GMA Records

December 27, 2007 BIR RULING [DA-684-07] DA 115-06 GMA Records Unit 1402, Future Point Plaza I 112 Panay Avenue, Barangay South Triangle Quezon City Attention: Mr. Jose S. Toledo, Jr. Officer-In-Charge for Subsidiary Operations & Monitoring Division Gentlemen : This refers to your letter dated August 15, 2007 stating that RGMA Marketing and Productions, Inc. (GMA Records) is a domestic corporation organized and existing under and by virtue of the laws of the Philippines with registered office at GMA Network Building, EDSA corner Timog Avenue, Diliman, Quezon City; that GMA Records is engaged in producing, recording, publishing, reproducing, selling, buying, distributing, exporting, importing and otherwise dealing in musical tapes, records, discs, musical compositions, arrangements, sounds and songs of any and all kinds of services necessary for the business; and that as a recording company, the royalty income that it received from its clients is one of income sources of its Company, which it considers as an ordinary income subject to 35% income tax. DCcTHa In connection therewith, you now request confirmation of your opinion that 1. The royalty payments that GMA Records received from its clients are subject to 35% regular corporate income tax and not the 20% final tax; and 2. The Company is not obliged to withhold the 2% creditable withholding tax unless the payor 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. DA115-06 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." HIaSDc 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 royalty payments that GMA Records received from its clients are subject to the 35% regular corporate income tax and not to the 20% final tax. 2. The Company 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. CTcSAE Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service