ITAD Ruling No. 089-01

October 17, 2001 ITAD RULING NO. 089-01 Art. 13, RP-US Tax Treaty Art. 12, RP-Denmark Tax Treaty BIR Ruling No. ITAD-123-00 Eagle Broadcasting Corporation Maligaya Building 2 287 Edsa, Quezon City Attention: Atty. Susan C. Tuazon Corporate Secretary Gentlemen : This refers to your application for tax treaty relief dated December 11, 2000 requesting confirmation of your opinion that the royalty payment of Eagle Broadcasting Corporation to Planet Pictures, Limited is subject to withholding tax at the rate of 25% pursuant to Article 13(2)(b)(iii) of the RP-US Tax Treaty in relation to the RP-Denmark Tax Treaty. It is represented that Planet Pictures, Ltd. is a non-resident foreign corporation duly organized and existing under the laws of the United States of America; that it is not registered as a corporation/partnership licensed to do business in the Philippines as per certification issued by the Securities and Exchange Commission dated March 23, 2000; that Eagle Broadcasting Corporation is a corporation duly organized and existing under Philippine Laws; that it currently maintains UHF TV Channel 25; that Eagle Broadcasting Corporation and Planet Pictures, Ltd. entered into a Standard Telecast License Agreement whereby the latter granted the former an exclusive license to broadcast the following programs: Contract Date of Agreement Program Title Term Number 090999-1 September 9, 1999 "Living Right" 2 years [November 1, 1999 to October 31, 2001 091099 September 10, 1999 "Concrete Jungle" 2 years [November 1, 1999 to October 31, 2001 091599 September 15, 1999 "Futures" 2 years [November 1, 1999 to October 31, 2001 that in consideration of the aforementioned licenses, Eagle Broadcasting Corporation agreed to pay Planet Pictures, Ltd. the following: Contract No. License Fee 090999-1 US$800.00 per hour, total license fee of US$7,600, less applicable withholding tax 091099 US$800.00 per hour, total license fee of US$4,800, less applicable withholding tax 091599 US$800.00 per hour, total license fee of US$26,000, less applicable withholding tax In reply, please be informed that Article 13 of the RP-US Tax Treaty provides as follows, viz: aSADIC "ARTICLE 13 ROYALTIES 1. Royalties derived by a resident of one of the Contracting States from sources within the other Contracting State may be taxed by both Contracting States. 2. However, the tax imposed by that other Contracting State shall not exceed a) In the case of the United States, 15 percent of the gross amount of the royalties, and b) In the case of the Philippines, the least of: i) 25 percent of the gross amount of the royalties, ii) 15 percent of the gross amount of the royalties, where the royalties are paid by a corporation registered with the Philippine Board of Investments and engaged in preferred areas of activities, and iii) 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 . (Emphasis supplied) 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 or films or tapes used for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or other like right or property, or for information concerning industrial, commercial or scientific experience. The term "royalties" also includes gains derived from the sale, exchange or other disposition of any such right or property which are contingent on the productivity, use, or disposition thereof. xxx xxx xxx" Article 13(2)(b)(iii) of the RP-US Tax Treaty speaks of 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." This is known as the most favored nation clause of the RP-US Tax Treaty. The purpose of a most favored nation clause is to grant to the Contracting State treatment no less favorable than that which has been or may be granted to the "most favored" among other countries and the provisions of Article 12 of the RP-Denmark Tax Treaty, particularly the preferential tax rate of 15%, may be made to apply in the case of Planet Pictures, Ltd.. Article 12 of the RP-Denmark Tax Treaty provides: "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. xxx xxx xxx" In the case of Commissioner of Internal Revenue vs. S.C. Johnson and Son, Inc. and Court of Appeals, G.R. No. 127105 promulgated on June 25, 1999, the Supreme Court interpreted the "most favored nation" clause particularly the phrase "paid under similar circumstances" as referring to the manner of payment of taxes. A perusal of the RP-US and RP-Denmark Tax Treaty provisions on the elimination from double taxation show a similarity on the manner of payment of taxes, that is, the allowable foreign tax credit on both treaties is the amount actually paid in the Philippines. Such being the case, the royalties payable by Eagle Broadcasting Corporation to Planet Pictures, Ltd. under their Standard Telecast License Agreement are subject to Philippine tax at the rate of fifteen percent (15%), in accordance with Article 12(2) of the RP-Denmark Tax Treaty, in relation to Article 13(2)(b)(iii) of the RP-US Tax Treaty. (BIR Ruling No. ITAD-123-00 dated September 1, 2000) Furthermore, under Section 108 of the said Code, the royalty payments to be remitted by Eagle Broadcasting Corporation is subject to ten percent (10%) value added tax. Section 4.102-1(b) of Revenue Regulations No. 7-95 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 (BIR Form No. 1600-Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld) for this purpose. The duly validated VAT declaration/return is sufficient evidence in claiming input tax credit by the licensee." In view of all the foregoing, Eagle Broadcasting Corporation shall be responsible for the withholding of income tax at the rate of 15% of the gross amount of royalties and the value-added tax at the rate of 10% of the contract amount. HDITCS This ruling is issued on the basis of the foregoing facts as represented. However, if upon investigation it shall be discovered that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) EDMUNDO P. GUEVARA Deputy Commissioner Legal and Inspection Group