July 15, 2020

ITAD BIR RULING NO. 056-20

Articles 5 (Permanent
Establishment), 7 (Business Profits)
and 11 (Royalties)
Philippines-Hungary tax treaty

Viva Communications, Inc.

7th Floor, East Tower
Philippine Stock Exchange Centre
Exchange Road, Ortigas Center
1605 Pasig City

Attention: AAA
_______________

Gentlemen :

This refers to your tax treaty relief application filed on August 4, 2016
requesting confirmation that income payments made by Viva Communications,
Inc. ("Viva") to Freeway Entertainment Korlatolt Felelossegu Tarsasag
("Freeway") are subject to relief under the Convention between the Republic of
the Philippines and the Republic of Hungary for the Avoidance of Double
Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on
Income ("Philippines-Hungary tax treaty").

FACTS:

Freeway is a foreign corporation organized and existing under the laws of

Hungary and a resident thereof based on the Certificate of Company Data Extract
issued by the Igazsagugyi Miniszterium of Hungary and Certificate of Residency
issued by the Nemzeti Ado-es Vamhivatal of Hungary. It is engaged in publishing
journals and periodicals, sound recording and music publishing activities, other
publishing activities, reproduction of recorded materials, motion picture, video and
television program distribution activities, among others. It is not registered as a
corporation or partnership in the Philippines based on the Certificate of
Non-Registration of Company issued by the Securities and Exchange Commission.
On the other hand, Viva is a domestic corporation engaged in producing,
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 preparing, designing, staging, exhibiting, selling, distributing, leasing, trading or
otherwise dealing in motion pictures, including undertaking theatrical,
cinematographic and other varieties of entertainment, based on its Audited
Financial Statements as of December 31, 2016. Viva and Freeway are not related
entities. Viva is 74.90% owned by Viva Entertainment, Inc. (immediate parent), a
domestic corporation, which, in turn, is 71.10% owned by VRJ Holdings, Inc.
(ultimate parent), another domestic corporation.

On July 15, 2015, Viva, as agent, and Freeway, as channel provider,

entered into a Carriage of 24 Hour Channel — Agent Agreement where Freeway
appointed Viva as exclusive agent for the distribution of the Celestial Movies
Pinoy Channel ("Channel") in the Philippines. The Channel is a 24-hour
programming channel in standard definition version, which features Chinese and
Cantonese language movies dubbed in Tagalog by Viva. All movies in the
Channel shall be feature-length films. The Channel shall contain 300 movies for
the first license year and additional 50 new movies for succeeding license years.
Movies means any motion picture which has an original language primarily in
Mandarin or any other Chinese dialects, and wholly or partially produced or
distributed by companies domiciled in Hong Kong, Taiwan, China or Singapore.
The Agreement took effect on July 15, 2015 and will be in effect indefinitely
unless terminated by either party. IDSEAH

The parties shall share the Channel Net Revenue equally (being 50% to
Freeway and 50% to Viva), which is equal to the Channel Gross Revenue less
agency fee payable to Viva, equipment reimbursement, sub-agent costs (if
applicable), value added tax ("VAT"), and other related costs. The agency fee is
set at 5% for the first year of the Agreement, at 4% for the second and third year,
and at 3% for the fourth year and onwards. Channel Gross Revenue means
revenue derived by Viva from license agreements it entered into with local
channel operators for the distribution or broadcast of the Channel via subscription
television services or over-the-top linear services (streaming through internet).
Viva shall pay Freeway the latter's share in the Channel Net Revenue together
with equipment reimbursement and sub-agent costs (if applicable) within 30 days
from the date of collection by Viva of the Channel Gross Revenue. Viva paid
Freeway's share in the Channel Net Revenue amounting to Php__________ in
2016, Php__________ in 2017, and Php__________ in January to April 2018. In
2016 and 2015, Viva's gross revenue amounted to Php_______________ and
Php_______________, respectively. In 2016, the ratio of Viva's estimated
Channel Net Revenue with its total gross revenue is 3.56%, as computed below:

Amount paid to Freeway Php__________

Divide by: Revenue sharing percentage 50%

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 –––––––––––––––
Channel net revenue __________
Divide by: Viva's gross revenue ______________
Ratio of Viva's channel net revenue over gross revenue 3.56%
=============

In addition, the parties shall share the Local Ad Net Revenue and the
Regional Ad Net Revenue equally (being 60% to Freeway and 40% to Viva).
Local Ad Net Revenue means the Local Ad Gross Revenue less agency fee
payable to Viva (set at 15%), VAT, sub-ad sales costs (if applicable), and other
related costs. Regional Ad Net Revenue means the Regional Ad Gross Revenue
apportioned by Freeway to Viva based on the former's rate card for the territory
less agency fee payable to Viva (set at 15%) and tax. Viva shall pay Freeway's
share in the Local Ad Net Revenue together with sub-ad sales costs (if applicable)
within 30 days from the date of collection by Viva of the Local Ad Gross
Revenue. In the event there is any Regional Ad Net Revenue to be shared between
the parties, Viva's share in the Regional Ad Net Revenue may be offset and
deducted from Freeway's Local Ad Net Revenue before Viva's remittance to
Freeway. To date, Viva has not paid Freeway any share in the Channel Net
Revenue because no commercial airtimes have been sold by Viva to either local or
regional advertisers.

Based on a sworn statement issued by Viva, the income subject of this

ruling is not under investigation, on-going audit, administrative protest, claim for
refund or issuance of a tax credit certificate, collection proceeding, or judicial
appeal.

RULING:

Income tax

In reply, please be informed that under Section 28 (B) (1) of the National
Internal Revenue Code of 1997 ("Tax Code"), as amended, income derived in the
Philippines by a foreign corporation not engaged in trade or business is subject to
income tax at the rate of 30%, to wit:

"SEC. 28. Rates of Income Tax on Foreign Corporations. —

xxx xxx xxx

(B) Tax on Nonresident Foreign Corporation. —

(1) In General. — Except as otherwise provided in this Code, a

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 foreign corporation not engaged in trade or business in the
Philippines shall pay a tax equal to thirty-five percent (35%)
of the gross income received during each taxable year from
all sources within the Philippines, such as interests,
dividends, rents, royalties, salaries, premiums (except
reinsurance premiums), annuities, emoluments or other fixed
or determinable annual, periodic or casual gains, profits and
income, and capital gains, except capital gains subject to tax
under subparagraph 5(c) and (d) above: *(1) Provided, That
effective January 1, 2009, the rate of income tax shall be
thirty percent (30%)."

However, under Section 32 (B) (5) of the Tax Code, such income is exempt
to the extent required by any treaty obligation binding upon the Philippine
government, to wit:

"SEC. 32. Gross Income. —

xxx xxx xxx

(B) Exclusions from Gross Income. — The following items shall

not be included in gross income and shall be exempt from
taxation under this Title:

xxx xxx xxx

(5) Income Exempt under Treaty. — Income of any kind,

to the extent required by any treaty obligation binding
upon the Government of the Philippines."

In this case, Freeway's share in the Channel Net Revenue constitutes

payment of royalty and is taxable under paragraphs 2 and 3, Article 11 of the
Philippines-Hungary tax treaty, which reads as follows:

"Article 11
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. Such royalties may also be taxed in the Contracting State in

which they arise and according to the laws of that State.
However, if the recipient is the beneficial owner of the
royalties, the tax so charged shall not exceed the lesser of:

a) 15 percent of the gross amount of the royalties,

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 b) the lowest rate of Philippine tax that may, under
similar circumstances, be imposed on royalties
derived by a resident of a third State. AHCETa

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, 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 and includes payments of any kind in respect of
motion picture films and works on films or videotapes or
video cassettes for use in connection with television or tapes
for the use of radio broadcasting."

The Channel Gross Revenue, out of which the parties' respective shares in
the Channel Net Revenue are paid, is derived from the distribution or broadcast of
the Movies in the Philippines through local channel operators via subscription
television services or by way of over-the-top linear services (streaming through
internet). Under paragraph 3, Article 11 of the Philippines-Hungary tax treaty, the
term royalties includes payments of any kind in respect of motion picture films
and works on films or videotapes or video cassettes for use in connection with
television. Under paragraph 2 (b) of the same article, royalties arising in the
Philippines and paid to a resident of Hungary are subject to the lowest rate of
Philippine income tax that may, under similar circumstances, be imposed on
royalties derived by a resident of a third State (so-called most favored nation
treatment).

In this connection, paragraphs 2 and 3, Article 12 of The Agreement

between the Government of the Republic of the Philippines and the
Government of the United Arab Emirates for the Avoidance of Double
Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on
Income and on Capital ("Philippines-United Arab Emirates tax treaty")
provide as follows:

"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

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 State, but if the beneficial owner of the royalties is a resident
of the other Contracting State, the tax so charged shall not
exceed 10 per cent of the gross amount of the royalties. The
competent authorities of the Contracting States shall, by
mutual agreement, settle the mode of application of this
limitation.

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 cinematographic films and films or tapes for
television or radio 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."

Under paragraph 3, Article 12 of the Philippines-United Arab Emirates tax

treaty, the term royalties include payments for the use of, or the right to use, any
copyright of literary, artistic or scientific work including cinematographic films
and films or tapes for television. Under paragraph 2 of the same article, royalties
arising in the Philippines and paid to a resident of the United Arab Emirates are
subject to Philippine income tax at the rate of 10%. ScHADI

This being the case, Freeway's share in the Channel Net Revenue, being
royalties, are subject to income at the rate of 10% under paragraph 2 (b), Article
11 of the Philippines-Hungary tax treaty, in relation to the most favored nation
treatment under paragraph 2, Article 12 of the Philippines-United Arab Emirates
tax treaty.

On the contrary, Freeway's revenue shares from the Local Ad Net Revenue
and Regional Ad Net Revenue are not considered royalties but business profits
taxable under paragraph 1, Article 7 and paragraphs 1, 2 and 6 of the
Philippines-Hungary tax treaty below:

"Article 7
BUSINESS PROFITS

1. The profits of an enterprise of a Contracting State shall be

taxable only in that State unless the enterprise carries on
business in the other Contracting State through a permanent
establishment situated therein. If the enterprise carries on
business as aforesaid, the profits of the enterprise may be
taxed in the other State but only so much of them as is
attributable to that permanent establishment."

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 "Article 5
PERMANENT ESTABLISHMENT

1. For the purposes of this Convention, the term 'permanent

establishment' means a fixed place of business through which
the business of the enterprise is wholly or partly carried on.

2. The term 'permanent establishment' includes especially:

a) a place of management;

b) a branch;

c) an office;

d) a factory;

e) a workshop;

f) a mine, an oil or gas well, a quarry or any other place

of extraction of natural resources;

g) a building site or construction project or supervisory

activities in connection therewith, where such site,
project or activity continues for a period of more than
six months;

h) an assembly or installation project which exists for

more than six months;

i) the furnishing of services, including consultancy

services by an enterprise through employees or other
personnel where activities of that nature continue (for
the same or a connected project) within a State for a
period or periods aggregating more than six months
within any twelve-month period.

xxx xxx xxx

6. An enterprise shall not be deemed to have a permanent

establishment in a Contracting State merely because it
carries on business in that State through a broker, general
commission agent or any other agent of an independent
status, provided that such persons are acting in the ordinary
course of their business. However, when the activities of such
an agent are devoted wholly or almost wholly on behalf of the
enterprise, he shall not be considered an agent of an
independent status within the meaning of this paragraph if it
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 is shown that the transactions between the agent and the
enterprise were not made under arms-length conditions. In
such a case, the provisions of paragraph 4 shall apply.

The Local Ad Net Revenue and the Regional Ad Net Revenue consist of
revenue derived by Viva from providing commercial airtime to local and regional
advertisers for the local commercials/advertisements on the Channel. Unlike local
channel operators and internet movie providers, advertisers are not paying for the
right to broadcast the Movies; hence payments for the airtime are not considered
royalties under paragraph 3, Article 11 of the Philippines-Hungary tax treaty. The
revenue constitutes business profits since it is derived from Freeway's ordinary
course of business. aICcHA

Under paragraph 1, Article 7, business profits derived by an enterprise of

Hungary in the Philippines may be taxed in the Philippines if the profits are
attributable to a permanent establishment which the enterprise has in the
Philippines. Under paragraphs 1 and 2, Article 5, the term permanent
establishment means a fixed place of business through which the business of the
enterprise is wholly or partly carried on, and includes a place of management, a
branch, an office, a factory, a workshop. Under paragraph 6 of the same article, a
permanent establishment includes also a broker, general commission agent or any
other agent of an independent status, which acts on behalf of an enterprise of the
other Contracting State, and where the activities of such agent are devoted wholly
or almost wholly on behalf of the enterprise and the transactions between the agent
and the enterprise were not made under arms-length conditions.

In the case of a branch, an office, or other fixed place of business, Freeway

is not deemed to have this type of permanent establishment since it is not engaged
in trade or business in the Philippines to which a fixed place of business is
necessary.

In the case of an agent of an independent status, Viva is considered as such

since it is not related with Freeway, and it is not established solely for the purpose
of acting on behalf of Freeway or another specific principal. Secondly, Viva does
not lose its independent status when it acts on behalf of Freeway. In 2016, the
ratio of Viva's estimated Channel Gross Revenue over its total gross revenue is
only 3.56%, which means that its business activities were not devoted wholly or
almost wholly on behalf of Freeway or another single principal.

This being the case, Freeway's share in the Local Ad Net Revenue and
Regional Ad Net Revenue, if any, is exempt from income tax in the Philippines
pursuant to paragraph 1, Article 7 of the Philippines-Hungary tax treaty.

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 Value-Added Tax

Finally, Freeway's share in the Channel Net Revenue and in the Local Ad
Net Revenue and Regional Ad Net Revenue, being payments for the lease of
property (namely, use of motion picture films, films, tapes and discs, use of cable
television time) in the Philippines, is subject to VAT under Section 108 (A) of the
Tax Code, to wit:

"SEC. 108. Value-Added Tax on Sale of Services and Use or Lease of

Properties. —

(A) Rate and Base of Tax. — There shall be levied, assessed and
collected, a value-added tax equivalent to ten percent (10%)
of gross receipts derived from the sale or exchange of
services, including the use or lease of properties: Provided,
that the President, upon the recommendation of the Secretary
of Finance, shall, effective January 1, 2006, raise the rate of
value-added tax to twelve percent (12%). . . 1(2)

. . . The phrase 'sale or exchange of services' shall likewise include:

xxx xxx xxx

(7) The lease of motion picture films, films, tapes and discs; and

(8) The lease or the use of or the right to use radio, television,
satellite transmission and cable television time.

Lease of properties shall be subject to the tax herein imposed irrespective of

the place where the contract of lease or licensing agreement was executed if
the property is leased or used in the Philippines."

Pursuant to Section 4.114-2 of Revenue Regulations No. 16-2005, 2(3)

Viva shall withhold VAT on Freeway's share in the Channel Net Revenue, Local
Ad Net Revenue and Regional Ad Net Revenue at the rate of 12% before remitting
it to Freeway. Viva shall use BIR Form No. 1600 (Monthly Remittance Return of
Value-Added Tax and Other Percentage Taxes Withheld). The duly filed form and
its accompanying proof of payment shall serve as documentary substantiation for
Viva's claim of input VAT on the payment; otherwise, if it is not a VAT-registered
taxpayer, Viva may treat the passed-on VAT as part of the cost of the lease of
property and treat the same as asset or expense, whichever is applicable. VAT
withheld shall be remitted within 10 days following the end of the month the
withholding was made. IDTSEH

This ruling is issued on the basis of the facts as represented. However, if

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 upon investigation it shall be disclosed that the actual facts are different, then this
ruling shall be without force and effect insofar as the herein parties are concerned.

Very truly yours,

(SGD.) CAESAR R. DULAY

Commissioner of Internal Revenue
Footnotes
1. Republic Act No. 10963, otherwise known as the TRAIN (Tax Reform for
Acceleration and Inclusion) Law, effective January 1, 2018, amends Section 108
(A) as follows:
"SEC. 108. Value-Added Tax on Sale of Services and Use or Lease of
Properties. —
(A) Rate and Base of Tax. — There shall be levied, assessed and collected, a
value-added tax equivalent to twelve percent (12%) of gross receipts derived from
the sale or exchange of services, including the use or lease of properties. . ."
2. Entitled Revenue Regulations No. 16-2005 (Consolidated Value-Added Tax
Regulations of 2005), as amended by Revenue Regulations No. 4-2007
(Amending Certain Provisions of Revenue Regulations No. 16-2005, as
Amended, Otherwise Known as the Consolidated Value-Added Tax Regulations
of 2005).

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 Endnotes

1 (Popup - Popup)
* Note from the Publisher: Copied verbatim from the official copy. The phrase "and
(d) above" no longer appears in RA 9337, the law amending this provision.

2 (Popup - Popup)
1. Republic Act No. 10963, otherwise known as the TRAIN (Tax Reform for
Acceleration and Inclusion) Law, effective January 1, 2018, amends Section 108
(A) as follows:
"SEC. 108. Value-Added Tax on Sale of Services and Use or Lease of Properties.
—
(A) Rate and Base of Tax. — There shall be levied, assessed and collected, a
value-added tax equivalent to twelve percent (12%) of gross receipts derived from
the sale or exchange of services, including the use or lease of properties. . ."

3 (Popup - Popup)
2. Entitled Revenue Regulations No. 16-2005 (Consolidated Value-Added Tax
Regulations of 2005), as amended by Revenue Regulations No. 4-2007
(Amending Certain Provisions of Revenue Regulations No. 16-2005, as
Amended, Otherwise Known as the Consolidated Value-Added Tax Regulations
of 2005).

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