There are many factors that affect the taxability of a particular transaction, one of them being the location of taxation. A taxation authority cannot go beyond the territorial limits of the taxation authority, i.e. there must be an established link between the subject and the state that aims to tax it. The presence of a nexus acts as a check, ensuring that the taxing power is not overblown. According to Philippine income tax law, this link is established by the person's domicile and source of income. While resident individuals and domestic companies are taxed on their worldwide income, the National Internal Revenue Act of 1997 , as amended, states that any foreign company, whether or not trading or doing business in the Philippines, is taxable. only on income from sources within the Philippines.” Specifically, a non-resident foreign company is subject to a final tax of 25 percent on its “gross income from all sources in the Philippines in each taxable year.” Any tax due must be deducted at source by the income taxpayer , who will also be responsible for filing the relevant return and paying the tax withheld to BIR. In other words, the law recognizes that the taxability of a foreign company's income is limited to income from the Philippine territory or from the Philippines. Of course, any other income that the foreign company may generate from foreign sources is beyond the scope of the Philippines' taxation jurisdiction. In BIR Resolution D514-06, the Internal Revenue Service said that services performed abroad by an NRFC are not subject to Philippine income tax. This also complies with the Tax Code. However, the taxpayer bears the burden of proving that the income comes from sources outside the Philippines and is therefore exempt from income tax. The Tax Appeals Tribunal took the opportunity to clarify the evidentiary value of the different documents submitted to prove whether an organization is an NRFC doing business outside the Philippines, namely news delivered for The Manila Times' daily s By with an email address, I confirm that I have read and accept the Terms of Service and Privacy Policy. “Each of the above-mentioned documents, by itself, is insufficient to prove that plaintiff's clients are non-resident foreign companies doing business outside the Philippines. The same does not prove that such entities are non-resident foreign companies doing business outside the Philippines. "Furthermore, the memorandum andor articles of association only prove that the entities named here are establishedorganized abroad, but do not prove that such entities do not do business in the Philippines." For an organization to be considered an NRFC doing business outside of the Philippines, it must be able to present both an SEC certificate of non-registration and foreign entityassociation certificatearticles. A recent Supreme Court decision involving a satellite company required a two-tier approach to determining whether an income payment to an NRFC was subject to final withholding tax first, the source of the income, and second, its status. source. The same Supreme Court decision explains that income refers to the flow of wealth. In identifying the source of income, we must investigate the property, activity or service that generates the income, or where the flow of wealth originates. It is not enough to describe any property, activity or service. The subject may be considered a source of income only if a particular property, activity or service causes an increase in economic benefits, which may be in the form of an inflow or increase in assets or a corresponding increase in equity and a reduction in liabilities. more than can be attributed to a capital contribution. After identifying the source of the income, we are now investigating its location. Where the flow of wealth andor economic interests comes from and occurs in Philippine territory, it is deemed to enjoy the protection of the Philippine government. Given such protection, the flow of wealth must share the burden of supporting the government and is therefore taxable. Based on the above decision of the Supreme Court, it is understood that even if a service is performed outside the Philippines, if the income generating activity related to the service is located in the Philippines, on the contrary, the service is considered as income in the Philippines. to those stipulated in the tax code for the place of taxation. This latest Supreme Court ruling has confused taxpayers when it comes to determining whether services performed abroad are considered Philippine sourced income where income generating activities take place on Philippine soil. Because the taxpayer bears the burden of proving that "income comes from sources outside the Philippines and is income tax exempt," it would be prudent for an NRFC to take a decision to avoid future tax penalties, if any. The author is vice president of the Tax and Corporate Services group of Deloitte Philippines , a member of Deloitte Asia Pacific Network. for comments or questions [email protected] Deloitte Asia Pacific Limited is a warranty company and a member firm of Deloitte Touche Tohmatsu Limited.