BIR Ruling

January 21, 1972 Messrs. V. E. Del Rosario & Associates Third Floor, Ermita Building Arquiza corner Alhambra St. Ermita, Manila Gentlemen : This refers to your letters dated September 7, 1971 and November 16, 1971 requesting confirmation of your opinion to the effect that the remittance of the amount of $3,300 representing the second installment of the amount payable by your client, Maremeo Mineral Corporation (hereinafter referred to as BESSI) are not subject to tax. It is represented that in accordance with a Service Agreement entered into by and between MMC and BESSI, a non-resident foreign corporation organized under the laws of Colorado, U.S.A., the latter agrees to render in favor of the former the following services: A. BESSI's Technical staff shall review, study, and evaluate the subject concessions held by MMC and shall prepare a report which shall include, but not be limited to, the following: 1. Geological Summary of Concession Areas 2. Oil and Gas Potential of Concession Areas 3. Economic Summary of Oil or Gas Discovery 4. Summary of Concession Status 5. Summary of Philippine Petroleum Law 6. Summary of Philippine Tax Law 7. Summary of Current Activity in the Philippines 8. Recommendations as relate to (a) Geological and Geophysical Exploration program on subject concessions with time schedule and estimated costs. (b) Acquisition of new concessions or farm-ins with other operators in the Philippines. (c) Farmout or joint venture with suggested term on MMC concessions. B. BESSI shall also advice MMC on future programs, prospective sources for and methods of financing operations and the arrangement of preliminary contacts with potential U.S. Partners. C. The services shall also include a seven (7) days visit to MMC's Manila offices by a key member of BESSI's technical staff who is thoroughly familiar with the geology of the Philippines and South East Asia and of the technical problems operating oil and gas exploration programs in these areas. BESSI is also prepared to offer the following additional services to MMC on per diem basis: A.. Contacts and negotiations with possible U.S.A. and other partners B. Discussions, negotiations and assistance in forming joint venture programs for MMC in the Philippines C. Seismic Interpretations (to be deducted in U.S.A. price doesn't include processing) D. Supervision of Seismic programs in the Philippines E. Supervision of field geological programs in the Philippines F. Supervision of Drilling program in the Philippines That in consideration of the services to be rendered by BESSI, MMC agrees to pay BESSI the aggregate amount of $12,600 payable monthly, in advance, during the term of the agreement. MMC is of the opinion that the remittance of the amount of $3,300 representing the second installment of the amount payable by MMC to BESSI is not subject to tax because the services so far rendered by BESSI were all performed in the United States, that BESSI did not send any of its men to the Philippines to gather geological and geophysical data which would be the basis of its report; that BESSI was chosen by MMC because they were already in possession of the required data gathered in connection with previous contracts with different companies in the Philippines during their stay here between 1956-1966; that with the extensive studies, BESSI' men have previously made of Philippine geology there was no need for sending another team to conduct geological studies in the Philippines; and that while the agreement provides in sub-paragraph (c) for a seven-day visit by one of the key members of BESSI's technical staff to MMC's offices no such visit was made. 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 situs of the services rendered by BESSI for MMC is not in the United States but in the Philippines as can be seen from the aforementioned Service Agreement entered into by and between MMC and BESSI. Consequently, the remittance to be made by MMC to BESSI constitute compensation for services performed in the Philippines. In view thereof, this Office is of the opinion and so holds that the remittance to be made by Marenco Mineral Corporation to Bacis Earth Science Systems Inc. are 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) both of the Section 24(b)(1) in relation to Section 53(b)(2) both of the Tax Code, as amended. cdta Very truly yours, MISAEL P. VERA Commissioner of Internal Revenue