Royalty Payments Made by Studio Ventures, Inc. Subject to Lower Rate of 15% Pursuant to "Most Favored Nation Clause"

September 10, 1998 BIR RULING NO. 129-98 000-00-129-98 PunongBayan & Araullo 6thFloor Vernida IV Bldg. Alfaro St., Salcedo Village Makati City Attention: Atty . Vic C . Mamalateo Gentlemen : This refers to your letter dated March 11, 1998 requesting on behalf of your client, Warner Bros. Consumer Products (Warner) for confirmation of your opinion that royalty payments made by Studio Ventures, Incorporated (Studio) to Warner under the Franchise Agreement (Agreement) executed by them shall be subject to the lower rate of 15% pursuant to the "most favored nation clause" [Article 13(2)(b)(iii) of the RP-US Tax Treaty] in relation to Article 12, paragraphs (2)(b) and (4) of the RP-Netherlands Tax Treaty. It is represented that Warner is a division of Time Warner Entertainment Company, L.P., (Time Warner), a limited partnership organized and existing under the laws of Delaware, USA; that it entered into an Agreement with Studio, a corporation organized under Philippine laws; that under the Agreement, Warner shall allow Studio to operate Warner Bros. Studio Stores (Stores) in the Philippines in accordance with the Warner Bros. Studio Stores System (WBSS System) which will use copyrighted characters and the proprietary marks belonging to Warner and its affiliates (WB Intellectual Property), as well as sell products designed and manufactured by or for Warner specifically for sale in the Stores; that the products utilize, incorporate or depict some aspect of the WB Intellectual Property which include wearing apparel, fashion and home accessories, gifts and toys (WB Merchandise); that in consideration of the grant by Warner to Studio of the exclusive right to use the WB Intellectual Property and the WBSS System in connection with the ownership and operation of such Stores and the sale of the WB Merchandise, Studio shall pay Warner or its designee royalties (i) equivalent to a percentage of the aggregate gross sales of the Stores in the Philippines for each fiscal month during the term of the Agreement (Fee Percentage); and (ii) a pre-determined amount pre-paid upon the execution of the Agreement (Initial Term Fee). In reply, please be informed that under the most favored nation provision of the RP-US Tax Treaty [Article 13, paragraph (2)(b)(iii)], the tax imposed on royalties derived by a resident of the United States from sources within the Philippines shall be the lowest rate of Philippine tax that may be imposed on royalties of the same kind paid under similar circumstances to a resident of a Third State. Article 12, paragraphs (2)(b) and (4) of the RP-Netherlands Tax Treaty provides that royalties arising in the Philippines and paid to a resident of Netherlands may also be taxed in the Philippines, but the tax so charged shall not exceed 15 per cent of the gross amount of the royalties in all other cases. The term "royalties" as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any patent, trademark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience. Such being the case, this Office is of the opinion as it hereby holds that the royalty payments made by Studio to Warner, a limited partnership organized under the laws of Delaware, U.S.A., for the right to establish and operate Stores in the Philippines as well as for the exclusive right to use the WB Intellectual Property and the WBSS System in connection with the ownership and operation of the Stores and the sale of the WB Merchandise, are subject to the preferential tax rate of 15%. However, the remittance by Studio to Warner of the said royalties shall be subject to the 10% value-added tax pursuant to Section 108(A)(1) of the Tax Code of 1997. Moreover, 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 licensor 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. (Secs. 4.102-1(b), Revenue Regulations No. 7-95) In view thereof, Studio shall, before making payment of royalties to Warner, withhold and remit to this Bureau the 10% VAT due thereon by filing a separate VAT return for and in behalf of Warner. (Sec. 4.110-3(b) of Revenue Regulations No. 7-95) 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.) BEETHOVEN L. RUALO Commissioner of Internal Revenue