 BIR RULING [DA-364-08] DA 115-06 Punongbayan & Araullo 20th Floor, Tower 1 The Enterprise Center 6766 Ayala Avenue Makati City Attention: Ms. Maria Victoria C. Espao Tax Partner Gentlemen : This refers to your letter dated April 14, 2008 stating that your client, VIVA Communications, Inc. (formerly VIVA Productions, Inc. or "VCI"), is a domestic corporation with office address at VIVA Entertainment Center, No. 61 Scout Mandrinan Street, South Triangle, Diliman, Quezon City, engaged generally in the movie industry business; that it derives income primarily from license fees arising from various license agreements with television companies and cable television operators for the distribution of entertainment content such as motion pictures and television programs; that in 2007, VCI entered into a Content Licensing Agreement (the Agreement) with MediaScape wherein the former granted the latter the exclusive right to make available for subscription the twenty four (24) hour linear television program service currently known as "Pinoy Box Office" consisting of Philippine made movies and all promotions thereof (referred to as the Content); that under the Agreement, MediaScape will make available the Content to subscribers through an audiovisual service owned or operated by the latter, comprising of linear channels transmitted encrypted via wireless networks to mobile devices of subscribers in the territory (Service); that MediaScape will also make use of the telecommunication facilities and broadcast licenses of its associated companies for the distribution and transmission of the Content in the Service; that in consideration of the right to use of the Content, MediaScape will pay VCI a fixed amount of License Fee per subscriber per month or, where a fraction of a month is subscribed to by a subscriber, the equivalent number of subscribers to the Service including the Content for the relevant month where all subscriptions within the relevant month will be aggregated so that each full month's worth of subscription (28 to 31 days as appropriate) will be calculated and reported as one (1) subscriber; that in addition, MediaScape is obliged to pay VCI an Annual Minimum Guarantee Fee of P12 Million for the 1st year of the term of the Agreement, P24 Million for the 2nd year of the term of the Agreement and P36 Million for the 3rd, 4th and 5th terms of the Agreement; and that payments of the License and Minimum Guarantee Fees will be made by MediaScape to VCI on a quarterly basis. Based on the foregoing representations, you now request confirmation of your opinion that 1) the License and Minimum Guarantee Fees payments made to VCI be considered as active income subject to the regular corporate income tax rate of 35% pursuant to Section 27 (A) of the Tax Code of 1997 and not to the 20% royalty tax on certain passive income pursuant to Section 27 (D) (1) of the said Code; and 2) the payments are not subject to creditable withholding tax of 2% unless MediaScape belongs to the top 10,000 corporations designated by the BIR. In reply thereto, please be informed that this Office had already occasioned to rule on the matter when it said in BIR Ruling No. DA-115-06 dated March 16, 2006, as follows: ". . ., since the income derived by MKI-Phils from the distribution of the Licensed Company Systems to Philippine banks and the performance of support services is income generated in the active pursuit and performance of its primary purpose, this Office confirms your opinion that the same is clearly NOT passive income subject to the 20% final tax. Such being the case, the payments received by MKI-Phils from the active conduct of trade or business is considered ordinary business income subject to the 33% for 1999 regular corporate income tax." In applying the above-cited rulings, it is clear that the royalties and other fees received by WARNER are in the nature of ordinary business income because the aforesaid income was derived or generated from activities that are in accordance with the primary purpose of WARNER which is licensing and sub-licensing of musical compositions and performance of support services as provided in its Articles of Incorporation. SUCH BEING THE CASE, the royalty income derived by WARNER in the conduct of its business shall form part of its ordinary income subject to the 32% regular corporate income tax. Generally, if the royalty income is considered as an active income, there is no duty to withhold on such payments as required under Section 57 of the Tax Code of 1997, as the royalty payments are not subject to creditable withholding tax since said income is not among those enumerated under the withholding tax regulations as subject to withholding tax. However, if WARNER's client/payor is one of the top ten thousand (10,000) corporations designated by the BIR, the royalty shall be subject to the withholding tax of 2% which shall be creditable against the tax due on the taxable income of WARNER". Considering that the above-cited ruling is in all fours similar to the instant case, this Office holds that 1. The License and Minimum Guarantee Fees payments made to VCI be considered as active income subject to the 35% regular corporate income tax pursuant to Section 27 (A) of the Tax Code of 1997 and not to the 20% final tax. 2. The MediaScape is not obliged to withhold the 2% creditable withholding tax unless the payor belongs to the top 10,000 corporations designated by the BIR. 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service