Monday, January 18, 2021

Situs in taxation issues


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A government or state exercises its taxing power and authority only on taxpayers, income or transactions that fall within its jurisdiction. Thus, the situs, or place, of taxation is critical in determining whether or not a state has the power to tax, especially with respect to nonresident or foreign individuals or corporations that are taxed only on Philippine-sourced income.

The situs of taxation has been defined as the place where an authority has the right to impose and collect taxes. Section 42(A) of our National Internal Revenue Code (Tax Code) embodies a set of situs rules and provides that the following are Philippine-sourced income:

– Interest income from borrowings of residents, whether individual or corporate.

– Dividends from domestic corporations or from foreign ones that derived 50 percent or more of its income for a three-year period preceding the dividend declaration from Philippine sources.

– Service fees or compensation for services rendered in the Philippines.

– Rentals and royalties from property or interest located or used in the Philippines.

– Gains from the sale of real property in the Philippines.

– Gains, profits and income from personal property sold in the Philippines.

– Gain, profit or income from the sale of shares of stock of a domestic corporation, regardless where these are sold.

The Supreme Court, in Commissioner of Internal Revenue vs. British Overseas Airways Corporation, et al., (149 SCRA 395 [1987]), ruled that the enumeration in Section 42(A) (then Section 37[a]) of the Tax Code is not all-inclusive. Thus, in this case, it ruled that the sale of airline tickets in the Philippines by a foreign airline with no landing rights in the country is “the activity that produces the income.” The tickets exchanged hands in the Philippines and payments for fares were also made in the Philippine currency. The Supreme Court then concluded that the situs of the source of payments is the Philippines, since the flow of wealth proceeded from and occurred within Philippine territory, and enjoyed the protection accorded by the Philippine government. This doctrine was reiterated in several “airline” cases, as well as in Commissioner of Internal Revenue v. Juliane Baier-Nickel (Baier-Nickel Case) (G.R. 153793, Aug. 29, 2006).

Several issues have arisen when determining the situs of taxation:

Sale: Place of delivery

As to “where” the sale of property is made, it has long been settled by the Supreme Court that it is not the place where the contract was perfected, but the place of delivery that determines the taxable situs of the property sought to be taxed (Shell vs. Sipocot, G.R. L-12680, March 20, 1959).

Services: Place of performance of services

For services, the place where these are performed should be established. If it can be proven that the services rendered by a nonresident were performed abroad, then there is no issue. But if payments are made in the Philippines, the Bureau of Internal Revenue (BIR) will immediately assume they are for services rendered in the country, and thus subject these payments to withholding tax. It will then become the burden of the taxpayer to prove that the services were rendered offshore (Visayas Geothermal Power Company v. Commissioner of Internal Revenue, CTA EB 1291, Sept. 21, 2016). Proof of where the services were performed can be shown through the terms of the contract or other evidence.

But how about payments made to a foreign satellite company? The Court of Tax Appeals (CTA), in Aces Philippines Cellular Satellite Corporation v. Commissioner of Internal Revenue (CTA EB 1242, June 8, 2016), reiterated the rule that it is the place of activity, not of the business of the payee, that is controlling. The CTA held that the satellite airtime fees paid by a domestic company to a nonresident foreign satellite corporation are Philippine-sourced income, even if the satellite was located in outer space and its control center was in another country. The CTA also held that the satellite services were performed in the Philippines because their performance was completed through the gateway facilities in the country.

Royalties versus services

The characterization of payments, whether they be royalty or service fees, can also affect situs. Royalties are generally Philippine-sourced if the technology or intellectual property right is used in the Philippines. If not properly characterized, some service fees may be construed to be royalty payments, which the BIR will consider to be taxable in the country.

A clear description of the services or transaction that gives rise to royalty fees is important.

In Ishida Philippines Tube Co. Inc. v. Commissioner of Internal Revenue (CTA Case 9729, Oct. 08, 2020), the CTA did not consider as royalty fees the management fees paid by a Philippine taxpayer to a Japanese for the management and service support due to the clear stipulation in the service agreement that the services shall in no case involve the transfer of any technological know-how or other intellectual property rights, and that it will be rendered outside of the Philippines.

With respect to software, payments are deemed to be royalties when only copyright rights are transferred. On the other hand, payments for transfer copyright ownership are considered business income from a sale. The BIR made clear these distinctions in Revenue Memorandum Circular 44-05.

Based on the above, domestic taxpayers with contracts with nonresidents should be aware or properly advised on the tax situs and the tax consequences of their payments. A thorough study of the transaction and a proper characterization of the payments, embodied in a well-drafted contract, are crucial.

Euney Marie J. Mata-Perez is a CPA-lawyer and the managing partner of Mata-Perez, Tamayo & Francisco (MTF Counsel). She is a corporate, M&A and tax lawyer. She is also the president of the Asia-Oceana Tax Consultants’ Association. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. If you have any question or comment regarding this article, email the author at or visit



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