Taxation Review

Income Tax – Source of Income R.C. GLORIA/V.C.GUDANI

I. Classification of Income as to Sources

a. Income derived from sources within;
b. Income derived from sources without;
c. Income derived from sources partly within and partly without.
II. Determination of Income as to Sources (Section 42 of the Tax Code, as amended)
TYPES OF INCOME RULE TO DETERMINE SOURCE OF INCOME
a. Interest Residence of the debtor (if resident, source is derived from
within)
b. Dividends
1) From domestic corporation source is derived from within if declared by a DC
2) From foreign corporation (based on the Predominant test is applied.
ratio of the gross income of the foreign If predominant income is from the Philippines, i.e. more
corporation for the preceding 3 years than 50% - source is derived from within
prior to declaration of dividends) If predominant income is from without the Philippines, i.e.
more than 50% - source is derived from
without
c. Income from services Place where service is rendered (if rendered within, the
source is derived from within)
d. Rent Location of property (if located within, the source is
derived from within)
e. Royalties Where employed or place of use (if used/employed within,
the source is derived from within)
f. Gain on sale of real property Location of property (if located within, the source is
derived from within)
g. Gain on sale of personal property G.R. Place of sale
purchased in one country and sold in Exception: If taxpayer is PRODUCER/MANUFACTURER,
another the source is partly within, partly without
h. Gain on sale of domestic shares (personal Source of income is derived from within if the issuer of
property) shares of stock is a DC
NOTE:  the "source of income" relates not to the physical sourcing of a flow of money or the physical situs
of payment but rather to the "property, activity or service which produced the income. Hence, the list above
is NOT exclusive. The source can be based on “activity”.

Exercises
Compute the source of income whether derived from within or Within Without
without. (Assume RC or DC if silent)
1. ABC Finance and Lending Corp. earned Php100,000.00 interest
income for the taxable year 2015; 20% of which came from non-
residents.
2. SMC, a domestic corporation whose earnings are 100% foreign
based, declared dividends. Mr. McDonald Trump, an American based
in Washington is a shareholder. The BOD declared that he shall
receive Php 100,000.00.
3. SMC, a foreign corporation whose earnings are 100% foreign based,
declared dividends. Mr. McDonald Trump, an American based in
Washington is a shareholder. The BOD declared that he shall
receive Php 100,000.00.
4. Mark Zackerberg is an American living in the Philippines. He is an IT
expert servicing Peysbook, a popular social media site, home-based
and online. He receives compensation in the amount of Php 1M.
5. Nicanor is an OCW working in Canda. He earned income of Php 1
Million as a health care provide.
6. Paris Hilton operates the Azure Hotels located in Alabang
Muntinlupa, Philippines. Rentals from bookings amounted to Php1M
(50% from foreigners and 50% from Filipinos).
7. Paris Hilton operates the Hilton Hotels located in New York, USA.
Rentals from bookings amounted to Php1M (50% from foreigners and
50% from Filipinos).
7. Dex Bangga, the author of tax textbook, earned royalties. The book
sales in the Philippines is Php1M and another Php1M in the US. The
royalty rate is 20%.
8. Julybee, a popular food giant in the Philippines opened a franchise in
Japan. The franchisee paid Php1M pesos.
9. Mark Zackerberg is an American living in Los Angeles, California,
US. He is a shareholder of Near Eastern University, a top5 university
in the Philippines. He purchased the share at 1M and sold it for 2M in
the US.
10 Universal Studios, a US based media company invested in El Nido
. Palawan, and opened a new theme park. Gate receipts amounted to
Php 1M (50% from foreigners and the rest from Filipinos)
 Income partly from sources within and partly from sources without
a. Examples a. Income from transportation and other services rendered partly within and
partly without the Philippines.
b. Income from the sale of personal property produced in whole or in part by
the taxpayer within and sold without the Philippines. MANUFACTURER
c. Income from sale of property produced, in whole or in part by the taxpayer
without and sold within the Philippines. PRODUCER

b. Computation of Taxable income x Value of property, within_________

income within when 2 Value of property, within and without xxx
independent factory Add:
or production price Taxable income x Gross sales, within_____
has not been 2 Gross sales, within and without xxx
established Income within xxx

Exercises:
1. ABC Corp., a domestic corporation, (with Php1 Billion sales in the United States) declared
dividends. The shareholders of record shall receive a specific amount. Which is TRUE?
a. The source of the dividends is within the Philippines
b. The dividends is NOT subject to final tax
c. The source of the dividends are without
d. The pre-dominance test will be applied
2. XYZ Corp., a foreign corporation, (with Php1 Billion sales in the United States and Php 500
Million sales in the Philippines) declared dividends. The shareholders of record shall receive
a specific amount. Which is TRUE?
a. The source of the dividends is within the Philippines
b. The dividends is NOT subject to final tax
c. The source of the dividends are without
d. The pre-dominance test will be applied
3. XYZ Corp., a corporation registered with the Philippine Securities and Exchange
Commission, declared dividends. One of the stockholders is Li Min Who, a resident and
citizen of South Korea. Which is TRUE?
a. The dividends is NOT subject to final tax
b. The pre-dominance test will be applied
c. The source of the dividends are without
d. The source of the dividends is within the Philippines
The place of taxation (situs or source) as far as interest income is concerned is:
a. Citizenship of the lender
b. Nationality of the borrower
c. Residence of the borrower
d. Residence of the lender
4. The situs of taxation in regard to rent income of a resident alien is:
e. Citizenship of the lessor
a. Location of the property
b. Nationality of the lessee
c. Residence of the lessor
5. Which of the following is TRUE regarding the source of compensation?
I. If the services were rendered within the Philippines, then the source is within
II. If the services were rendered without the Philippines, then the source is without
III. If the services were rendered within the Philippines but paid without, the source is still
within
IV. If the services were rendered without the Philippines but paid within, then the source is
within
a. Only one of the statement is true
b. Only two of the statements are true
c. Only three of the statements are true
d. All of the statements are true
6. 1st statement – The gain from disposition of shares of stocks issued by Domestic Corporation
is an income derived from sources within the Philippines even if disposed abroad.
2nd statement – The gain from disposition of real property is an income derived from sources
within if the real property is located in the Philippines and without if located outside.
a. Only the 1st statement is true
b. Only the 2nd statement is true
c. Both statements are true
d. Both statements are false