Sub-distributor of Films and Motion Pictures is Subject to Withholding Tax; Basis thereof

November 12, 1981 BIR RULING NO. 227-81 53-f 000-00 227-81 Udia Film Exchange, Inc. 4th Floor, State Bldg. Rizal Avenue, Metro Manila Attention: Mr . Rogelio Hidalgo Internal Auditor Gentlemen : This refers to your letter dated July 2, 1981, requesting a ruling as regards your liability to the expanded withholding tax with respect to your sub-distribution agreement with the Philippine Branch of Cinema International Corporation Aktiebolag (CIC Philippines for short). cdta You have represented that you are a domestic corporation acting as sub-distributor of CIC Philippines for theatrical and non-theatrical exhibition by means of prints of 35mm, 70mm or 16mm width of motion picture productions, including their trailers, as to which CIC Philippines has distribution rights in the Philippines; that as sub-distributor, you shall adhere to all instructions of CIC Philippines relating to the distribution of each production; that all exhibition contracts and bookings require prior CIC Philippines approval; and that CIC Philippines shall have the right to audit your books of accounts and records. It appears also that under the said sub-distribution agreement, for the services rendered, you shall be entitled to a flat distribution fee of 15% or 10% of the film rentals or gross receipts you collect from the theaters or film distributors depending on whether the film exhibited is Paramount and Universal Pictures or Metro Goldwyn Mayer Picture. The balance, after deducting publicity expenses, checking fees, percentage taxes, customs duties and other expenses approved by CIC Philippines, is remitted by you to CIC Philippines. In reply, I have the honor to inform you that gross payments to resident individual and corporate cinematographic film owners, lessors, or distributors are subject to the 5% withholding tax, pursuant to Section 1(d) of Revenue Regulations No. 13-78, as amended by Revenue Regulations No. 6-79, implementing Section 53 (f) of the Tax Code, as amended by Presidential Decree No. 1351. Under the foregoing terms of the sub-distribution agreement, 15% or 10% of the film rentals or gross receipts has been earmarked to you while the balance of 85% or 90% has been earmarked to CIC Philippines. Such being the case, the respective percentages of the film rentals or gross receipts constitute the gross payments subject to the 5% withholding tax. The Commissioner of Internal Revenue, on his part, contends that the 28% received by the Bureau of Customs constitutes a business expense of the respondent, which is not deductible from the latter's gross receipts for purposes of the 3% tax imposed by Section 191 of the Tax Code. In exempting the petitioner from the payment of 3% tax on the 28% given to the Bureau of Customs, the CTA cited the case of Manila Jockey Club v. Collector , supra , wherein this court, among others, has said: Needless to say, gross receipts of the proprietor of the amusement place should not include any money which although delivered to the amusement place has been especially earmarked by law or regulation for some person other than the proprietor. (Visayan Cebu Terminal Co., Inc. vs. Commissioner, R.R. No. L-14530 and L-19444, February 27, 1965). In view thereof, as a sub-distributor, you are subject to the 5% withholding tax based on the flat distribution fee of 15% or 10% of the film rentals or gross receipts collected by you from the theaters or film distributors. CIC Philippines which is also a film distributor shall, likewise; be subject to the 5% withholding tax based on the balance of 85% or 90% of the film rentals or gross receipts, without any deduction with respect to the expenses approved by CIC Philippines. It will be noted that said balance is considered the gross payment which, under the regulations, constitutes the basis of the withholding tax. Very truly yours, RUBEN B. ANCHETA Acting Commissioner