Business Taxation 101: Situs of Taxation

By: Atty Christian Andrew Labitoria Gallardo


Now that we already know the difference between an ordinary asset and a capital asset, as well as the type of transactions subject to capital gains tax, we can now focus on income taxation proper. Now the question is: what type of earnings are subject to income tax?


There are many variables affecting the taxability of a certain transaction. The primary consideration however is the situs of taxation. It must be remembered that Philippine taxation is territorial in nature. This means that, in order for a certain transaction to be subject to Philippine taxation, it must have a “link” to the country, either because the party is a Filipino, or because the essential parts of the transaction took place in the Philippines.


Hence, by virtue of the “link” from both their nationality and residence, the income of resident citizens and domestic corporations, whether “sourced “inside the Philippines or outside thereof, is subject to Philippine income tax. On the other hand, by virtue of the “link” deriving from their nationality, non-resident Filipino citizens are subject to Philippine income tax only in relation to the income “sourced” within the country. Similarly, by virtue of the “link” from their residence, resident aliens and foreign corporations are likewise subject to Philippine income tax in relation to income “sourced” in the Philippines. Let us have a concrete example. Mang Kanor, a Filipino citizen of senior age resid