New ruling on VAT related to music recording and broadcasting agreements

On June 11, 2009, the Federal Tax Court, Division B ("TFN" by its Spanish abbreviation) confirmed the tax authority decision in the case "Ortega, Emanuel" and ordered the singer to pay Value Added Tax ("VAT"), compensatory interest and a fine which amounts to 70% of the unpaid tax (Law No. 11,683 on Tax Proceedings, Section 46) related to the sums that the singer had received in consideration for a music recording and broadcasting agreement.

Under the contract, the singer agreed to play certain musical works and assigned to the recorded music company, on an exclusive basis, the property of the phonograms and any connected rights in order that the company may distribute them.

The TFN deemed that the singer's duties under the contract and the performance of musical pieces to be recorded was subject to VAT (Section 21:f of VAT Law). Whereas, the Court reasoned, an assignment of copyright is not subject to VAT (Section 3, last paragraph, VAT Law) in the case at hand this assignment was connected with taxable services that the artist was bound to render and, therefore, it must be taxed.

This is to say, the TFN understood that the assignment of musical works’ ownership, in connection with services subject to tax, should also be taxed. The ruling also took into account that the singer proved to be the author and composer of works, but has not filed evidence that he was the copyright beneficiary.

Although the tax treatment will depend on the particularities of the contract at hand, the ruling triggers a warning signal for this kind of agreements, which are “fairly common” within the context of the recording industry.