NUTS (Sources of Income).docx

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)