BIR Ruling No. 138-84

August 10, 1984 BIR RULING NO. 138-84 37-c-3-238-83-138-84 Gentlemen : This refers to your letters dated March 15 and May 2, 1984, requesting a ruling on whether the share of foreign telephone administration in the payment received by your client, Philippine Long Distance Telephone Co., (PLDT) from its customers, is subject to withholding tax at source. You have represented that PLDT was enfranchised to render local and international telephone service; that since March 20, 1933, PLDT had telephone interconnection agreements with American Telephone & Telegraph Co., a U.S. corporation, to provide radio telephone facilities in the Philippines and in the United States, respectively, and to jointly furnish radio-telephonic services in or reached via the Philippines and points in or reached via the mainland U.S.A.; that the original agreement had been amended to provide service through the submarine cable system across the Pacific Ocean and recently via satellite facilities furnished through satellite channels of the Philippine Communications Satellite Corporation; and that similar agreements of PLDT as in effect with various countries whereby the sharing of revenues between PLDT and the foreign telecommunications administrations are basically the same as in the AT&T agreements or on a 50-50 basis. In said letter dated March 15, 1984, you explained the sharing between PLDT and the foreign telecommunications administration in the payment received by PLDT from its customers as follows: "For example, where a Philippine customer places telephone call to New York and he pays a certain amount, say P100.00 to PLDT, the sum of P50.00 is recognized as income of PLDT in payment for services performed here in the Philippines. PLDT recognizes as a liability to the foreign administration the other half or P50.00 as the share of the foreign communications administration for receiving the telephone call from the Philippines and providing for the facilities and services in the foreign country. The share of the foreign telecommunications administration is entered in the books of PLDT as traffic settlements payable and PLDT does not subject said share to withholding tax at source inasmuch as they are payment for the services rendered by the foreign non-resident corporations for services rendered abroad." In reply, I have the honor to inform you that your request is answered in the negative. The important factor which determines the source of income, if from services, for purposes of income taxation, is place where services are actually rendered. (Mertens, Law of Federal Taxation, Vol. 8, Chap. 45 p. 141; cited in CTA Case No. 2373 and 2561, British Overseas Airways Corp. vs. Commissioner, January 26, 1983). In the present case, the share of the foreign telephone administrations were for services rendered abroad by the foreign administrations which are non-resident foreign corporations; hence, the same are considered income derived from sources outside the Philippines (Sec. 37(c)(3), Tax Code). Such being the case, and since non-resident foreign corporations are subject to income tax only on income derived from sources within the Philippines, said share is not subject to income tax and, consequently, not also subject to the 35% withholding tax prescribed by Section 24(b)(1) in relation to Section 53(e)(2) of the Tax Code, as amended. adc Very truly yours, (SGD.) RUBEN B. ANCHETA Acting Commissioner