ITAD Ruling No. 008-00

January 19, 2000 ITAD RULING NO. 008-00 RP-Denmark Art. 12 (2) ITAD 25-99 131-97 Viva Records Corporation 4th Floor, Viva Entertainment Center 334 E. Rodriguez Sr. Ave., New Manila, Quezon City Attention: Ms . Maria Rita R . Bonifacio Legal Counsel Gentlemen : This refers to your letter dated April 8, 1999, requesting for confirmation/ruling on the application of preferential tax rate to be withheld from royalty remittance of Viva Records Corporation (VRC) to Mega Records Scandinavia A/S (Mega Records) pursuant to the RP-Denmark Tax Treaty. It is represented that VRC is a domestic corporation organized and existing under the laws of the Philippines with office address at 4th Flr. VIVA Entertainment Center, 334 E. Rodriguez Sr. Ave., New Manila, Quezon City; that Mega Records is a non-resident foreign corporation existing under the laws of Denmark with office address at Indiakaj No. 1, Copenhagen, Denmark DK-2100; that Mega Records is not engaged in trade or business in the Philippines as per Securities and Exchange Commission certification dated April 9, 1999; that VRC and Mega Records entered into a license agreement for VRC's use in the Philippines of master recording of musical works owned and controlled by Mega Records; and that VRC agreed to pay Mega Records as follows: 1. Advances consisting of the following amounts which shall be non-refundable but recoupable against Royalties payable hereunder. Each years Advance shall be payable irrespective of the level of recoupment of the advance paid in preceding years. Year One $50,000 (fifty thousand) payable on signature Year Two $70,000 (seventy thousand) payable on or before 15th September 1998 Year Three $75,000 (seventy five thousand) payable on or before 15th September 1999 2. Royalties Singles 20% of PPD (Published Price to Dealers) EPS 20% of PPD Albums 24% of PPD Videograms 24% of PPD In-house Compilations 24% of PPD In reply, please be informed that Article 12 (2) of the RP-Denmark Tax Treaty effective January 1, 1998 provides as follows: " Article 12 (Royalties) "1. Royalties arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. "2. However, the royalties may also be taxed in the Contracting State in which they arise and according to the laws of that state, but if the recipient is the beneficial owner of the royalties the tax so charged shall not exceed 15 per cent of the gross amount of the royalties. The competent authorities of the Contracting States may by mutual agreement settle the mode of application of this limitation. "3. 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 copyright of literary, artistic or scientific work including cinematographic films and films and tapes for television or radio broadcasting, any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, and for the use of, or the right to use, industrial, commercial or scientific equipment in connection therewith. Considering that the recipient, Mega Records, is the beneficial owner of royalties arising in the Philippines, the royalty fees consisting of the Advance and Royalties paid by VRC are subject to the Philippine tax at the rate of 15% of the gross amount of the royalties. Moreover, under Section 108 of the National Internal Revenue Code of 1997, the royalty payments to be remitted by VRC is subject to ten percent (10%) value-added tax (VAT). Section 4.102-1(b) of Revenue Regulations No. 7-95, as amended by Revenue Regulations No. 6-97, provides that: "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 the 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 credit by the licensee." (ITAD 25-99 dated September 15, 1999) LibLex This ruling is being issued on the basis of the foregoing facts as presented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal and Enforcement Group