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TAXATION IN A NUTSHELL (Sec.

42, NIRC)
SOURCES OF INCOME
Rules:

1. This section is not material for Resident Citizens (RC) and Domestic Corporations (DC) because they are taxed from all sources
2. This is relevant to other taxpayers because they are only liable for income derived from sources within only.

SOURCES OF INCOME

RULE

CONSEQUENCE

INTERESTS FROM SOURCES WITHIN THE


PHILIPPINES
(Bank Interest derived in the Philippines )

Follows the status of the obligor

Debtor is a non-resident, interest is considered


an income derived from sources outside the
Philippines.

INTERESTS ON BONDS, NOTES OR OTHER


INTEREST BEARING OBLIGATIONS OF RESIDENTS,
CORPORATE OR OTHERWISE (INDIVIDUALS)

Note: it is not the place of the perfection of the contract but


the status of the obligor-debtor that determines whether the
income is from sources within.

(NDC vs. CIR, 151 SCRA 471)


The 50% and 3 year rule:

SHARES OF STOCKS AND DIVIDENDS

1. Amounts received as Dividends from DC always


income within
2. If received from RFC - Apply the 50% and 3 years rule.
3. If received from FC it is an income from the place it is
sold

1. If 50% of the Gross Income of such FC;


2. for the 3 year period ending with the
close of the taxable year preceding the
declaration of such dividends was
derived
from
sources
within
the
Philippines, then it is an income within .
if the element is not present or some of the
elements were not present, it is an income
without.

SERVICES

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The place of performance of the service for personal or


labor services depend on the place of the service.

Performed outside the Phils. income


without
Performed in the Philippines income within

SOURCES OF INCOME
any copyright, patent, design or model,
plan, secret formula or process, goodwill,
trademark, trade brand or other like
property or right;
The any industrial, commercial or scientific
equipment;

RENTALS
AND
ROYALTIES
From property
located in the
Phils or from
any interest in
such Property.

RULE

CONSEQUENCE

Use of or the right or privilege to use in the Philippines

use of, or the right to use in the Philippines


The supply

scientific,
technical,
industrial
or
commercial knowledge or information;
furnished as a means of enabling the
application or enjoyment of, any such
property or right as is mentioned above
of any brand, machinery or other apparatus
purchased from such nonresident person;
rendered in connection with technical
management or administration of any
scientific,
industrial
or
commercial
undertaking, venture, project or scheme
(i) Motion picture films;
(ii) Films or video tapes for use in
connection with television; and
(iii) Tapes for use in connection with radio
broadcasting.

Sale of Real Property


Sale of Personal Property

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supply of any assistance that is ancillary and subsidiary to


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
Technical advice, assistance or services

The use of or the right to use

gains, profits and income from the sale of real property


located in the Philippines;
Gains; profits and income from the sale of personal
property, as determined in Subsection (E) of this
Section.

Subject to Sec. 42 subsection (E)

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