BIR Ruling [DA-518-03]

December 16, 2003 BIR RULING [DA-518-03] 27 (D) (1); 057-2000 Joaquin Cunanan & Co . 29th Floor Philamlife Tower 8767 Paseo de Roxas Makati City Attention: Mr. George J. Lavadia Principal Tax Services Gentlemen : This refers to your follow-up letter dated May 7, 2003 requesting confirmation of your opinion that the software license fees received by your client, Getronics Philippines Inc. (GPI) from its regular sale of software licenses to Philippine banks are in the nature of ordinary business income subject to the 32% regular corporate income tax under Section 27(A) of the Tax Code of 1997 and not royalty payments under Section 27(D) of the Tax Code of 1997 subject to the 20% final tax. It is represented that GPI is a Philippine corporation engaged in the marketing and selling at wholesale of computer, networking products and services, the distribution of computer hardware, software and other allied products, assembly, installation, and maintenance services, offices automation and consultancy; that its main business activity is the selling of software licenses to its bank clients in the Philippines which includes granting to the latter the non-exclusive right to use the software internally for its own business and the support services provided in connection therewith; and that GP acquired the license to market and sell computer, networking products and related services in the Philippines from Getronics USA. 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 deposit and yield or any other monetary benefit from deposits 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 depositary bank under the expanded foreign currency deposit system shall be subject to a final income tax the rate of seven and one-half percent,(7 %) of such interest income." As expressly denoted in the caption, to be subject to the 20% final withholding tax, the royalties must be in the nature of a passive income as defined in Section 42(A)(4) of the Tax Code of 1997. On the other hand, since the software license fee received by GPI are in the nature of ordinary business income arising from the active pursuit of its business, this Office confirms your opinion that the same is clearly not passive income subject to the 20% final tax. Such being the case, the software license fee received by GPI is considered ordinary business income subject to the 32% regular corporate income tax. (BIR Ruling No. 057-2000 dated November 7, 2000) CHcESa 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