ITAD Ruling No. 176-00

November 14, 2000 ITAD RULING NO. 176-00 RP-US Article 13 RP-Denmark Article 12 BIR Ruling No. ITAD-123-00 Joaquin Cunanan & Co. 14TH Floor, Multinational Bancorporation Centre 6805 Ayala Avenue, Makati City Attention: Atty . Alexander B . Cabrera Partner, Tax Services Gentlemen : This refers to your letter dated July 14, 200 requesting confirmation of your opinion that the royalty payments to a foreign licensor which is a resident of the United States are subject to the preferential tax rate of 15% pursuant to Article 13(2)(b)(iii) of the RP-US Tax Treaty in relation to Article 12(2) of the RP-Denmark Tax Treaty. CEASaT It is represented that Columbia Tri-Star Film Distributors International, Inc. (hereinafter referred to as Columbia Tri-Star) is a non-resident foreign corporation organized and existing under the laws of the State of California, United States of America; that Columbia Tri-Star is not registered as a corporation or partnership licensed to do business in the Philippines as per Certification of Non-Registration of Corporation/Partnership issued by the Securities and Exchange Commission dated May 24, 2000; that Columbia Pictures Industries, Inc. (hereinafter referred to as Columbia Pictures) is a Philippine branch of Columbia Pictures Industries, Inc., a corporation organized under the laws of Delaware, United States of America, with principal office address at 10202 West Washington Blvd., Culver City, California, U.S.A. with branch office at 7/F, Times Plaza Bldg., UN Avenue corner Taft Avenue, Manila; that on January 3, 2000, Columbia Pictures entered into a Distribution Agreement with the Columbia Tri-Star; that on June 21, 2000 and June 23, 2000 Columbia Pictures and Columbia Tri-Star signed a Supplemental Agreement as an integral part of the Distribution Agreement; that under the Distribution Agreement, Columbia Pictures granted the license to distribute locally theatrical and television products such as films, pictures and videotapes; and that in consideration for the grant of license to distribute; Columbia Pictures shall pay Columbia Tri-Star a royalty/rental fee equivalent to sixty six per cent (66%) of the proceeds from exhibitors, which is net of leasing cost. In reply, please be informed that Article 13 of the RP-US Tax Treaty provides as follows: "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 per cent 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 the Philippine tax that may be imposed on royalties of the same kind paid under similar circumstances to a resident of a third State, "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 film or films or tapes used for radio or television broadcasting, any patent, trademark, 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 or any such right or property which are contingent on the productivity use, or disposition thereof. "xxx xxx xxx" Corollary, Article 12 (2) of the RP-Denmark Tax Treaty states: "Article 12 Royalties "xxx xxx xxx "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. DISEaC "xxx xxx xxx" Based on the foregoing, royalties paid by a Philippine corporation to a resident of United States may be taxed at the lowest rate of the 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 of the RP-Denmark Tax Treaty provides that royalties paid by Philippine resident to resident of Denmark for the use of or the right to use cinematographic films and films and tapes for television locally are subject to the rate of 15 per cent of the gross amount of royalties, the lowest of the same kind and paid under similar circumstances among Philippine tax treaties. Such being the case and since Columbia Pictures is not registered with the Philippine Board of Investments and engaged in preferred areas of activities in the Philippines, royalties arising in the Philippines and payable to Columbia Tri-Star are subject to Philippine tax at the rate of 15% of the gross amount of royalties pursuant to Article (2)(b)(iii) of the RP-US Tax Treaty in relation to Article 12(2) of the RP-Denmark Tax Treaty. Moreover, the said royalties shall be subject to 10% value-added tax (VAT) pursuant to Sec. 108 of the Tax Code and that Columbia Pictures, shall, before making payments of royalties to Columbia Tri-Star, withhold and remit to this Bureau the said 10% VAT due thereon, by filing a separate VAT return for and in behalf of Columbia Tri-Star using BIR Form 1600. The duly validated VAT declaration/return is sufficient evidence for Columbia Pictures in claiming input tax credit (Sec. 4.110-3(b) of the Revenue Regulation No. 7-95). This ruling is being issued based on the foregoing representations. However, if upon investigation, it will be disclosed or discovered that the facts are different, then this ruling shall be considered null and void. TaCEHA Very truly yours, Commissioner of Internal Revenue By: (SGD.) LILIAN B. HEFTI Deputy Commissioner Legal and Inspection Group