December 3, 2010

ITAD BIR RULING NO. 070-10

Article 11 of the Philippines-Israel tax treaty; Section 176, NIRC of 1997

A. Territoriality or the Situs of Taxation
Territoriality or the situs of taxation, which means the "place of taxation," is a limitation on the taxing power. This is so because
well-recognized is the principle that however broad the power of taxation may be as to its character and no matter how
searching it is in extent, such power is necessarily limited only to persons, property or businesses within its jurisdiction; that is
to say, to subjects within its jurisdiction, or over which it can exercise dominion (51 Am. Jur. 457). Otherwise stated, taxation
may be exercised only within the territorial jurisdiction of the taxing authority (see 51 Am. Jur. 88).

It must be emphasized, however, that if no constitutional provisions are violated, the power of the legislature to fix situs is
undoubted (2 Cooley 90). With the legislature primarily lies the discretion to determine, inter alia, the situs (place) of taxation
(Commissioner of Internal Revenue, et al., vs. Santos, et al., 277 SCRA 617).

Within the territorial jurisdiction, the taxing authority may determine the "place of taxation" (tax situs) (Tax law and
Jurisprudence by Vitug and Acosta, 2nd Ed., p. 10).

In Tax law and Jurisprudence (2nd Ed., pp. 10-11), Justice Vitug and Justice Acosta stated that:

"In fixing the tax situs, the following criteria are generally observed, viz.:
"xxx xxx xxx
"(c) For excise taxes, the tax situs can be the place (1) where the privilege is exercised; (2) where the taxpayer is a national of; or
(3) where he has his residence. In the selection of the appropriate criteria, the taxing authority is given wide latitude; among
the circumstances often considered are the nature of the tax, the extent of benefit that may be derived by the taxpayer and
equity principles. But, unless otherwise stated, the tax situs is deemed to be the place where the privilege is exercised. Under
the National Internal Revenue Code, all three criteria (nationality, residence, and place of the exercise of privilege) are used in
the levy of income tax, as well as estate and gifts taxes, but not of business taxes." (underscoring supplied; citations omitted)

Thus, in imposing DST, an excise tax, the foregoing criterion in fixing the situs thereof is a mere "guideline" and in no way
prevents the taxing authority from providing otherwise.


B. The situs of the Documentary Stamp Tax
It should be helpful to first give a brief historical background on the development of Section 173 of the Tax Code of 1997.

In Section 173, both of the Tax Code of 1986, as amended by Presidential Decree No. 1994, and of the Tax Code of 1993 it is
provided that:

"SEC. 173. Stamp taxes upon documents, instruments, loan agreements, and papers. Upon documents, instruments, and
papers, and upon acceptances, assignments, sales, and transfers of the obligation, right, or property incidents thereto, there
shall be levied, collected and paid for, and in respect of the transaction so had or accomplished, the corresponding
documentary stamp taxes prescribed in the following sections of this Title, by the person making, signing, issuing, accepting, or
transferring the same, and at the same time such act is done or transaction had: Provided, That whenever one party to the
taxable document enjoys exemption from the tax herein imposed, the other party thereto who is not exempt shall be the one
directly liable for the tax."

The foregoing provision was, however, amended or modified by Republic Act No. (RA) 7660 1 which later was reenacted in RA
8424 (the law embodying the Tax Code of 1997), 2 to read as follows:

"SEC. 173. Stamp taxes upon documents, instruments, loan agreements, and papers. Upon documents, instruments, loan
agreements, and papers, and upon acceptances, assignments, sales and transfers of the obligation, right, or property incident
thereto, there shall be levied, collected and paid for, and in respect of the transactions so had or accomplished, the
corresponding documentary stamp taxes prescribed in the following sections of this Title, by the person making, signing,
issuing, accepting, or transferring the same wherever the document is made, signed, issued, accepted, or transferred when
the obligation or right arises from Philippine sources or the property is situated in the Philippines, and at the same time such
act is done or transaction had: Provided, That whenever one party to the taxable document enjoys exemption from the tax
herein imposed, the other party thereto who is not exempt shall be the one directly liable for the tax." (underscoring supplied)

It must be noted that there is a change in phraseology of the subject provision of law. It is a settled rule in statutory
construction that a change in phraseology by amendment of a provision of law indicates a legislative intent to change the
meaning of the provision from that it had originally. Thus, where the legislative history shows that a statute has undergone
several amendments, each amendment using different phraseology, the deliberate selection of language differing from that of
the earlier act on the subject indicates that a change in meaning of the law was intended, and courts (as well as administrative
officers who are charged with interpreting the provisions of special laws such as the Tax Code) should so construe that statute
as to reflect such change in meaning. (Agpalo, Statutory Construction, 3rd Ed., p. 79)

Thus, it may be inferred from the premises that the legislators have intended to fix the situs of the DST to be within the
Philippines, when it inserted the phrase "wherever the document is made, signed, issued, accepted, or transferred" in Section
173 of the Tax Code as long as "the obligation or right arises from Philippine sources or the property is situated in the
Philippines".

[G.R. No. 66838. December 2, 1991.]
COMMISSIONER OF INTERNAL REVENUE vs. PROCTER & GAMBLE PHILIPPINE MANUFACTURING CORPORATION and THE
COURT OF TAX APPEALS

A cardinal principle adhered to in international taxation is the avoidance of double taxation. The phenomenon of double
taxation (i.e., taxing an item more than once) arises because of global movement of goods and services. Double taxation also
occurs because of overlaps in tax jurisdictions resulting in the taxation of taxable items by the country of source or location
(source or situs rule) and the taxation of the same items by the country of residence or nationality of the taxpayer (domiciliary
or nationality principle).

An item may, therefore, be taxed in full in the country of source because it originated there, and in another country because
the recipient is a resident or citizen of that country. If the taxes in both countries are substantial and no tax relief is offered, the
resulting double taxation would serve as a discouragement to the activity that gives rise to the taxable item.

As a way out of double taxation, countries enter into tax treaties. A tax treaty is a bilateral convention (but may be made
multilateral) entered into between sovereign states for purposes of eliminating double taxation on income and capital,
preventing fiscal evasion, promoting mutual trade and investment, and according fair and equitable tax treatment to foreign
residents or nationals.

A more general way of mitigating the impact of double taxation is to recognize the foreign tax either as a tax credit or an item
of deduction.