NEVER place the fuel filter in the engine compartment.  The only thing you will get is an engine fire.  THIS IS NOT STOCK CONFIGURATION!  The reason being is if the fuel filter or fuel line gets a leak, the vapor will get under the distributor and ignite.  The fuel pump will continue pumping fuel make the situation worse and a much bigger fire!  Dave and I have seen too MANY poor VW's in the junk yards and found the distributor broken in 3 places and the engine compartment burned. In the above photo is Stock configuration.

Usually in stock configuration, there is a brass sock in the fuel tank.  But this thing get clogged and you have to clean it out.  Best thing to do is to remove the Brass sock (which means pulling out the fuel tank) and replace with a fuel filter placed as described below.

Placement of the fuel filter can be under the VW in between the transmission and the wheel well on the driver's side. (The green circle)  

Best grade of fuel to use in your Air cooled VW is 92 octane in a stock configuration.  The reason for using 92 octane and not 87 octane is the problem of "valve chatter" which is pre-detonation of octane poor fuel.