Information Release

CF 1991-02 - Foreign Technical Service Fee Deduction - May 15, 1991

Foreign technical service fees can qualify for the foreign source income deduction provided in Ohio Revised Code (ORC) division (I)(2) of section 5733.04 to the extent that the technical service was performed outside the United States. Set forth below is the Income Tax Audit Division's discussion of this matter:

  • Division (I)(2) of ORC section 5733.04 provides for a franchise tax deduction for
    ". . . amounts received for . . . technical or other services derived from sources outside the United States."

  • The definition of a "technical assistance fee" contained in the allocation provisions of division (G) of ORC section 5733.051 also applies to the foreign source income deduction for income from technical or other services where such income was derived from sources outside the United States. The courts have defined "technical assistance fee" as ". . . a payment for mechanical, industrial, scientific or practical aid expertise or services."  See Holiday Inn v. Limbach (1990), 48 Ohio St. 3d 34.

  • However, income from technical services performed in the United States for a foreign customer does not qualify for the foreign source income deduction: "The source of income for services rendered under R.C. 5733.04(I) is determined by the situs of the service performed."  See Rio Indal v. Lindley (1980), 62 Ohio St. 2d 283. Income from technical services provided to a foreign customer is deductible under division (I) of ORC section 5733.04 only to the extent that the service was performed outside the United States. If the technical service is performed both within and without the United States, net income from the project must be reasonably allocated within and without the United States.

  • Deductible foreign source income must be reduced by the expenses incurred in generating that income. See Westinghouse v. Lindley (1979), 58 Ohio St. 2d 137. Whether deductible foreign source income must be reduced by expenses which are not directly related to producing that income (such as interest, research and development, stewardship, charitable contributions, etc.) is before the Ohio Supreme Court in Dana Corporation v. Limbach, Case No. 90-730.

  • If the technical service fees are received for services performed both within and without the United States, the United States' portion of the technical service fees are apportionable if total (United States and foreign) technical service fees represent the principal (more than any other single source of income) source of gross receipts of the taxpayer.  However, the United States' portion of the technical services fees are allocable if total (United States and foreign) technical service fees do not represent the principal source of gross receipts of the taxpayer. See division (G) of ORC section 5733.051.

  • Fairness may require the exclusion from the apportionment formula of that property, payroll, and sales which generated the deductible net foreign source income (and allocable United States' income). See division (B)(2)(d) of ORC section 5733.05.

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Franchise Tax Information Releases are not "Opinions of the Tax Commissioner" within the meaning of ORC section 5703.53. Accordingly, the Tax Commissioner is not bound by this release. Nevertheless, the above discussion does reflect the Income Tax Audit Division's interpretation of the law.

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