BIR Ruling

November 2, 1976 Test of Taxability of Income This refers to your letter dated March 27, 1976 requesting a ruling as to whether or not the consulting services fee to be paid by Beach Hotels Corporation to Harrison Co. (HC),San Francisco, California, U.S.A. for services rendered in favor of Beach Hotels Corporation is subject to tax. cdtech Investigation by this Office disclosed that the services to be rendered by Harrison Co. in favor of Beach Hotels Corporation are as follows: "A. Scope of Services : 1. The following is a statement of the general categories in which HC's services are to be performed: HC agrees to conduct an on-site evaluation of all communications and low voltage system requirements for the four (4) existing Philippine hotel properties owned and operated by Beach Hotels Corporation. Upon completion of the aforementioned evaluation step HC will ascertain the systems requirements needed for each property from both an economic and operational standpoint. With receipt of Owner's concurrence to our recommendations, HC will proceed to engineer, specify and select the systems best suited to the needs of the four (4) properties. HC will inform the Owner, architects and contractors as to the space and conduit requirements, and mark drawings accordingly. 2. It is understood that by performing its services, HC will provide as complete a program of low voltage systems as possible, consistent with the various stages of construction of the four hotel projects. The services will include but are not restricted to those activities generally described in the Appendix "A". 3. HC shall consult and coordinate with the Owner, Architect and other Owner's consultants. HC shall attend any necessary conferences convened by the Owner. 4. HC shall fully cooperate and comply with all reasonable instructions given by the Owner in order to coordinate HC's services with the work of other parties involved in the Project. 5. The basic approach to this project will be as follows: In-depth interviews with all key project participants, including owners, architect, contractors, etc. On-site survey of project." xxx xxx xxx "B. Terms & Conditions : 1. Owner will pay HC the non-escalatable lump sum of Seventeen Thousand Five Hundred Dollars ($17,000.00) in United States dollars in the United States for the services rendered. 2. An initial payment of Five Thousand Two Hundred Fifty Dollars ($5,250.00) shall be payable upon execution of this Agreement. Monthly payments shall be made on account of the basic compensation in proportion to the amount of services rendered by HC so that after approval by the Owner of all of the services to be performed, the payments shall equal the basic compensation. 3. Owner shall reimburse HC for reasonable costs of travel and subsistence incurred in the Philippines by its representatives while on trips previously authorized by Owner in the discharge of duties connected with performing the services. 4. HC shall maintain and have available for Owner's inspection on request statements, vouchers, or other documents covering the costs, charges, and expenses for which Owner shall be liable for reimbursement under this Agreement, with the exception of incidental costs such as telephone, telex and taxis. 5. If at any time prior to the completion of HC's work or after the feasibility studies, the scope of such work is materially changed, the amount of the basic compensation shall be adjusted equitably by agreement of the parties." In reply thereto, I have the honor to inform you that the test of the taxability of an income is the "source" or situs of the activities or property which produce the income. In the case of an income derived from labor (services) the factor which determines the source of the income is not the residence of the payor, or the place where the contract for the services is entered into or the place of payment. It is the place where the services are actually rendered. (Par. 45.33 Vol. 8 Mertens Law of Federal Income Taxation) In the instant case, the services to be rendered by Harrison, Co. in favor of Beach Hotels Corporation will be done in the Philippines. Consequently, the fee to be paid by Beach Hotels Corporation constitute compensation for services performed within the Philippines. In view thereof, this Office is of the opinion and so holds that the consulting services fee to be paid by Beach Hotels Corporation to Harrison, Co. is subject to Philippine income tax and consequently to the 35% withholding tax prescribed by Section 24(b)(1) in relation to Section 53(b)(2) of the Tax Code, as amended. cdtech