BIR Ruling [DA-501-04]

September 24, 2004 BIR RULING [DA-501-04] C.L. Manabat & Co. 3rd to 6th Floor, Salamin Building 197 Salcedo Street, Legaspi Village Makati City Attention: Mr. Richard R. Lapres Manager Tax and Legal Department Gentlemen : This refers to your letter dated August 5, 2004 stating that your client, Mynd International Ltd. (the Company), formerly known as Policy Management Systems Corporation Limited, is a Foreign corporation organized and existing under the laws of the State of Delaware, USA; that it is licensed to transact business in the Philippines by operating a branch office on April 5, 1999 with the Securities and Exchange Commission (SEC) with SEC License No. A199815698 with principal office address at the 11th Floor Pacific Star Building, Sen. Gil Puyat Avenue, Makati City; that its primary purpose is to provide installation, maintenance, design, assembling and support services of computer software, and import/export of computer peripherals in the capacity of either as an agent, trading company, computer service provider or manufacturer; to analyze and design computer programs, to design, import/export installation, service and maintenance of automating machinery and robots required for surveying computer software; that on November 5, 2001, the Company has changed its corporate name from Mynd International, Ltd. to Mynd International, Ltd. (Philippine Branch) doing business under the name and style of CSC International Holdings, Inc.; and that the Company in the ordinary conduct or in the active pursuit and performance of its primary purpose normally grants its local customers (end-users) a personal, non-transferable, non-assignable and non-exclusive license for the use of the software, which continues until terminated pursuant to the terms and conditions as stipulated by the Company and its customers. In connection therewith, you now request confirmation of your opinion that income payments made to Mynd International Ltd. (Philippine Branch), doing business under the name and style of CSC International Holdings, Inc. for the use of or right to use software products and the rendition of the related support and maintenance services to local end-users are considered ordinary business income subject to the 32% regular corporate income tax under Section 27(A) of the Tax Code of 1997 and to the 2% creditable withholding tax at source. In reply thereto, please be informed that in BIR Ruling No. DA351-03 dated October 10, 2003 , which was later reiterated in BIR Ruling No. DA518-03 dated December 16, 2003 , this Office 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. "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 business income subject to the 32% regular corporate income tax is hereby confirmed." IN VIEW OF THE FOREGOING, since the income payments made to Mynd International Ltd. (Philippine Branch) for the use of or the right to use its software products is in all fours similar to the above-cited cases, this Office holds that the income derived therefrom is considered as ordinary business income subject to the 32% corporate income tax imposed under Section 27(A) of the Tax Code of 1997 and consequently to the 2% creditable withholding tax prescribed in Revenue Regulations No. 2-98, as amended by Revenue Regulations No. 14-2002. IaEASH 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.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group