BIR Ruling

October 19, 1971 Messrs. Sycip, Gorres, Velayo & Co. P.O. Box 589, Manila Gentlemen : This refers to your letter dated March 17, 1971 requesting confirmation of your opinion to the effect that the monthly fee to be paid by your client, Allied Thread Co., Inc. (hereinafter referred to as Allied), for services rendered by R. F. J. Alexander, a non-resident foreign company, whose services are performed in London and such other foreign countries where Allied has branches or subsidiaries are not subject to income tax. acd It is represented that in accordance with a Service Agreement entered into by and between Allied and the Foreign Company, the latter agrees to furnish the former the following services: "(a) To act on behalf of Allied, as required, in acquiring machinery and equipment, by purchase or otherwise, assist Allied in selecting the machinery most suitable for its operations and also to assist Allied to get all replacement parts and other equipment as needed; "(b) To advise and cooperate in procuring all yarns, industrial chemicals, dyestuffs and other raw materials, to test in their Research Laboratories supplier's samples are required, and to advise on the adaptation to use of raw materials of Philippine manufacture as they become available; "(c) To assist actively in taking delivery of supplies overseas on behalf of Allied, packing, shipment, and in arranging payment of suppliers, as occasion requires; "(d) To test and advise Allied on the possibilities of adapting to use Philippine grown fibers, such as ramie, hemp jute, in its manufacturing operations; "(e) To advise Allied on selection of personnel, on methods of training and instructing its employees in the latest methods of manufacture and machinery operations, and to cooperate in training selected persons from the Filipino staff of Allied in its British mills as requested; "(f) To consider and advise upon scales of wages, piece rate standards, trade union relationships, welfare organizations, with the object of seeking all possible improvements of working conditions; "(g) To advise monthly or as required on production figures, waste, etc. obtained at each process by the local factory with the object of establishing maximum efficiency in operation of the Philippine factory; "(h) To make research laboratory test as required of all Allied's productions for quality control, and advise on methods to improve quality and remedy defects." In consideration of the above services to be rendered by the Foreign Company outside the Philippines, Allied agrees to pay a monthly fee of P10,000 by crediting the account of the Foreign Company within fifteen (15) days after the end of each month and the amount so credited must be remitted as soon as possible by a sight draft in U.S. dollars. In reply thereto, I have the honor to inform you that it appearing that the services of the abovenamed non-resident foreign corporation will be performed in London and in such other foreign countries where the latter has branches or subsidiaries, the monthly fee to be paid by Allied to the former constitute compensation for services performed without the Philippines and therefore, not subject to Philippine income tax, pursuant to the cardinal rule in taxation that the test of the taxability of an income is the "source" or situs of the activities or property which produce the income and 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 but the place where the services are actually rendered (Par. 45.33 Vol. 8 Mertens Law of Federal Income Taxation) Since the recipient of the compensation is not subject to income tax, Allied is not liable for the withholding tax under Section 53(b)(2) of the Tax Code. It should be emphasized, however, that the above ruling is based on the representations that actual services are rendered by the recipient of the fee outside the Philippines and this Office may reverse or modify this ruling if upon investigation, it will appear that the facts are different from those upon which the ruling is predicated. cdta Very truly yours, MISAEL P. VERA Commissioner of Internal Revenue