BIR Ruling No. 001-61

January 6, 1961 BIR RULING NO. 001-61 Reference is made to your letter dated . . . requesting information as to the correctness of the advice you gave on the tax aspect of the employment contract entered into between your client, the Philippine Woodcraft and Veneer Corporation, hereafter referred to as Woodcraft, a domestic corporation enjoying exemption under Republic Acts Nos. 35 and 901, and the Checchi and Company hereafter referred to as Checchi, a non-resident foreign corporation doing business in Washington D.C., U.S.A. and not engaged in trade or business in the Philippines. LexLib From the documentary evidence submitted by you, the following appears: The services performed by Checchi under its employment contract with Woodcraft are as follows: 1. Engineering services; 2. Production operations; 3. Training of Filipino personnel; 4. Providing American Technicians; 5. Training Filipino Technicians in the U.S.; 6. Export sales and distribution; and 7. Market reports, analyses and forecasts. These services are all performed by Checchi in the U.S. For these services, it is paid $65,000 for the first year payable at the rate of $5,416.67 per month and $35,000 for the second year payable at the rate of $2,916.67 per month, which payments were all approved by the Central Bank. Checchi's technicians which are sent over to the Philippines are provided with allowances by Woodcraft, such as overseas travel expenses, transportation within the Philippines, living quarters, and living allowances. Through the recommendation of Checchi, Woodcraft purchased its plywood machinery from the United States machinery Company, Inc. of New York. To supervise the installation of the plywood machinery and help train local operators, the United States Machinery Company, Inc. sent over Engineer James F. Palmer after the latter had been screened by Checchi and favorably recommended to Woodcraft. The salary and allowances of Mr. Palmer were all provided by Woodcraft. You stated that, under the foregoing facts, you advised your client that the entire compensation received by Checchi is not subject to withholding tax inasmuch as the services rendered by Checchi were all performed in the United States. In reply thereto, I have the honor to inform you that non-resident aliens (natural or juridical persons) are subject to Philippine income tax only on income derived by them from sources within the Philippines. Compensation for labor or personal services are considered income from sources within the Philippine only when the services are performed within the Philippines. (Sec. 37(a) (3), Tax Code.) Compensation for labor and personal services performed outside the Philippines is income from sources without the Philippines. (Sec. 37(c) (3), Tax Code.) This Office has consistently held that the criterion in determining the source of income is the situs of the service rendered, regardless of the residence of the payor, of the place in which the contract of services was made, or of the place of payment. Since Checchi performed all the services under its employment contract in the United States, all the compensation it received from Woodcraft for such services is income from sources without the Philippines, and inasmuch as Checchi is a non-resident foreign corporation not engaged in trade or business in the Philippines, it is not subject to Philippine income tax on such income. Apparently, therefore, you have given the correct advice to your client. The compensation of Mr. Palmer, however, is income from sources within the Philippines and, therefore, subject to Philippine income tax. The taxable income of Mr. Palmer includes his basic salary and allowances.