Sapalo Velez Bundang & Bulilan Law Offices

September 10, 2009 BIR RULING [DA-(C-207) 531-09] RR 2-98; DA-628-07; DA-129-04; DA-070-02 Sapalo Velez Bundang & Bulilan Law Offices 11/F, Security Bank Centre, Ayala Avenue Makati City Attention: Attys. Romeo H. Duran & Alexius P. Tang Gentlemen : This refers to your letter dated November 27, 2008 requesting on behalf of your client, NETWORLD CAPITAL VENTURES, INC. ("NETWORLD", for brevity), a domestic corporation organized and existing under and by virtue of Philippine laws, with principal office at 1782 Nicanor Garcia St. corner Candelaria St., Makati City, for confirmation of your opinion that income payments to NETWORLD, which is engaged in the sale of computer services and other computer-related activities, by its local clients or customers are subject to the creditable/expanded withholding tax of two percent (2%) , in accordance with Section 2.57.2 (E) (4) (m) of Revenue Regulations (RR) No. 2-98, as amended. The facts as represented are as follows: NETWORLD was registered with the Securities and Exchange Commission (SEC) on December 21, 2005 under SEC Registration No. CS200520630. On May 15, 2008, the primary and secondary purposes of its Articles of Incorporation were amended to reflect, among others, NETWORLD's new business focus and direction, which is to render or perform exclusively information technology ("IT") and other computer-related or computer-based services for its various customers or clients. In particular, the primary purpose of NETWORLD was amended to read as follows: "To engage in, conduct, and carry on the business of sale of computer services, such as but not limited to computer programming, software/program development/design, providing internet and network services, web page design, computer data processing, database and storage management, information modeling, systems analysis and design/development, conversion or base services, management & integration, operations & maintenance, training and other support functions for complex and high performance computing environments, and other computer related services without engaging as Internet Service Provider." cCaATD Pursuant to its primary purpose as an IT company, NETWORLD shall be rendering and performing various numerous IT and computer-related services and/or activities for its local customers or clients in the Philippines, which include: IT Solutions Design providing programming, analysis, design, and and Development development, enhancement, and maintenance of various types of IT solutions across different types of delivery platforms IT Data Center providing facilities and services covering end-to- Management end requirements of data center requirements involving environmentals, system programming, planning, network, hosts, storage, back-up, databases, disaster recovery, report generation, technical accreditations, and security Service Desk providing facilities and services for the maintenance of an IT service desk such as tiered support, ticketing, service level management, incident and problem management Office Remote/ providing facilities and services covering end-to- Branch Support end requirements needed to support offices or branches such as network (planning, connectivity, maintenance), PC/Printer/ Peripherals (sourcing, deployment, installation, maintenance, decommissioning), applications (rollouts and maintenance), physical security alarms, and other types of services that will require on-site support Information Security rendering IT-based security services such as Services vulnerability assessment, identity access, first party assessment, and providing disaster recovery solutions IT Process design, documentation, development, Engineering implementation, assessment, and maintenance of IT and business processes based on internationally accepted standards such as CMMI and ISO 2000 (ITIL), including Quality Assurance Test, Stress Testing, change Management and Release Management IT Skills providing analysis, administration, tracking, Management course design, implementation, turnover and results analysis of required skills as needed in fulfilling projects completion IT Portfolio providing IT-based portfolio management services such as project prioritization, resource management, performance management and design, implementation, and monitoring of Service/Operating Level Agreements (SLAs/OLAs) From the foregoing, it is your opinion that the gross income or service fees received by NETWORLD from its clients or customers for rendering the above services are subject to a creditable/expanded withholding tax of two percent (2%), pursuant to Section 2.57.2 (E) (4) (m) of RR No. 2-98, as amended. In reply thereto, please be informed that Section 2.57.2 (E) (4) (m) of RR No. 2-98, as amended by RR No. 14-2002, provides viz. : "SECTION 2.57.2. Income Payment Subject to Creditable Withholding Tax and Rates Prescribed Thereof. Except as herein otherwise provided, there shall be withheld a creditable income tax at the rates specified for each class of payee from the following items of income payments to persons residing in the Philippines: xxx xxx xxx (E) Income payments to certain contractors On gross payments to the following contractors, whether individual or corporate Two percent (2%) : xxx xxx xxx (4) Other contractors xxx xxx xxx (m) Persons engaged in the sale of computer services; computer programmers, software/program developer/designer, internet service providers, web page designing, computer data processing, conversion or base services and other computer related activities; . . . ." In BIR Ruling DA-628-07 dated December 7, 2007, involving, among others, the performance of System Integration Services by Unisys Australia Limited (Philippine Branch), this Office ruled thus: ". . . . The System Integration Services performed by Unisys Philippines in relation to the implementation of a computerized solution to mission-critical business requirements of PPA such as those relating to the completion and acceptance of systems specification, the completion of accounting and financial management systems, and completion of the administrative port operations, inventory and engineering systems constitute computer related activities. Moreover, installation of Application Software and Related Software, the development of data processing techniques, among others, as well as the warranty extended to systems application and the Unisys Philippines-Supplied Software, Hardware/Peripherals and Infrastructure further confirm the status of Unisys Philippines as other contractor under Section 2.57.2 (E) (4) (m), supra . The aforesaid services clearly show that Unisys Philippines is engaged in the sale of computer services, computers programmers, software/program developer/designer, computer data processing and other computer related activities. TCcDaE Such being the case, the gross income received by Unisys Philippines in the form of Professional Fees and Solution Costs should be subject to the 2% withholding tax." Similarly, this Office has ruled that a contractor providing computer-programming services hired by companies to help develop their system and computer-programming requirements are engaged in the sale of computer services, and hence subject to the 2% creditable withholding tax on income based on the gross amount received, net of value-added tax. (BIR Ruling DA-129-04, dated March 24, 2004; BIR Ruling DA-070-02, dated April 18, 2002) From the foregoing, and considering that the above outlined activities of NETWORLD clearly show that it is engaged in the sale of computer services, computer programming, software/program developing/design, computer data processing and other computer-related activities, this Office hereby confirms your opinion that the gross income or service fees received by it from its clients or customers for rendering the above services are subject to a creditable/expanded withholding tax of two percent (2%), pursuant to Section 2.57.2 (E) (4) (m) of RR No. 2-98, as amended by RR 14-2002. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation it is shown that the facts are different from those represented, then this ruling shall be null and void. SacTAC Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service