Territorial (i) Situs of taxation (a) Meaning (b) Situs of income tax (1) From sources within the

Philippines (2) From sources without the Philippines (3) Income partly within and partly without the Philippines (c) Situs of property taxes (1) Taxes on real property (2) Taxes on personal property (d) Situs of excise tax (1) Estate tax (2) Donors tax (e) Situs of business tax (1) Sale of real property (2) Sale of personal property (3) VAT

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.

Situs rule on local business tax by: Senen M. Quizon

One of the most contentious issues in local taxation is the taxing jurisdiction of other local governments over businesses. This issue arises because most business operations span multiple jurisdictions as evidenced by the presence of a branch, factory, warehouse, or plantation in different localities resulting in a conflict among competing local government units (LGUs) as to the exercise of taxing power.

To avoid this conflict, Section 150 of the Local Government Code (LGC) of 1991 provides for rules on the situs of local business tax (LBT) particularly, the allocation of sales which applies to manufacturers, assemblers, contractors, producers, and exporters with factories, project offices, plants, and plantations located in different LGUs. These rules are implemented by Article 243 of the Implementing Rules and Regulations (IRR) of the LGC. The Department of Finance has also prepared specific guidelines on the situs of LBT for certain industries like banks and other financial institutions, insurance companies, exporters, and very recently, mining companies taking into account their peculiarities. The basic rule in determining the situs of LBT is that all sales made in a locality where there is a branch or sales office or warehouse should be recorded in said branch or sales office or warehouse and the LBT due should be paid to the city or municipality where the same is located. The foregoing rule appears to be straightforward but a closer look at the definition of a branch, sales office, and warehouse under Article 243 (a)(2) and (3) of the IRR of the LGC provides us a better understanding on how this specific situs rule is implemented. Under Section 243(a)(1) and (2) of the IRR of the LGC, the term branch or sales office is defined as a fixed place in a locality which conducts operations of the business as an extension of the principal office. As further defined by the IRR, branches or sales offices used only as display areas of the products where no stocks or items are stored for sale, although orders for the products may be received, are not considered branches or sales offices. On the other hand, the term warehouse is defined as a building utilized for the storage of products for sale and from which goods or merchandise are withdrawn for delivery to customers or dealers, or by persons acting in behalf of the business. A warehouse that does not accept orders and/or issues sales invoices as aforementioned shall not be considered a branch or sales office. Following the above definition, mere presence of a branch, sales office or warehouse in a locality does not automatically give rise to LBT liability to the host LGU. The IRR requires that the sales should be recorded in the branch, sales office or warehouse before it can be considered as such, and for the LGU to be able to collect LBT on such establishment within its territorial boundary. Otherwise, the host LGU may only collect Mayors permit fee and other regulatory fees provided for under the existing local ordinance of the said LGU. This view has been consistently expressed by the Bureau of Local Government Finance (BLGF) in the various opinions it has issued on the matter. There are also specific rules if a factory, project office, plant or plantation is maintained by the taxpayer and 100 percent of the sales are recorded in its principal office. The LGU where the principal office is located cannot tax 100 percent of its sales. Instead, a sales allocation is required to be applied. In this regard, Article 243(b)(3) of the IRR of LGC provides that only 30 percent of all sales recorded in the principal office shall be taxable in the LGU where it is located while the 70 percent shall be taxable in the LGU where the factory, project office, plant or plantation is located. In certain cases, even the plantation maintained by a taxpayer and the factory may be situated in s eparate localities. In this particular case, the 70 percent sales allocation shall be further allocated between the LGUs where the factory and plantation are located i.e., 60 percent

should accrue to the city of municipality where the factory is located while 40 percent shall be taxable to the city or municipality where the plantation is located. It is also possible that two or more factories, project offices, plants or plantations are located in different localities. In that case, the 70 percent sales allocation shall be prorated among the localities in proportion to the volumes of production generated in each locality during the period for which the tax is due. Despite these rules, many LGUs still believe that they are not getting their proportionate share of taxes from business establishments which maintain their physical presence in their locality. Hence, they try to exert their taxing authority by imposing LBT on all the facilities in their jurisdiction, regardless of the situs rules. In some cases, they impose LBT on 100 percent of the recorded sales in the principal instead of applying the mandated sales allocation. When this happens, a taxpayer should not feel helpless. He can file a protest against the LBT assessment issued by the local treasurer. Under the rules, the protest to the assessment should be filed within 60 days from the receipt of notice of the LBT assessment; otherwise, the assessment shall become final. The protest letter shall be persuasive enough, citing the facts of the case, the legal basis to dispute the assessment and any other documentary support or issuances.