BIR Ruling [DA-393-99]

July 8, 1999 BIR RULING [DA-393-99] Viva Productions, Inc. Viva Entertainment Center 334 E. Rodriguez Sr. Avenue New Manila Quezon City Attention: Atty. Emiliana Belen Raymundo Ubogen Legal Counsel Gentlemen : This refers to your letter dated July 28, 1998 requesting for a ruling as to whether or not the royalties payable by Viva Productions, Inc. (Viva) to Twentieth Century Fox International Corporation (Century Fox) for the use in the Philippines of motion picture films owned by Century Fox are subject to a withholding tax at the reduced rate of 10% pursuant to Article 13, paragraph 2(b)(iii) of the RP-US Tax Treaty in relation to the RP-Denmark and RP-Sweden Tax Treaties. It is represented that Viva is a domestic corporation engaged in the business of producing and distributing motion pictures for theatrical and non-theatrical exhibition in the Philippines; that Century Fox, on the other hand, is a non-resident foreign corporation not engaged in trade or business in the Philippines organized under the laws of the State of New York, USA; that Viva and Century Fox entered into a Distribution Agreement whereby the latter granted the former an exclusive license to distribute and exhibit motion pictures owned by Century Fox; that Viva shall pay Century Fox an amount equivalent to 100% of the Gross Film rentals remaining after deducting the 5% Distribution Fee, Direct Distribution Expenses and the Minimum Guarantee; and that in support of your request, you submitted the following documents: 1) Certification of Non-Recognition of Twentieth Century Fox, Int'l from the Securities and Exchange Commission: 2) Distribution Agreement; and 3) Certificate of Registration of Viva Productions, Inc. with the Securities and Exchange Commission. In reply, please be informed that under Article 13 of the RP-US Tax Treaty which provides as follows: "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. xxx xxx xxx" Moreover, Article IX, paragraph (1) of the RP-Denmark Tax Treaty provides that income which a resident or corporation of Sweden derives from rentals or other amounts paid by a resident or corporation of the Philippines as consideration for the use 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 such rentals or amounts paid. Such being the case, the royalties payable by Viva to Century Fox for the use in the Philippines of motion picture films are subject to the Philippine tax at the rate of 10% because this rate appears in the RP-Sweden and RP-Denmark Tax Treaties and pursuant to Article 13, paragraph (2)(b)(iii) of the RP-US Tax Treaty. The said tax shall be withheld and paid in the same manner and subject to the same conditions as provided in Section 57 of the Tax Code of 1997. (BIR Ruling No. 089-88 dated March 8, 1988) Moreover, the remittance by Viva to Century Fox of the said royalties shall be subject to the 10% value-added tax pursuant to Section 108(A) of the Tax Code of 1997. 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), Revenue Regulations No. 7-95) SDATEc In view thereof, Viva shall, before making payment of royalties to Century Fox withhold and remit to this Bureau the 10% VAT due thereon, by filing a separate VAT return for and in behalf of Century Fox. (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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal & Enforcement Group)