5% Expanded Withholding Tax on Theaters

March 29, 1990 BIR RULING NO. 044-90 50 (b) 227-81 044-90 Gentlemen : This refers to your letter dated September 7, 1989 requesting in behalf of your client, Twentieth Century Fox Philippines, Inc. ("20th Century Fox"), confirmation of your opinion that the theaters shall collect the 5% expanded withholding tax only on the 14%-19% share of Mever Films, Inc. ("Mever") which in turn, shall collect the 5% expanded withholding tax on the 81%-86% share of 20th Century Fox. cdtech It is represented that your client has entered into a Sub-Distribution Agreement with Mever; that under said agreement 20th Century Fox grants Mever the right to distribute feature motion pictures designated by 20th Century Fox for theatrical exhibition by means of 16 mm, 35 mm and 70 mm prints; that in the same agreement Mever remits to 20th Century Fox the film rentals or gross receipts collected from the theaters after Mever has deducted therefrom its share equivalent to 14%-19% of the film rentals; that while it appears that the theaters remit the film rentals in their entirety to Mever, only 14%-19% of such rentals is actually paid to Mever since the balance of 81%-86% is remitted or paid by Mever to 20th Century Fox as the share of the latter pursuant to the Sub-Distribution Agreement, hence, in actuality, only 14% to 19% of a film rental is derived by Mever while the remainder of 81%-86% of the rental is derived by 20th Century Fox; that in view of this actual economic substance of the sub-distribution transaction involving 20th Century Fox. Mever and the theater owners, you are of the opinion that the 5% expanded withholding tax that the theaters are required to withhold should be based only on the 14%-19% share of Mever, while Mever, on the other hand, is bound to withhold the 5% expanded withholding tax on the 81%-86% share which Mever ultimately remits to 20th Century Fox; and that the peculiar circumstances surrounding the distribution of cinematographic films render administratively cumbersome for theaters to remit directly to 20th Century Fox its shares of the rentals, thus, the 81%-86% share of 20th Century Fox is paid through the sub-distributor; Mever, which holds such share for and in behalf of 20th Century Fox. In reply, please be informed that your opinion that the theaters shall withhold the 5% expanded withholding tax only on the 14%-19% share of Mever which shall, in turn, withhold the 5% expanded withholding tax on the 81%-86% share of 20th Century Fox is hereby confirmed. Under Section 1(d) of Revenue Regulations No. 6-85, as amended, otherwise known as the Expanded Withholding Tax Regulations implementing Section 50(b) of the Tax Code gross payments to resident individuals and corporate cinematographic film owners, lessors or distributors are subject to the 5% expanded withholding tax. It is noted that under the terms of the Sub-Distribution Agreement between your client, 20th Century Fox and Mever, 14%-19% of the film rentals or gross receipts has been earmarked to Mever while the balance of 81%-86% has been earmarked to your client. Such being the case, the respective percentages of the film rentals or gross receipts constitute the gross payments subject to the 5% expanded withholding tax Accordingly, as a sub-distributor, Mever is subject to the 5% withholding tax based on the distribution fee of 14%-19% of the film rentals of gross receipts collected by it from the theaters, while your client shall, likewise, be subject to the 5% expanded withholding tax based on the balance of 81%-86% of the film rentals or gross receipts held by Mever on its behalf, without any deduction with respect to distribution expenses. It will be noted that said balance is considered the gross payment which under the regulations, constitutes the basis of the 5% expanded withholding tax. aisadc Very truly yours, (SGD.) JOSE U. ONG Commissioner