Exemption of the Share of Foreign Administration from Withholding Tax-at-Source

May 27, 1988 BIR RULING NO. 219-88 36-c-3 238-83 219-88 Gentlemen : This refers to your letter dated May 16, 1988 requesting a ruling as to whether the share of foreign administration on payments made by customers to Capitol Wireless, Inc. (CAPWIRE) for (a) outbound messages or (b) transit traffic messages are subject to withholding tax-at-source. It is represented that the transactions with the foreign administrations are as follows: "(a) OUTBOUND MESSAGES A customer wishes to send a telex to California. He pays, for example, the sum of P10.00 to CAPWIRE. CAPWIRE recognizes as income the sum of P5.00 in payment for the services performed here in the Philippines, to wit, receiving the message from the customer and sending the message to the foreign telecommunications company (herein referred to as foreign administration). CAPWIRE recognizes as a liability to the foreign administration the other P5.00 as payment to the foreign administration the other P5.00 as payment to the foreign telecommunications company for receiving the message from CAPWIRE and delivering the message to the addressee, all of which services are performed by the foreign administration abroad. cd "(b) TRANSIT TRAFFIC MESSAGE A customer, for example, wishes to send a telex to a place say country X, where CAPWIRE does not have direct communication. CAPWIRE usually sends the message through another country (in-transit), any country Y, which in turn sends the message to country X. If the customer pays P10.00 for the services, P3.75 is retained by CAPWIRE, P1.25 is collected by country Y for transmitting the message to country X (services performed abroad) and P5.00 is collected by country X for receiving the message and sending it to the addressee (these are also services performed abroad)." that the shares of the foreign telecommunications are entered in the books of CAPWIRE as traffic settlement payables and that CAPWIRE does not subject said shares to withholding tax-at-source since the same are payments for services rendered by the foreign telecommunications abroad for outbound messages and transit traffic messages. In reply thereto, I have the honor to inform you that the important factor which determines the source of income, if from services, for purposes of income taxation, is the place where services are actually rendered. (Mertens, Law of Federal Taxation, Vol. 8, Chapter 45, p. 141; cited in CTA Case No. 2373 and 2561, British Overseas Airways Corp. vs. Commissioner, January 26, 1983) The traffic settlements paid by CAPWIRE were for services rendered abroad, by the foreign telecommunications which are non-resident foreign corporations; hence, the same are considered income derived from sources outside the Philippines [Sec. 36(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 traffic settlements are not subject to income tax and, consequently, not also subject to the 35% withholding tax prescribed by Section 25(b)(1) in relation to Section 50(a) of the Tax Code, as amended. cdtech Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner