BIR Ruling [DA-482-98]

November 9, 1998 BIR RULING [DA-482-98] Joaquin Cunanan & Co. 14th Floor, Multinational Bancorporation Center Ayala Avenue, Makati City Attention: Atty . Mary Assumption S . Bautista Principal Tax and Corporate Services Gentlemen : This refers to your letter dated April 2, 1998 requesting for our opinion as to whether the royalty payments to be made by your client, Sony Music Entertainment Philippines, Inc. (Sony-RP), to Sony Music Entertainment (UK) Ltd. (Sony-UK), are subject to the preferential tax rate of 15% pursuant to Article 11(2)(a) of the RP-UK Tax Treaty; and that said payments are considered deductible expenses under Section 34(A)(1)(a) of the Tax Code of 1997. It is represented that Sony-RP is a domestic corporation duly organized and existing under the laws of the Philippines; that it is engaged, among others, 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; that on December 1, 1997, Sony-RP entered into a Royalty Matrix Agreement (Agreement) with Sony-UK, a corporation organized and existing under the laws of the United Kingdom; that pursuant to the Agreement between the parties, Sony-UK granted to Sony-RP the exclusive license, under copyright laws to exploit the Master Recordings embodied on the album entitled "The Diana, Princess of Wales Tribute Album" (the Tribute Album) throughout the Philippines during the period commencing on December 1, 1997 and ending on the sooner of (a) the date of expiration of Sony-UK's rights in respect of the Tribute Album and (b) the date of expiration of the term of the Matrix Agreement between Sony-RP and Sony Corporation of America. In reply, please be informed that Article 11(2)(a) of the RP-UK Tax Treaty reads as follows : RP-UK TAX TREATY ARTICLE 11 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 if such resident is the beneficial owner of the royalties. (2) Such royalties may also be taxed in the Contracting State in which they arise, and according to the law of that State. However, the tax so charged shall not exceed : (a) 15 per cent of the gross amount of the royalties, where the royalties are paid by an enterprise registered with the Philippine Board of Investments and engaged in preferred areas of activities and also royalties in respect of cinematographic films and films or tapes for television or broadcasting. xxx xxx xxx" Accordingly, the remittance of royalties by Sony-RP to Sony-UK shall be subject to the preferential tax rate of 15% Philippine income/withholding tax based on the gross amount of the royalties in accordance with the aforequoted Article 11(2)(a) of the RP-UK Tax Treaty. However, the said royalty payments for the right to exploit the Master Recordings embodied on the Tribute Album shall be subject to the 10% value-added tax (VAT) pursuant to 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 licenser 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. 4102-1(b) of Revenue Regulations No. 7-95) In view thereof, Sony-RP shall, before making payment of royalties to Sony-UK, withhold and remit to this Bureau the 10% VAT due thereon, by filing a separate VAT return for and in behalf of Sony-UK. (Sec. 4.110-3)(b) of Revenue Regulations No. 7-95 (BIR Rulings Nos. 049-96 dated April 11, 1996 and DA-150-97 dated April 20, 1997). 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 Sec. 34(A)(1)(a) of the Tax Code of 1997. Thus, the royalty payments to be made by Sony-RP to Sony-UK pursuant to the aforementioned Agreement to exploit the Master Recordings embodied on the Tribute Album, are considered business expenses deductible in computing the net income of Sony-RP subject to income tax. 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 S. ESQUIVIAS IV Deputy Commissioner Legal and Enforcement Group