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.