ITAD Ruling No. 108-02

May 30, 2002 ITAD RULING NO. 108-02 RP-US Tax Treaty RP-Russia Tax Treaty Sec. 108 (A) (1) of NIRC 97 BIR Ruling No. ITAD 10-01 Joaquin Cunanan & Co. 29th Floor, Philamlife Tower 8767 Paseo de Roxas 1226 Makati City, Philippines Attention: Ms. Mary A.S. Bautista-Villareal Principal Tax Service Department Gentlemen : This refers to your letter dated April 18, 2001 on behalf of your client, Sony Music Entertainment Philippines Inc. (SONY-RP), requesting confirmation of your opinion that the royalties paid by SONY-RP to Sony/ATV Music Publishing, LLC (SONY/ATV) are subject to the 15% final withholding tax pursuant to the "most favored nation" clause of the RP-US tax treaty in relation to the RP-Russia tax treaty. It is represented that SONY-RP is a domestic corporation duly organized and existing under the laws of the Philippines; that it is engaged in the development, production, origination, licensing, importation, marketing, rental, and sale (wholesale basis) of records, cassette tapes, compact discs, laser discs, computer software, and other audio and audio-visual carriers for entertainment and education, musical copyrights, and music publishing in any media, among others: that on January 1, 1997, SONY-RP entered into a Sub-Publishing Agreement with SONY/ATV, a non-resident foreign corporation organized and existing under the laws of the States of New York, USA; that pursuant to the agreement, SONY/ATV granted SONY-RP sub-publishing rights to all of the musical compositions in the SONY/ATV music catalog as of the date of the agreement and other compositions which will become part of the catalog during the term of the agreement; that in consideration of the said grant, SONY-RP agreed to pay SONY/ATV the following; 1) mechanical royalties for original recordings and cover records; 2) Public Performance/Broadcasting Income Royalties of Publisher's Share; and 3) Synchronization, print and other income royalties. Based on the above, it is now your opinion that pursuant to Article 13 of the RP-US tax treaty, which provides: "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) . . . (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 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" and in relation thereto, considering that the lowest rate given to a third State is 15% as provided in Article 12(2) of the RP-Russian tax treaty, to wit: "Article 12 ROYALTIES "1. Royalties arising in a Contracting State and paid to a resident of the 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 the State, but the tax so charged shall not exceed 15 per cent of the gross amount of royalties. (Emphasis supplied) "xxx xxx xxx" the royalties arising as a consequence of the Sub-Publishing Agreement between SONY-RP and SONY/ATV, are subject to 15% final withholding tax. In reply, please be informed that under the "most favored nation" clause provision of the RP-US tax treaty [Article 13, paragraph (2)(b)iii], the tax imposed on royalties derived by a resident of the United States from sources within the Philippines shall be 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. Article 12, paragraph 2 of the RP-Russia tax treaty provides that the royalties arising from the Philippines and paid to a resident of Russia may also be taxed in the Philippines but the tax so charged shall not exceed 15 per cent of the gross amount of royalties. The term "royalties" as used in this Article means any payment of any kind received as a consideration for the use of, or right to use, any patent, trademark, design or model, 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. A perusal of the RP-US and RP-Russia tax treaties, particularly their provisions on the avoidance of double taxation, shows 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, this Office is of the opinion and so holds that the royalties paid by SONY-RP to SONY/ATV are subject to tax at the rate of 15 percent pursuant to the "most favored nation" provision of the RP-US tax treaty in relation to the RP-Russia tax treaty. ( BIR Ruling ITAD No. 10-01 dated February 12, 2001 ) However, the said royalty payments by SONY-RP for the right to sub-publish the musical composition of SONY/ATV music catalog shall be subject to the 10% value added tax (VAT) pursuant to Section 108(A)(1) of National Internal Revenue Code of 1997. 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 tax credit by the licensee. (Sec. 4.102-1(b) of the Revenue Regulations No. 7-95). Accordingly, SONY-RP 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. This ruling is issued on the basis of the foregoing facts as represented. However, if upon investigation it shall be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service