BIR Ruling [DA-351-03]

October 10, 2003 BIR RULING [DA-351-03] Sec. 27; DA-195-02 Donato Em Santos Zarate & Rodriguez 7/F Electra House, 115 Esteban Street Legaspi Village, 1229 Makati City Attention: Atty. Demosthenes B. Donato Gentlemen : This refers to your letter dated May 9, 2003 requesting on behalf of your client, Misnet, Inc. (MISNet), for a confirmation of your opinion that the income derived by MISNet from its clients in the distribution of computer software programs/products and provision of maintenance or training or consulting services is in the nature of ordinary business income subject to the 32% regular corporate income tax and not the 20% final tax on gross royalty payments under Section 27(D)(1) of the Tax Code of 1997. It is represented that MISNet is a domestic stock corporation primarily engaged in the distribution, support and maintenance of software programs/products, provision of training and related services, in the domestic and foreign markets; that it is licensed by Microsoft Regional Sales Corporation (Microsoft) of Singapore, to distribute, support, provide training and use in the Philippines, licensed software programs/products owned by Microsoft, including basic and related materials and services incidental thereto; that MISNet does not and will not acquire any proprietary rights of whatever kind in or over the licensed software programs/products except the right to distribute, support, provide training and use the same within the Philippines; that MISNet pays the purchase price to Microsoft for the purchase of the licensed software programs/products; that as its principal and main activity, MISNet distribute the licensed software programs/products through the issuance of sales invoices; that the end-user license agreements (EULA) covering the software programs/products are executed directly between Microsoft and the clients as end users; that the EULA grants the clients as end users the perpetual and non-exclusive right to use the licensed software programs/products for its own internal business/personal purposes; that the EULA also grants the clients as end users the limited right to transfer or assign the license to use the software programs/products; that as part of its principal activity, MISNet also provides technical services to the clients by entering into support and maintenance agreements, training services agreements, and consulting services agreements; that the service agreements provide for the rendition of technical services by and through MISNet personnel; and that MISNet receives fees in consideration of the services provided. cSTDIC In reply, 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 two occasions had ruled that to be subject to the 20% final withholding tax, the royalties must be in the nature of passive income. Thus, if the income is generated in the active pursuit and performance of the corporation's primary purpose, the same is NOT passive income but ordinary business income subject to the regular corporate income tax. ( BIR Ruling No. 057-00 dated November 7, 2000 and BIR Ruling No. DA-195-02 dated October 30, 2002 ) In the instant case, the income derived by MISNet from the distribution of the licensed software programs/products to its clients, and the provision of technical services, is income generated in the active pursuit and performance of its primary purpose, therefore, it is clearly NOT a passive income subject to the 20% final tax. Such being the case, your opinion that the payments received by MISNet from the active conduct of trade or business is considered ordinary business income subject to the 32% regular corporate income tax is hereby confirmed. 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, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group