Request for Tax Treaty Relief of Business Profits and Royalties Being Remitted to Sony Music International (Asia) Pte. Limited

July 5, 1995 BIR RULING NO. 101-95 25 000-00 101-95 BMG Records (Pilipinas), Inc. 2nd Floor Equitable Bank Bldg. 090 Aurora Blvd. Cubao, Quezon City Attention: Mr . Chris Fulgar Gentlemen : This refers to your letter dated March 28, 1995 for tax treaty relief of business profits and royalties you are remitting to Sony Music International (Asia) Pte. Limited. cdll Documents submitted to this Office showed that on January 31, 1994, in Hong Kong, BMG International Asia Pacific (operated by BMG Hong Kong Limited and SONY Music International (Asia) Limited entered into a Master Agreement for the production and marketing of compilation album throughout South East Asia and to engage in the business of manufacturing and distributing recorded music throughout South East Asia; that BMG International Pacific (BMG INTERNATIONAL) is a company incorporated in Hong Kong whose business address is Building, Kowloon, Hong Kong while SONY INTERNATIONAL is a company In Singapore whose business, address is House, Singapore, that the term of the agreement commenced on January 1, 1994 and shall continue until terminated earlier Party giving six (6) months written of termination and subject to continuance of the Master Agreement, the period of one year specified in a a Supplemental Agreement plus a sell-off period of three months during which time the Album to which that Supplemental Agreement relates may be exploited by the Designated Distributor, which period may be extended by the Committee; that its designated distributor in the Philippines is BMG Records (Pilipinas), Inc. (BMG PILIPINAS), a domestic licensed manufacturer and distributor of sound recordings of BMG International and domestic sound recordings for the Philippine market; that on February 7, 1994 BMG PILIPINAS and SONY INTERNATIONAL entered into an agreement wherein the latter shall MANUFACTURE and distribute musical albums commencing with the pilot project "10% HITZ Vol. I" album in the Philippine market and that these musical albums will contain a compilation of selected recordings from artists under SONY INTERNATIONAL and BMG INTERNATIONAL; that the designated distributor in each country must, in respect of all tracks on an album, pay royalties to the licensor; that in the Philippines, BMG PILIPINAS will pay the royalties due to SONY INTERNATIONAL as directed by the latter, net of any applicable withholding taxes; that for the period January to March 1994, BMG PILIPINAS remitted to SONY INTERNATIONAL the latter's business profit share in the amount of P117,797.02 and royalties amounting to P66,656.20; that it is your contention that the said business profits are exempt from while the royalties are subject to the 25% withholding tax. In reply, please be informed that paragraph 1, Article 7 of the RP-Singapore Tax Treaty provides as follows: "Article 7 Moreover, Article 5(1) and (2) of the said treaty provides as follows: "Article 5 " PERMANENT ESTABLISHMENT "1. For the purpose of this Convention, the term "permanent establishment" means a fined place of business in which the business of the enterprise is wholly or partly carried on. "2. The term "permanent establishment" includes specially but is not limited to (a) A seat of management (b) A branch; (c) An office; (d) A store or other sales outlets; (e) A factory; (f) A workshop; (g) A warehouse, in relation to a person providing storage facilities for others; xxx xxx xxx" It could be gleaned from the foregoing representations that BMG PILIPINAS, having entered into a contract with SONY INTERNATIONAL to MANUFACTURE and distribute musical albums containing compilation of selected recordings from article under SONY INTERNATIONAL and BMG INTERNATIONAL, fells within the of the word factory". "Factory" as defined by Mr. is a building, usually with equipment, for the MANUFACTURE of goods; a MANUFACTORY." In view thereof, BMG PILIPINAS, being a factory in the Philippines of SONY INTERNATIONAL and BMG INTERNATIONAL, is deemed as a "permanent establishment", hence, under Article 7 (1) of the RP-Singapore Tax Treaty, the business profits derived by SONY INTERNATIONAL for the manufacture and distribution of its musical albums may be taxed in the Philippines but only so much of them as is attributable to that permanent establishment. llcd On the other hand, under Article 12 of the same RP-Singapore Tax Treaty, royalties arising in the Philippines and paid to a resident of Singapore, who is the beneficial owner of the royalties, are taxed as follows: (a) 15% of the gross amount of royalties paid by an enterprise registered with the Philippines Board of Investments and engaged in preferred areas of activities and royalties in respect of cinematographic Films or tapes for television or broadcasting; (b) 25% of the gross amount of the royalties in all other cases. Consider that BMG PILIPINAS does not qualify under paragraph (a) above, this Office confirms your opinion that the royalties being remitted by it to SONY INTERNATIONAL is subject to 25% tax of the gross amount of the aforesaid royalties. cdt Very truly yours, RENE G. BAEZ Acting Commissioner