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
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
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.
* * * * *
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.
For further assistance please call 614-433-7617.