ACCTAX1 - Income Taxation

Situs (Sources) of Income

Types of Individual Taxpayers: Types of Corporation Taxpayers:

1. Resident citizen 1. Domestic corporation

2. Non-resident citizen 2. Resident foreign Corporation
3. Resident alien 3. Non-resident foreign corporation
4. Non-Resident alien engaged in trade or business
5. Non-resident alien not engaged in trade or business

 All (except Resident citizens and Domestic Corporations) are taxable only on derived income from sources within the Philippines.
 Resident citizens and Domestic Corporations are taxable upon income derived from all sources (within and without the Philippines)

General Principles of Income Taxation in the Philippines. - Except when otherwise provided in this Code:

 A citizen of the Philippines residing therein is taxable on all income derived from sources within and without the Philippines;
 A nonresident citizen is taxable only on income derived from sources within the Philippines;
 An individual citizen of the Philippines who is working and deriving income from abroad as an overseas contract worker is taxable only on
income derived from sources within the Philippines: Provided, That a seaman who is a citizen of the Philippines and who receives
compensation for services rendered abroad as a member of the complement of a vessel engaged exclusively in international trade shall be
treated as an overseas contract worker;
 An alien individual, whether a resident or not of the Philippines, is taxable only on income derived from sources within the Philippines;
 A domestic corporation is taxable on all income derived from sources within and without the Philippines; and
 A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources
within the Philippines.

Sources of Income in General (“sources” is not a place but an “activity” or “property”, and as such, it has a situs or location). In the case of income
derived:

 From labor  place where the labor is performed

 From the use of capital  place where the capital is employed
 From the sale of exchange of capital assets  place where the sale occurs

CLASSIFICATION OF INCOME AS TO SOURCE

1. Income which is derived in full from sources within the Philippines

2. Income which is derived in full from sources outside the Philippines
3. Income which is derived partly from sources within and partly from sources outside the Philippines

1. Gross Income from Sources WITHIN the Philippines

 Interest income
o Interests derived from sources within the Philippines, and interests on bonds, notes or other interest-bearing obligation of
residents, corporate or otherwise;
 Test Source of Income: Residence of the debtor
 Dividend income
o Amount received as dividends:
 from a domestic corporation; and
 from a foreign corporation
 Test Source of Income: if 50% or more of the Gross Income (GI) of the foreign corporation – derived from
sources within the Philippines
o For the three-year period ending with the close of its taxable year preceding the declaration of such
dividends or for such part of such period as the corporation has been in existence)
o 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;
Philippine Gross Income (3-year period)
o × Dividend Income = Dividend Income within the Philippines
Worldwide Gross Income (3-year period)
 Compensation for labor or personal services performed in the Philippines
 Test Source of Income: Place of performance
ACCTAX1 - Income Taxation
Situs (Sources) of Income

 Rentals and royalties from property located in the Philippines or from any interest in such property, including rentals or royalties for -
o The use of or the right or privilege to use in the Philippines any copyright, patent, design or model, plan, secret formula or
process, goodwill, trademark, trade brand or other like property or right;
o The use of, or the right to use in the Philippines any industrial, commercial or scientific equipment;
o The supply of scientific, technical, industrial or commercial knowledge or information;
o The supply of any assistance that is ancillary and subsidiary to, and is furnished as a means of enabling the application or
enjoyment of, any such property or right as is mentioned in paragraph (a), any such equipment as is mentioned in paragraph (b)
or any such knowledge or information as is mentioned in paragraph (c);
o The supply of services by a nonresident person or his employee in connection with the use of property or rights belonging to, or
the installation or operation of any brand, machinery or other apparatus purchased from such nonresident person;
o Technical advice, assistance or services rendered in connection with technical management or administration of any scientific,
industrial or commercial undertaking, venture, project or scheme; and\
o The use of or the right to use:
 Motion picture films;
 Films or video tapes for use in connection with television; and
 Tapes for use in connection with radio broadcasting.
 Test Source of Income: Location of property (for rent); Place of use of intangible (for royalty)
 Gain on sale of real property – Gains, profits and income from the sale of real property located in the Philippines
 Test Source of Income: Location of property
 Gain on sale of personal property – Income derived from the purchase of personal property is treated as derived entirely from the
country where it is sold.
 Test Source of Income: Place of Sale
 Exception: Gain from the sale of shares of stock in a domestic corporation  shall be treated as derived entirely from
sources within the Philippines regardless where the share is sold/exchange.
o Rule not applicable to income from sale or personal property:
 Produced in whole or in part by the taxpayer within and sold outside the Philippines, or
 Produced in whole or in part by the taxpayer outside and sold within the Philippines

 Income derived from the ownership of farms and natural deposits

 Sale of domestic shares

2. Gross Income From Sources WITHOUT the Philippines.

 Interests other than those derived from sources within the Philippines
 Dividends other than those derived from sources within the Philippines
 Compensation for labor or personal services performed without the Philippines;
 Rentals or royalties from property located without the Philippines or from any interest in such property including rentals or royalties for the
use of or for the privilege of using without the Philippines, patents, copyrights, secret processes and formulas, goodwill, trademarks, trade
brands, franchises and other like properties; and
 Gains, profits and income from the sale of real property located without the Philippines.
 Sale of foreign shares

3. Income from Sources Partly Within and Partly Without the Philippines.-

 Gains, profits and income from the sale of personal property:

o produced (in whole or in part) by the taxpayer within and sold without the Philippines, or
o produced (in whole or in part) by the taxpayer without and sold within the Philippines,
 Income from transportation such as foreign steamship companies whose vessels touch Philippine ports and other services rendered partly
within and partly outside the Philippines such as foreign corporations carrying on the business of transmission of telegraph and cable
messages between points outside the Philippines.

[Problem 60]

 Others  Use days in apportioning not months (Problem 60-H)

 Does not matter where the services are rendered. Know-how is transferred within (Royalty Income) (Problem 60-K)
 Assumed that title transferred within the Philippines (export sales) (Problem 60-N)
ACCTAX1 - Income Taxation
Situs (Sources) of Income

Apportionment of Deductions in Computation of Taxable Income

In computing taxable income form 1-3; the taxpayer may have two (2) general classes of deductions from the items of gross income:

 Expenses, losses, and other deductions properly apportioned or allocated thereto (Directly attributable expenses), and
 A ratable part of any expense, loss or other deduction which cannot definitely be allocated to some items or classes of gross income.
Philippine (if within) or Foreign Gross Income (if without)
o × Unallocated Deductions (or Common Expenses) = Ratable part
Worldwide Gross Income

The remainder, if any, shall be treated in full as taxable income from sources within or without the Philippines, as the case may be.

 Provided that items of deductions, for computing taxable income from sources within the Philippines, is allowable when it is:
o effectively connected with the business or trade conducted exclusively within the Philippines which cannot definitely be allocated
to some items or class of gross income
o fully substantiated by all the information necessary for its calculation.
 Exception. - No deductions for interest paid or incurred abroad shall be allowed from the item of gross income from sources
within the Philippines
o unless indebtedness was actually incurred to provide funds for use in connection with the conduct or operation of trade
or business in the Philippines.
o

[Problem 61]

 Philippine branch (considered as resident foreign corporation) is allowed to deduct Head office allocated expense