BIR Ruling [DA-479-06]

August 8, 2006 BIR RULING [DA-479-06] Sec. 59; 003-80; 128-99 Lina Lavarez Didulo & Leviste-Avellana Unit 2202 Asia Tower Building, Paseo de Roxas cor. Benavidez St., Legaspi Village, Makati City Attention: Atty. Jose Leonilo V. Didulo Partner Gentlemen : This refers to your letter dated July 23, 2006, requesting confirmation on behalf of your client, UNITED INTERNATIONAL PICTURES AB - Philippine Branch ("UIP"), for confirmation on the following: 1. Pursuant to the Distribution Agreement executed by UIP on March 1, 2000, the local film distributor (the "Distributor") that has the control, custody and disposition of funds is constituted as the withholding agent on income payments made from UIP funds pursuant to the Tax Code and implementing regulations. 2. The Distributor as the duly constituted withholding agent is personally liable for the preparation of the withholding tax returns, and the remittance and the payment of withholding taxes of UIP to the Bureau of Internal Revenue ("BIR"); and 3. As the duly constituted withholding agent, the Distributor shall be personally liable for deficiency tax assessments, surcharges and penalties on its failure to subject to withholding taxes income payments made from UIP funds, as well as penalty assessments arising from non-filing and late filing, if any, of the appropriate withholding tax returns. It is represented that United International Pictures AB is a foreign corporation incorporated under the laws of Sweden and licensed to engage in business as a Philippines branch; that on March 1, 2000, UIP entered into a Distribution Agreement with the Distributor whereby UIP granted the Distributor a non-exclusive license under copyright to exhibit and distribute for exhibition feature motion pictures and their trailers as may be designated by UIP; that in consideration, UIP shall pay the Distributor a distribution fee equal to: (a) 6% of gross receipts for each picture generating gross receipts of P6 million or less, and (b) 4% of gross receipts in excess of P6 million; that UIP had only one (1) employee in the Philippines during the entire duration of the Agreement to oversee that UIP's property rights (including prints for each picture) are protected, orderly distribution and advertising of the pictures, and accounting, liquidation and payment of UIP share; that the Distributor obligated itself to provide services for the benefit of UIP by performing, among others, the following services; 1. To provide office space for the sole UIP representative within the Distributor's business premises [Section 10]; 2. Arrange exhibition contracts and bookings in the best available theaters [Section 5(b)(i)]; 3. Arrange for verification of box office receipts [Section 5(b)(iv)]; 4. To submit accounting statements and make payments specifically enumerated in the Agreement [Section 5(b)(v)]; 5. Maintain all records which are customary in the motion picture industry with respect to shipments and exhibitions [Section 5(b)(vii) and Section 6(c)]; 6. To pay costs of insurance, handling, storage and censorship fees and all associated costs subject to reimbursement from the Gross Receipts [Section 7(k)]; 7. Distributor shall initially pay advertising accessories, advertising, promotion and publicity expenses subject to reimbursement from the Gross Receipts [Section 8(d) and Section 9(g)]; 8. The Distributor shall issue its own invoice for all film rentals and revenues to theater owners and third parties with an indication that either 94% or 96% of the gross receipts shall be for the account of UIP [Section 13 (c)]; TaDSHC 9. The Distributor shall advance payments for ALL DIRECT COSTS defined in the Agreement on behalf of UIP in connection with the distribution of each Picture subject to Distributor's reimbursement from the Gross Receipts; and to ensure that all invoices or receipts are issued in the name of UIP [Section 5(c) and Section 14 10. The Distributor was required to liquidate the Gross Receipts in this order: by first deducting its Distribution Fee; second, reimburse itself from the balance of either the 94% or 96% payments for Direct Costs paid or advanced on behalf of UIP; and third, remit the residual balance of the Gross Receipts to UIP [Section 15 (K)]; 11. The Distributor was specifically required under the Agreement to deduct from the Gross Receipts any sum required to be paid in accordance with any applicable laws, withholding, income and similar taxes, and pay the same to the competent tax authority. Distributor was required to provide UIP proof of payment of taxes within 30 days from the gate of such payment [Section 17]. 12. Distributor shall require the exhibitors to pay all royalty fees and taxes that may be required for the public performance of the motion pictures in the Philippines [Section 11(c)]; and 13. Distributor obligated itself to keep complete and accurate books of accounts and to preserve all contracts and other records relative to the distribution of each motion picture; and submit to UIP accounting statements within 30 days of the last working day of each of Distributor's fiscal month; and to provide Picture-by-Picture accounting each month [Section 18] that based on the documentation you have submitted, the Distributor receiving gross receipts from the distribution/exhibition of featured motion pictures was obligated under the Distribution Agreement to pay, on behalf of UIP, withholding tax liabilities while the funds were in the custody and control of the Distributor; and finally it was represented, that in the implementation of the Agreement, Distributor not only kept the book of accounts for the benefit of UIP, but also prepares all of UIP's tax returns and pays the corresponding monthly withholding taxes, and quarterly income tax and VAT specifically required under Section 17 of the Agreement. In support of the request, you have submitted copies of the following: 1. UIP Distribution Agreement dated March 1, 2000; and 2. UIP SEC Certificate of Registration In reply, please be informed that Section 59 of the Tax Code, as amended, provides as follows: "SEC. 59. Tax on Profits Collectible from Owner or Other Persons . . . . The intent and purpose of the Title is that all gains, profits and income of a taxable class, as defined in this Title, shall be charged and assessed with the corresponding tax prescribed by this Title, and said tax shall be paid by the owners of such gains, profits and income, or the proper person having the receipt, custody, control or disposal of the same . For purposes of this Title, ownership of such gains, profits and income or liability to pay the tax shall be determined as of the year for which a return is required to be rendered." (Emphasis and underscoring supplied.) In BIR Ruling No. 003-80 dated January 3, 1980, this Office has ruled that a corporation that has the control, custody and disposal of the interest payments, is the withholding agent and should, therefore, deduct and withhold the (then) 15% withholding tax due thereon. This principle, pursuant to Section 59 of the Tax Code, was reiterated in BIR Ruling No. 128-99 dated August 18, 1999 in the case of De La Salle University having receipt, control, or the obligation to disburse the honoraria of the faculty and panelists of its graduate school, wherein this Office ruled that: "It appearing that the University has the control, receipt, custody, or disposal of or is the one who pays the compensation payable by another employer, the University is under obligation to withhold the corresponding income tax and remit the same to the Bureau of Internal Revenue on behalf of the said employers." No less than the Supreme Court En Banc in the case of Commissioner of Internal Revenue vs. Procter and Gamble-Philippine Manufacturing Corporation, G.R. No. 66888, promulgated December 2, 1991, reiterated its Wander Philippines decision and ruled as follows: " . . . The term 'taxpayer' is defined in our NIRC as referring to 'any person subject to tax imposed by the Title [on Tax on Income]'. It thus becomes important to note that . . . the withholding agent who is 'required to deduct and withhold any tax is made 'personally liable for such tax' and indeed is indemnified against any claims and demands which the stockholder might wish to make in questioning the amount of payments effected by the withholding agent in accordance with the provisions of the NIRC. The withholding agent P&G-Phil. is directly and independently liable for the correct amount of the tax that should be withheld from the dividend remittances . The withholding agent is, moreover, subject to and liable for deficiency assessments, surcharges and penalties should the amount of the tax withheld be finally found to be less than the amount that should have been withheld under law ." (Emphasis and underscoring supplied.) SEcITC In view of the foregoing, this Office hereby confirms your opinion as follows: 1. Considering that the local film Distributor has the receipt, control, custody or disposal of the funds, then the said Distributor shall be constituted as the withholding agent on income payments made from UIP funds. 2. As the withholding agent, the Distributor shall be directly and personally liable for the preparation of the withholding tax returns, and the remittance and the payment of withholding taxes of UIP to the Bureau of Internal Revenue; and 3. As the withholding agent, the Distributor shall be directly and personally liable for deficiency tax assessments, surcharges and penalties, should the Distributor fail to withhold and remit the tax on income payments made from UIP funds, as well as applicable penalty assessments arising from non-filing and late filing of the appropriate withholding tax returns. 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