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Situs of taxation

Situs of taxation by. Nelson S. Gargoles

Can the Philippine government tax all the income of persons from sources within or without the Philippines?  Are all the properties of persons whether real or personal, tangible or intangible taxable in the Philippines?  The answer to these questions lies with the basic knowledge of the situs of taxation.

Situs of taxation literally means place of taxation.  The general rule is that the taxing power cannot go beyond the territorial limits of the taxing authority.  Basically, the state where the subject to be taxed has a situs may rightfully levy and collect the tax; and the situs is necessarily in the state which has jurisdiction or which exercises dominion over the subject in question.  

Income tax may properly be exacted from persons who are residents or citizens in the taxing jurisdiction and even from those who are neither residents nor citizens provided the income is derived from sources within the taxing state.  Thus, resident citizens and domestic corporation are taxable on all income derived from sources within or without the Philippines.  A non-resident citizen is taxable on all income derived from sources within the Philippines.  An alien whether a resident or not of the Philippines and a foreign corporation, whether engaged or not in trade or business in the Philippines are also taxable only from sources within the Philippines.

The taxable situs will depend upon the nature of income as follows;

     1)    Interests- Interest income is treated as income from within the Philippines if the debtor or lender whether an individual or corporation is a resident of the Philippines.

     2)    Dividends- Dividends received from a domestic corporation are treated as income from sources within the Philippines.  Dividends received from a foreign corporation are treated as income from sources within the Philippines, unless 50% of the gross income of the foreign corporation for the three-year period preceding the declaration of such dividends was derived from sources within the Philippines; but only in an amount which bears the same ratio to such dividends as the gross income of the corporation for such period derived from sources within the Philippines bears to its gross income from all sources.

     3)    Services- Services performed in the Philippines shall be treated as income from sources within the Philippines.

     4)    Rentals and Royalties- Gain or income from property or interest located or used in the Philippines is treated as income from sources within the Philippines.

     5)    Sale of Real Property- Gain from sale of real property located within the Philipines is considered as income within the Philippines.

     6)    Sale of Personal Property- Gain, profit or income from sale of shares of stocks of a domestic corporation is treated as derived entirely from sources within the Philippines, regardless of where the said shares are sold   Gains from sale of other personal property can be considered income from within or without or partly within or partly without depending on the rules provided in Section 42 E of the Tax Code.  

The taxing power of a state does not extend beyond its territorial limits, but within such limits it may tax persons, property, income, or business.  In  such case, knowledge of the situs of a particular income is crucial to ensure that only income taxable in a particular jurisdiction is declared and assessed properly.  Without proper knowledge on situs of taxation, a taxpayer is at risk of failing to declare income which is properly taxable in one jurisdiction or else declaring an income that is not taxable.