BIR Ruling [UN-190-94]

June 29, 1994 BIR RULING [UN-190-94] Carlos J. Valdes & Co. Certified Public Accountants CJVC Building, 108 Aguirre St. Legaspi Village, Makati Metro Manila Attention: Mr . Romeo C . Alba Managing Director Tax Division Gentlemen : This refers to your letter dated April 14, 1994 stating that your client, Fun Characters, Inc. (Fun Characters), with principal office located at 18/F BPI Condominium Center, 8753 Paseo de Roxas, Makati, Metro Manila, has a "Copyright License Character, merchandise Agreement" with its sublicenses with the approval of Disney Consumer Products International, Inc. (Disney), a corporation organized and existing under the laws of the State of California, U.S.A..; that the salient features of the "Sublicensee Agreements" signed between Fun Characters and various sublicenses are as follows: FIRST: Fun Characters and Disney shall be paid by the sublicenses the copyright royalties, net of withholding taxes, as follows: a) Under the "Promotions" agreement (i) Fun Characters copyright royalties equivalent to five percent (5%) of Net Acquisition Cost of the Premiums distributed or sold by the sublicenses as part of the Tie-In-Promotions [paragraph 7 (i), Annex "B"] ; (ii) Disney copyright royalties equivalent to five percent 5% of the Net Acquisition Cost of the Premiums distributed or sold by the sublicenses as part of the Tie-In-Promotions [paragraph 7 (ii) of the Annex 'B]; b) Under the "Book Publishing " agreement (i) Fun Characters copyright royalties equivalent to four percent (4%) of the suggested retail price [paragraph 4 (a) (i) of Annex "C"]; (ii) Disney copyright royalties equivalent to six percent (6%) of the suggested retail price [paragraph 4 (a) (ii) of Annex "C']; c) Under the "Merchandise Agreement" (i) Fun Characters copyright royalties in the form of "Sublicensor's Royalties equivalent to five percent (5%) of the sublicenses' Net Invoiced Billings to customers for articles sold F.O.B. location in the Philippines ("F.O.B. In Sales"), or if Articles are sold to a customer in the Territory F.O.B. a location outside the Philippines ("F.O.B. Out Sales"), seven percent (7%) of the Net Invoiced Billings to customers for such Articles [paragraph 1 (e) (i) Annex "D"]; (ii) Disney copyright royalties in the form of "Licensor's Royalties" equivalent to five percent (5%) of the sublicenses' Net Invoiced Billings to customers for Articles sold F.O.B. a location in the Philippines ("F.O.B. In Sales"), or if Articles are sold to a customer in the Territory F.O.B. a location outside the Philippines ("F.O.B. Out Sales"), seven percent (7%) of the Net Invoiced Billings to customers for such Articles [paragraph 1 (e) (ii) of Annex "D"] d) Under the "Music" agreement (i) For records embodying Long Play Masters (not including major Musicals, as such term is hereinafter defined), a royalty of seven and two-tenths percent (7.2%) for Fun Characters and ten and eight-tenths percent (10.8%) for Disney, of the suggested retail list price for the equivalent royalty based on a wholesale price if computed on such basis by the distributor of the Records); (ii) For records embodying Long Play masters derived from soundtracks of musically-oriented theatrical motion pictures produced by Disney, its subsidiaries, affiliates or predecessors-in-interest a royalty of eight percent (8%) for Fun Characters and Twelve percent (12%), of the suggested retail list price (or the equivalent royalty based on wholesale price if computed on such basis by the distributor of the Records); (iii) For Sets, a royalty of five and six-tenths percent (5.6%) for Fun Characters and eight and four-tenths percent (8.4%) for Disney of the suggested retail price for the equivalent royalty based on a wholesale price if computed on such basis by the distributor of the Sets. If there is no published retail price during the first year of the Term and a royalty of six and four-tenths percent (6.4%) for Fun Characters and nine six-tenths percent (9.6%) for Disney, during the second and third years of the Term [paragraph 4(i), (ii), and (iii) of Annex "E'] SECOND: To ensure timely remittance of the sublicenses copyright royalty payments to Disney Products, the sublicenses will remit Disney's copyright royalties to Fun Characters which will hold the same in trust for remittance to Disney [paragraph 1(e) (i) (ii) and 5(a) and (b) of the Sublicensee Agreement]. Fun Characters in turn, will remit these copyright royalties to Disney within the period to be agreed upon by and between the former and the latter. In connection therewith, you now request for confirmation of your opinion: 1. That the payments by the sublicensee of the copyright royalties remitted to Fun Characters shall be subject to the following tax: Share of Fun Characters 20% final withholding tax imposed under Section 24 (e) (1) of the Tax Code. Share of Disney (Remitted through Fun Characters in trusts for remittance to Disney) subject to the final tax of 25% (now 10% under the R.P. Germany Tax Treaty) in accordance with the most favored nation clause in paragraph (2) (b) (iii) Article 13 of the R.P. U.S. Tax Treaty. 2. That Fun Characters is not subject to the 20% final tax on the remittance coursed thru it by the Sublicensee for payment to Disney, but will withhold the 10% withholding tax for and in behalf of the sublicensee. In reply, please be informed that your abovestated opinion is hereby confirmed. Payments by the sublicensee of the copyright royalties to Fun Characters equivalent to its shares as specified in the Promotions Agreement, Book Publishing Agreement, Merchandise Agreement and Music Agreement, are subject to the 20% final withholding tax imposed under Section 24 (e) (i) of the Tax Code, as amended. On the other hand, the share of Disney in the royalties under the said agreements, which, pursuant to the provisions thereof shall be remitted to and held in trust by Fun Characters for payment/remittance abroad to Disney, shall be subject to the 10% withholding tax, pursuant to the provisions of Article 10, paragraph (2) (b) (iii) of the R.P.-U.S. Tax Treaty, in relation to Article 12, paragraph 2(b) of the R.P.-Germany Tax Treaty, the said tax to be withheld by Fun Characters upon remittance abroad. Accordingly, for merely receiving the corresponding share of the royalties from the sublicenses in trust and for subsequent remittance to Disney, Fun Characters shall not be liable for the payment of 20% final withholding tax thereon imposed under Section 24(e) (1) of the Tax Code. However, it shall be constituted as the withholding agent when it subsequently remits such earmarked shares of Disney in the royalties, and shall thereof withhold the 10% tax due thereon. (BIR Ruling No. 456-88 dated September 16, 1988) This opinion finds support in our previous ruling (BIR Ruling No. 140-90) dated July 24, 1990 to the effect that money which in fact belongs to another person do not form part of gross receipts for percentage tax purposes. In the case of CIR vs. Tours Specialist, Inc. 183 SCRA 403, the Supreme Court excluded from the gross receipts of a local travel agency amounts received by the latter from foreign tourist agencies which form part of the package fee paid by the tourists but were intended or earmarked for hotel room accommodations and accordingly paid by the local agency to the hotels. The Supreme Court found that the hotel charges paid by the local travel agency were taken out of funds entrusted to it by the foreign tour correspondent agency. As such, the said receipts never belonged to the local travel agency; neither did the latter from the payment of such sums to the hotels. In the case of CIR vs. Manila Jockey club (108 Phil. 821), the Supreme Court also ruled that amounts directed by law to be paid as prizes to owners of winning horses and jockeys were not deemed to form part of the gross receipts of the club subject to amusement tax. The Court specifically stated that "it is not necessary that there must be a law or regulation which would exempt such monies and receipts within the meaning of gross receipts under the Tax Code". Citing the opinion of the Secretary of Justice, the Supreme Court held: "There is no question that the Manila Jockey club, Inc. owns only 7% of the total bets registered by the Totalizer. This portion thereof represents its share or commission in the amount of money it handles and goes to the funds thereof as its own property which it may legally disburse for its own purpose. The 5% does not belong to the club. It is merely held in trust for distribution as prizes to the owners of winning horses. It is destined for no other object than the payment of prizes and the club cannot otherwise appropriate this portion without incurring liability to the owners of winning horses . . ." This ruling is issued on the basis of the facts represented. If after investigation it is found that the facts are different, this ruling shall be considered null and void. cdtech Very truly yours, ALICIA P. CLEMENO Acting Asst. Commissioner (Legal Service)