ITAD Ruling No. 123-00

September 1, 2000 ITAD RULING NO. 123-00 RP-US Article 13, RP-Sweden, Art 12 RP-Denmark, Art. 12 Viva Music Group Viva Entertainment Center No. 334 E. Rodriguez Sr. Ave. New Manila Q.C. Attention: Atty . Maria Rita R . Bonifacio Legal Counsel Gentlemen : This refers to your letter dated May 19, 1999 requesting for the issuance of a ruling confirming your opinion that the royalty payment of VIVA RECORDS CORPORATION (VRC) to WALT DISNEY RECORDS ("Disney Records") is subject to withholding tax at the reduced rate of ten percent (10%) pursuant to Art. 13, par. 2 (b)(iii) of the RP-US Tax Treaty in conjunction with the RP-Denmark and RP-Sweden Tax Treaties. It is represented that VRC is a corporation duly organized and existing under and by virtue of the laws of the Philippines and is engaged in the business of producing, recording, processing, reproducing, manufacturing, distributing, buying, selling, and otherwise dealing in phonograph and sound records of any form; that Disney Records is organized under the laws of the United States of America and is a non-resident foreign corporation not engaged in trade or business in the Philippines, as evidenced by a certification issued by the Securities and Exchange Commission dated May 19, 1999; that VRC and Disney Records entered into a Licensing Agreement whereby the latter granted the former a non-exclusive license to, among others: 1. manufacture, advertise, distribute, sell and otherwise exploit the Master Recordings owned and controlled by Disney Records; 2. produce and record master recordings embodying vocal performances in the Filipino and Tagalog languages derived from the Masters to be manufactured, advertised, distributed and sold; 3. produce and record, or cause to be produced and recorded, and to manufacture, advertise, distribute and sell records under the Walt Disney Records label, or records featuring any of the trademarks which embody master recordings originally created by VRC and comprised of either newly recorded music and vocals in the Filipino and Tagalog languages or instrumental only master recordings; 4. use and publish the drawings, artwork, fanciful characters and literary properties owned or controlled by Disney Enterprises, Inc., and the name, likeness and biography of each artist whose performances are embodied in the masters in connection with the advertising, publicizing or sale of records; EDcICT 5. use the names and designs (as specified in the Agreement) on the labels, jackets, and or advertising and promotional materials related thereto, in connection with the sale of records; that in consideration of the aforementioned license, VRC agreed to pay Disney Records royalties as follows: Frontline Records 28 % PPD (published price to dealers) (Soundtracks, Musicals, New Releases) Back Catalog Records 22% PPD In reply, please be informed that under the most favored nation provision of the RP-US Tax Treaty [Article 13, paragraph 2(b)(iii)], the tax imposable 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. cDIHES Article 12 of the RP-Sweden 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, such royalties may also be taxed in the Contracting State in which they arise, and according to the law of that State, but if the recipient is the beneficial owner of the royalties, the tax so charged shall not exceed: "(a) 15 percent of the gross amount of the royalties where the royalties are paid by an enterprise registered with and engaged in preferred areas of activities and also royalties in respect of cinematographic films or tapes for television or broadcasting and royalties for the use of, or the right to use, any copyright of literary, artistic or scientific work; "(b) in all other cases, 25 per cent of the gross amount of the royalties. xxx xxx xxx" 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 owner of the royalties the tax so charged shall not exceed 15 percent of the gross amount the royalties. The competent authorities of the Contracting State may by mutual agreement settle the mode of application of this limitation. xxx xxx xxx" Such being the case, the royalties payable by VRC to Disney Records under their Licensing Agreement are subject to Philippine tax at the rate of fifteen percent (15%), in accordance with the provisions of both the RP-Denmark and RP-Sweden Tax Treaties, in relation to Article 13 paragraph 2(b)(iii) of the RP-US Tax Treaty, contrary to your opinion that the applicable rate is ten percent (10%). CIcEHS In addition to the foregoing, please note that the royalty payments remitted by VRC to Disney Records is subject to the ten percent (10%) value added tax under Section 108 of the National Internal Revenue Code of 1997. Moreover, Sec. 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 for this purpose. The duly validated VAT declaration/return is sufficient evidence in claiming input tax credit by the licensee." This ruling is being issued on the basis of the foregoing facts as represented and will be considered null and void if upon investigation it will be disclosed that the facts are different. Very truly yours, (SGD.) DAKILA B. FONACIER Commissioner of Internal Revenue