BIR Ruling [DA-195-02]

October 30, 2002 BIR RULING [DA-195-02] SGV & Co. 6760 Ayala Avenue Makati City Attention: Joel L. Tan-Torres Partner Gentlemen : This refers to your letter dated May 17, 2002 stating that your client, Oracle Philippines (Oracle), is a corporation duly organized and existing under and by virtue of Philippine laws; that it is established for the primary purpose of "(P)roviding complete information solutions including licensing of computer software; provide consulting and training services; technical maintenance and updating of software programs; research and development of products." HICSTa that Oracle was appointed as a non-exclusive distributor of the software programs of Oracle Corporation, a corporation organized under the laws of the United States of America; that as the appointed distributor and licensee, it was granted a license to market, promote and to sublicense the software programs in the Philippines; that pursuant to the Distributorship Agreement, Oracle Corporation shall retain all intellectual property rights in the licensed computer software programs and to any product developed, acquired or licensed by Oracle; that in consideration for the above, Oracle pays Oracle Corporation royalties based on a certain percentage of the revenue; that as shown in the license and support contract, Oracle licenses computer software to customers, which license, may or may not involve consulting services depending on the package chosen by the customer; and that the customer support is part of the license agreement whereby the customer is given updates on the computer software and other forms of technical support. Based on the foregoing representations, you now request for a ruling that the income derived by Oracle from the distribution of computer systems software and rendition of support and maintenance services is in the nature of ordinary business income subject to the regular corporate income tax of 32% and not the 20% final tax on gross royalty payments under Section 27(D)(1) of the Tax Code of 1997. In reply thereto, please be informed that Section 27(D)(1) of the Tax Code of 1997 provides that a final tax at the rate of twenty percent (20%) is hereby imposed upon the amount of interest on currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements received by domestic corporations, and royalties , derived from sources within the Philippines. . . . In applying and interpreting the above-cited section, this Office in BIR Ruling No. 057-00 dated November 7, 2000 ruled that to be subject to the 20% final withholding tax, the royalties must be in the nature of passive income. In the aforestated case, the income derived by MKI-Phils from the distribution of the Licensed Computer Systems to Philippine banks and the performance of support services is income generated in the active pursuit and performance of its primary purpose, it was held to be clearly not passive income subject to the final tax of 20%. Thus, this Office held that the payments received by MKI-Phils. from the active conduct of trade or business is considered ordinary business income subject then to the 33% (for 1999) regular corporate income tax. Inasmuch as the income derived by Oracle, from the licensing computer software, consulting and training services, technical maintenance and updating of software programs, is in the exercise of its primary purpose as distributor and licensee, said income is therefore considered as an ordinary income subject to the 32% regular corporate income tax or the 2% minimum corporate income tax, as the case may be, as prescribed in Section 27(A) or (E) of the Tax Code of 1997. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) EDMUNDO P. GUEVARA Deputy Commissioner Legal & Inspection Group