BIR Ruling [DA-337-03]

October 7, 2003 BIR RULING [DA-337-03] 27 (D) (1); 057-2000 Victor G. Bitong and Co. 12 M. Gregorio St. Quezon City Gentlemen : This refers to your letter dated November 21, 2002 requesting on behalf of New Age Systems Philippines, Inc. (formerly Domphils, Inc. and New Age for brevity) for a confirmation of your opinion that the income derived by New Age from its bank clients in its distribution of computer system software and performance of maintenance works, is in the nature of an ordinary business income subject to the 32% corporate income tax and not the 20% final tax on gross payments. It appears that New Age is a corporation primarily engaged in the business of developing, selling or otherwise dealing, either as principal or agent, in computer related services; that it designs and develops various computer system software for Philippine-based bank clients which enters into a License Agreement (LA), as well as Consultancy and Service Agreements with them; that the License Agreements grant the clients the non-exclusive right to use the licensed system or a modified form of the system for its own internal business purposes only, and not to serve, directly or indirectly, as a data processing unit for third persons; that the Service Agreement, on the other hand, provides for the technical services to be performed by New Age's personnel to the client, in support of the licensed system; and that New Age will receive fees in consideration for the rights granted and the support services rendered by them. In reply, please be informed that Section 27(D)(1) of the Tax Code of 1997 provides as follows: "(D) Rates of tax on certain passive incomes . "(1) Interest from deposits and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements, and royalties . A final tax at the rate of twenty percent (20%) is hereby imposed upon the amount of interest on currency bank deposits 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: Provided, However, That interest income derived by a domestic corporation from a depository bank under the expanded foreign currency deposit system shall be subject to a final income tax at the rate of seven and one-half percent (7 1/2%) of such interest income." As expressly stated, to be subject to the 20% final withholding tax, the royalties must be in the nature of passive income. (BIR Ruling No. 057-2000 dated November 7, 2000) Considering that the income derived by New Age from its bank clients in the distribution of computer system software and the performance of maintenance services is income generated in the actual pursuit and performance of its primary purpose, this Office hereby confirms your opinion that the same is clearly not passive income subject to the 20% final tax. TaIHEA Such being the case, the payments received by New Age from its conduct of trade or business is considered ordinary business income subject to the 32% regular corporate income tax. This ruling is being issued on the basis of the facts as represented. However, if upon investigation it will be ascertained that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group