Ramon F. Garcia & Company

September 14, 2007 BIR RULING [DA-487-07] DA 187-02 Ramon F. Garcia & Company 30/F Burgundy Corporate Tower 252 Sen. Gil Puyat Avenue Makati City Attention: Mr. Ramon F. Garcia Gentlemen : This refers to your letter dated October 30, 2006 requesting on behalf of your client, Max's Franchising, Inc. (MFI), for reconsideration of BIR Ruling No. DA368-06 dated June 13, 2006, where it was ruled that ". . ., the fees received by MFI are in the nature of active income arising from the active pursuit of its business subject to the normal corporate income tax. Consequently, since said payments are not considered passive income then these are not subject to the 20% final withholding tax. Moreover, the same are subject to 15% creditable withholding tax as required under Section 57(B) of the Tax Code of 1997, as implemented by Revenue Regulations No. 2-98, as amended. (BIR Ruling Nos. DA249-01 dated December 3, 2001 and DA187-02 dated October 16, 2002) In the aforesaid letter, you stated that MFI should not be subject to the 15% creditable withholding taxes as the activities of MFI are substantially similar to the activities of Fun Character, Inc. (FCI), as ruled in BIR Ruling No. DA187-02 dated October 16, 2002 which was likewise invoked as precedent in the subject ruling, i.e., to support and enhance the name of Max's Restaurant, develop merchandising materials and come out with new menus and services. In reply thereto, please be informed that after a careful review of BIR Ruling No. DA368-06 dated June 13, 2006 vis-a-vis BIR Ruling No. DA187-02 dated October 16, 2002, it is undisputed that the royalties and other fees received by MFI are in the nature of active income arising from the active pursuit of its business and consequently subject to the regular corporate income tax. Inasmuch as the said payments are not considered passive income then these are not subject to the 20% final withholding tax. Moreover, there is no duty to withhold the tax on such payments as required under Section 57 of the Tax Code of 1997. TAHIED SUCH BEING THE CASE, the royalty fees are not subject to creditable withholding tax at source under Section 57 (B) of the Tax Code of 1997, as implemented by Revenue Regulations No. 2-98, as amended, since the payments to MFI are not among those listed therein that are subject to the creditable withholding 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. cAIDEa Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service