Question

Why are resident citizens and domestic corporations taxable on their income from within and outside of the Philippines? Explain and identify the basis.

Answer 1

Both domestic and foreign income is taxable in the hands of resident citizens and domestic corporations. The general idea behind fixing such a rule is to ensure that no income goes untaxed and also to avoid double taxation.

Suppose, a resident citizen earns profits from his business establishment in the neighboring country. If this rule doesn't exist, he would have avoided paying tax on it, claiming that it originated from outside Philippines. Same goes for a domestic company.

Now lets take an example of a non-resident citizen. He travels between the Philippines and its neighboring countries, earning money from all these countries. If he was liable to pay taxes on both domestic and foreign income in the Philippines, the other countries may have similar rules and he'd have to pay taxes in all these countries. Some countries may have entered into Double Taxation Avoidance Agreements (DTAA). This agreement specifies in which country should the tax be paid and how it will be shared among the countries.

Thus, both domestic and foreign income is taxable in the hands of resident citizens and domestic corporations so that no income goes untaxed and double taxation is avoided.