ITAD Ruling No. 032-00

February 2, 2000 ITAD RULING NO. 032-00 RP-UK Art. 11 (2) (a) (ii) 072-85 ITAD 25-99 Viva Productions, Inc. 3RD Floor, Viva Entertainment Center 334 E. Rodriguez Sr. Ave., New Manila, Quezon City Attention: Ms . Marcia Gina L . Lopez Legal Counsel Gentlemen : This refers to your request dated October 19, 1998 for confirmation/ruling on the application for preferential tax rate to be withheld from royalty remittance of Viva Productions, Inc. (VPI) to Polygram Film International Limited (Polygram) pursuant to the RP-UK Tax Treaty. llcd It is represented that VPI is a domestic corporation organized and existing under the laws of the Philippines engaged in the business of producing and distributing motion pictures for theatrical and non-theatrical exhibitions in the Philippines with office address at 3rd Flr. VIVA Entertainment Center, 344 E. Rodriguez Sr. Ave., New Manila, Quezon City; that Polygram is a non-resident foreign corporation existing under the laws of United Kingdom with office address at I Sussex Place, London W6 9XS; that Polygram is not engaged in trade or business in the Philippines per Securities and Exchange Commission certification dated September 16, 1999; that VPI and Polygram entered into a distribution agreement on April 22, 1997, giving VPI sole and exclusive license to exploit the Rights to the films owned by Polygram ; and that VPI agreed to pay Polygram as follows: 1. Non-returnable Cash Advances: a) US$105,000 for the film entitled "The Gingerbread Man" b) US$25,000 for the film entitled "Bodycount" c) US$45,000 for the film entitled "The Big Lebowski" d) US$40,000 for the film entitled "Shakespeares Sister" llcd Payable as follows: 30% of the Advance for each film on the execution of the agreement and 70% of the Advance for each film not later than five days after the date of Polygram notice for such Film. 2. Division of Gross Receipts: a) 60% of Theatrical and non-Theatrical Gross Receipts after recoupment Theatrical Expenses and Advances; b) 25% of Videogram Rental Income and 20% of Videogram Sell-through Income after recoupment of Theatrical Expenses and Advances; and c) 70% of Television Income after recoupment of Theatrical Expenses and Advances. In reply, please be informed that Article 11(2)(a)(ii) of the RP-UK Tax Treaty provides as follows: "Article 11 (Royalties) "1. Royalties arising in a Contracting State which are derived and beneficially owned by a resident of the other Contracting State may be taxed in that other State. "2. Such royalties may also be taxed in the Contracting State in which they arise, and according to the law of that State. However, that tax so charged shall not exceed: a) 15 per cent of the gross amount of the royalties, where the royalties are paid: (i) by an enterprise registered with the Philippine Board of Investments and engaged in preferred areas of activity or (ii) in respect of cinematograph films and films or tapes for television or radio broadcasting, b) in all other cases, 25 per cent of the gross amount of the royalties. "3. The term "royalties" as used in this Article means payment 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 cinematograph films, and films or tapes for radio or television broadcasting), 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. Considering that the royalties paid by VPI to Polygram were in respect of cinematograph films and films or tapes for television broadcasting, the royalty fees consisting of the Advances and the Division of Gross Receipts 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 VPI 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) 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