BIR Ruling [DA-355-03]

October 10, 2003 BIR RULING [DA-355-03] 27 (D) (1); 057-2000 Victor G. Bitong and Co. 12 M. Gregorio St.,Quezon City Gentlemen : This refers to your letter dated November 12, 2002 requesting on behalf of Progressive Software, Inc. (Progressive for brevity) for a confirmation of your opinion that the income derived by Progressive from its bank clients in its distribution of computer system software and performance of maintenance works, is in the nature of ordinary business income subject to the 32% corporate income tax and not the 20% final tax on gross royalty payments. Documents submitted shows that Progressive is a corporation primarily engaged in the business of distributing and selling licensed software products; that in the course of its distribution and trading of various computer system software and applications, Progressive enters into License Agreements (LA) with its clients, as well as Consultancy and Service Agreements; that such 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 the Progressive's personnel to the client, in support of the License System; and that Progressive receive fees in consideration for the rights granted and the support services provided by them. It is further represented that royalties on the licensed software products is paid for by Progressive's supplier, Oracle Phil.,who, in turn, is the authorized exclusive distributor of the software that is produced by Oracle, Inc. (USA);and that consequently, all necessary taxes in connection with the royalty fee is already levied by Oracle Phil.,a duly incorporated entity under Philippine law. 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 . TIAEac "(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 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: 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 Progressive from its bank clients in the distribution of computer system software and the performance of maintenance services is income generated in the active 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. Such being the case, the payments received by Progressive from the active 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