BIR Ruling No. 238-83

December 29, 1983 BIR RULING NO. 238-83 Gentlemen : This refers to your letter dated August 29, 1983 and September 28, 1983, requesting a ruling on whether the share of foreign administration (foreign telecommunications) on payments made by customers to your client, Philippine Global Communications, Inc., (PHILCOM) for (a) outbound messages or (b) transit traffic messages are subject to withholding tax-at-source. In said letter on August 29, 1983, you explained the said messages as follows: cdt OUTBOUND MESSAGES "A customer wishes to send a telex to New York. He pays, for example, the sum of P2.00 to Philcom. PhilCom recognizes as income the sum of P1.00 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 after referred to as foreign administration). PhilCom recognizes as a liability to the foreign administration the other P1.00 as payment to the foreign telecommunications company for receiving the message from PhilCom and delivering the message to the addressee, all of which services are performed by the foreign administration abroad. TRANSIT TRAFFIC MESSAGE "A customer, for example, wishes to send a telex to a place say country X, where PhilCom does not have direct communication. PhilCom 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 P2.00 for the service, P0.75 is retained by PhilCom, P0.25 is collected by country Y for transmitting the message to country X (services performed abroad) and P1.00 is collected by country X for receiving the message and sending it to the addressee (these are also services performed abroad)". You also represented that the shares of the foreign telecommunications are entered in the books of PhilCom as traffic settlement payables: that PhilCom does not subject said shares to withholding tax-at-source since the same are payments for services rendered by the foreign telecommunications abroad, both for outbound messages and transit traffic messages. cd In reply, I have the honor to inform you that your request has been answered in the negative in an unnumbered ruling dated April 2, 1975, quoted as follows: "We have examined the activities of your corporation and the income derived from your operations or incidents thereof for the year in question to determine whether your earnings were derived from activities other than your franchised operations and to also determine whether you should have withheld income taxes on traffic settlements due to or on account of income derived from Philippine sources by non-resident foreign administrations or corporations and we found that your company is not liable for income taxes nor other liabilities or obligations under the National Internal Revenue Code . (Emphasis supplied) This Office hereby reiterates the above ruling. The important factor which determines the source of income, if from services, for purposes of income taxation, is the place where service are normally 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 traffic settlement paid by the PhilCom 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. 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 traffic settlements are not subject to income tax and, consequently, not also subject to the 35% withholding tax prescribed by section 24(b)(l) in relation to Section 53(e)(2) of the Tax Code, as amended. Very truly yours, (SGD.) RUBEN B. ANCHETA Acting Commissioner Bureau of Internal Revenue