BIR Ruling

March 15, 1974 Messrs. Joaquin Cunanan & Co. P. O. Box 2288, Manila S i r : This has reference to your letter dated February 8, 1974, requesting a ruling on whether your client, La Playa Mining Corporation a domestic corporation, who engaged in the services of Universe AG, A German partnership, domiciled at Hamburg, Germany, and who will provide management and technical services for your client, is subject to withholding tax on the compensation it will pay to the said foreign firm based on the following services which will be performed abroad: cdta "A. PERSONNEL 1. Assist in the procurement of personnel from areas outside the Philippines, if necessary; 2. Assist in the training of personnel. "B. ENGINEERING AND PURCHASING 1. Give aid and advice in the selection, and purchase of machinery, equipment, materials and supplies; 2. Assist in the procurement of machinery, equipment, materials and supplies from sources outside of the Philippines if they are available locally or even if available locally prices of the same from foreign sources are reasonable lower as compared to local prices; 3. Assist in the planning of plant or mill structure; 4. Assist in the selection of builders or contractors. "C. PRODUCTION 1. Examination and analysis of mineral samples extracted from mine site. "D. SALES 1. Provide market surveys for the purposes of selling at the highest available prices; 2. Assist in obtaining good and solvent buyers in foreign countries of the minerals produced; and 3. Provide advice, assistance and instruction on sales problems. "E. FINANCIAL 1. Assist in obtaining loans from sources outside the Philippine; 2. Provide guarantees for loans that may be obtained from local and foreign sources; 3. Advise on budgetary and cost control procedures, including control of overhead expenses, inventory control, efficient office techniques and administration plans, financial policy including banking relations and investment guidance; and 4. Advice on administration, accounting procedures and personnel policies in conformity with the worldwide operation of the affiliated companies." In reply, 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 determine 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 Universe AG for the La Playa Mining Corporation will be performed in Hamburg, Germany. Therefore, the compensation to be paid by your client to the non-resident foreign corporation constitute compensation for services rendered outside the Philippines. In view thereof, this Office is of the opinion and so holds that the compensation to be paid by the La Playa Mining Corporation to Universe AG of Hamburg, Germany, are not 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. It should be emphasized, however, that the above ruling is based on the representation that the actual services are performed by Universe AG outside the Philippines and this Office may reserve or modify this ruling if upon investigation, it will appear that the facts are different from that upon which the ruling is predicated. Very truly yours, (SGD.) MISAEL P. VERA Commissioner of Internal Revenue TAN-1601-593-5 "TAXPAYERS SHOULD INDICATE THEIR TAN IN ALL COMMUNICATIONS TO THE BIR."