THE SOURCE PRINCIPLE
The source principle is based on the origin of income. According to this principle, a country has the right to tax all income generated within its territory, regardless of the taxpayer’s nationality or residence. This approach is common in many countries, particularly those seeking to attract foreign investment.
Under this principle, if a foreign company operates within a country and generates income there, that income will be subject to tax in the country where it was earned. The source principle is commonly applied to income such as salaries, rental income, interest, dividends, and capital gains.
THE WORLDWIDE INCOME PRINCIPLE
The worldwide income principle, on the other hand, is based on the taxpayer’s residence. Under this system, a country taxes all income of its residents, regardless of where it is earned. This means that both domestic and foreign income are subject to taxation.
Key features of the source principle include:
- Territoriality: Only income generated within the country is taxed.
- Non-residents: They are taxed solely on income earned within the country.
- Foreign income: Generally not subject to tax.
- In contrast, the worldwide income principle is characterized by:
- Universality: All of the taxpayer’s income is taxed, regardless of its origin.
- Residents: They are subject to taxation on their global income.
APPLICATION OF TAX PRINCIPLES IN BOLIVIA AND OTHER COUNTRIES
The choice between the source principle and the worldwide income principle depends on each country’s fiscal policy, its objectives, and administrative capacity. The source principle tends to attract capital and is easier to manage, while the worldwide income principle can generate higher tax revenues.
Some countries adopt a hybrid approach, combining elements of both principles to optimize their tax systems.
Bolivia is among the countries that have chosen to apply the source principle. According to Article 42 of Law Nº 843 (Consolidated Text) and Supreme Decree Nº 24051, only profits derived from capital located, placed, or economically used within the country are considered Bolivian-source income.
This allows Bolivian taxpayers to make foreign investments without being subject to Corporate Income Tax (IUE) in Bolivia, provided they can demonstrate that the capital used was not sourced from Bolivian-based assets. However, in case of doubt, it is crucial to seek guidance from legal professionals specializing in tax law to ensure compliance and optimize fiscal efficiency for both individuals and companies.
Need personalized advice on international taxation or Bolivian tax law? Contact our team of tax law experts today — we’re here to help you navigate complex cross-border tax obligations.
Frequently Asked Questions (FAQs)
What is the main difference between the source principle and the worldwide income principle?
The source principle taxes only income generated within the country, while the worldwide income principle taxes all income of a resident, regardless of where it is earned.
Does Bolivia apply the worldwide income principle?
No. Bolivia applies the source principle, meaning only income generated within Bolivian territory is subject to tax under current regulations.
Can Bolivian residents be taxed for foreign investments?
No, as long as they can prove that the capital used abroad was not sourced from assets located, placed, or economically used in Bolivia.
The content of this article does not reflect the technical opinion of Rigoberto Paredes & Associates and should not be considered a substitute for legal advice. The information presented herein corresponds to the date of publication and may be outdated at the time of reading. Rigoberto Paredes & Associates assumes no responsibility for keeping the information in this article up to date, as legal regulations may change over time.
