Income Tax; Income from Sources Within and Partly Without the Philippines

December 1, 1979 BIR RULING NO. 101-79 Income tax ; income from sources within and partly without the Philippines This is in reply to your letters dated September 28 and December 6, 1978 requesting a ruling on whether your compensation paid to the Mineral Deposits Ltd., a non-resident foreign corporation not engaged in trade or business in the Philippines for services allegedly rendered in favor of your company is subject to tax. Investigation in this case disclosed that you are a domestic corporation enjoyed primarily in the exploration, development and production of mineral deposits such as gold, silver, copper, lead, zinc, brass, iron and others; that on November 15, 1977 you engaged the services of Mineral Deposits Ltd., a non-resident foreign corporation organized under the laws of Australia to conduct a feasibility study on mining and concentration of chromite on your mining areas at Palawan and Samar; that practically all the work or services under the feasibility studies contract where done and performance in the Research and Engineering Department of Mineral Deposits Ltd., Queensland, Australia; that a portion of the work was done and performed in the Philippines, and that as originally agreed upon, for and in consideration of the aforesaid services at the Palawan and Samar project your company will pay Mineral Deposits Ltd. compensation in the respective amounts of $42,650.00 and $45,500.00 or a total amount of $88,150.00. The examiners who investigated this case reported, in part, the following findings: The services rendered by the Mineral Deposits Ltd. pursuant to the feasibility studies in Palawan and Samar within the Philippines were 6 days at $300.00 a day inspection of the mining site at Palawan and 4 days also at $300.00 a day inspection of the mining site at Samar for the ground condition, location of the concentrates, place and port facilities, availability of water, electricity, fuel and manpower. The company also prepared a consolidated report for $1,200.00 for both Palawan and Samar projects." It appears also that your company has already remitted to the said foreign corporation the total agreed amount of $88,150.00. However, the fiscal billing made by the Foreign Corporation exceeded the said agreed amount by $11,291.67 the remittance of which was withheld by the Central bank until this withholding tax case is resolved. It is clear from the foregoing that the services of Mineral Deposits Ltd. were rendered partly within and partly without the Philippines. Such being the case that portion of the fees paid to Mineral Deposits Ltd. which correspondence to services rendered in the Philippines is considered income from sources within the Philippines in accordance with Section 37(a) (3) of the tax code of 1977 as amended, subject to income tax, pursuant to section 24 (B) (1) of the same code and consequently, your company should withhold 35% the aforesaid portion of the fee paid to Mineral Deposits Ltd. and remit the amount so withheld to this Office. (See Sections 53(b)(2) and 54 of the tax Code). That portion of the fees paid to Mineral Deposits Ltd. which corresponds to Services rendered outside of the Philippines is considered income from source, without the Philippines, in accordance with section 37(c)(3) of the Tax Code, and consequently, exempt from income tax, as non-resident corporations are subject to income tax only on income from sources within the Philippines (Section 24(b)(1), Tax Code). The aforesaid fees would have been subject in its entirety to Philippine income tax since the same are "paid in consideration of technical advice, assistance or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking, venture, project or scheme in accordance with Section 37(a)(4)(F) of the Tax Code of 1977 as amended by P.D. No. 1457. However, since the work performed by the foreign corporation was completed as of March 3, 1978 and considering further that said amendment took effect on Dec. 11, 1978, said amendment was not apply to the instant case. Finally, our investigation also disclosed that of the aforesaid fees, the amount of $4,200.00 represents income corresponding to services performed by the foreign corporation in the Philippines, for which you are subject to the withholding tax of P10,710.42 since you have already paid the amount of P7,650.00 and withholding tax, there is still due from you the amount of P3,060.42 as deficiency withholding tax which should be paid upon receipt of an assessment notice upon payment of the said deficiency tax, the amount of $11,291.67 may be remitted abroad. cd