Gross Income from Sources Gross Income from sources PARTLY WITHIN Gross Income from Sources

WITHIN the Philippines Sec.42(B) And PARTLY WITHOUT the Philippines WITHOUT the Philippines Sec. 42(D)
Formula: Note: Items of gross income not allocated to Formula:
Gross income from Philippine Sources sources from within or without the Philippines Gross income from sources outside the Philippines
Less: Expenses, Losses and other deductions shall, unless unmistakably from a source within or Less: Expenses, Losses and other deductions
properly allocated thereto without the Philippines, be treated as derived from properly apportioned or allocated thereto
Less: Ratable part of expenses, interests, loses and sources partly within and partly without the Less: Ratable part of any expense, loss and other
other deductions effectively connected with Philippines (RR No. 02-40, Sec. 162) Deduction which cannot definitely be
the business or trade conducted exclusively allocated to some items or classes of gross
within the Philippines which cannot definitely (see Appendix A) income.
allocated to some items or class of gross ---------------------------------------------------------------------
income Taxable Income from sources outside the Philippines
---------------------------------------------------------------------
Taxable Income from Philippine Sources

Exceptions
 No deductions for interest paid or incurred
abroad shall be allowed from the item of gross
income specified in subsection (A) unless
indebtedness was actually incurred to provide
funds for use in connection with the conduct
or operation of trade or business in the
Philippines.

Note:
(1) The items of deductions shall be allowed only if
fully substantiated by all information necessary
for its calcutation.

Test of the taxability of an Income

1. The test is the “source” or situs of the activities or property which produce the income and
2. In the case of an income derived from labor (services) the factor which determines the source of the income is NOT the residence of the payor, or the place
of payment but the place where the labor or service is actually rendered or performed
 In other words, the source of the income is the situs of the income-producing service.
Importance of determining source income in view of the following:
(1) Resident Citizen and domestic corporation are taxable upon income from all sources
(2) Non-resident citizens are taxed only on their income within the Philippines
(3) Aliens and foreign corporations, whether resident and non-resident, are liable to pay income tax only on their income from sources within the Philippines;
and
(4) A claim for tax credit is subject to limitations as to amount which may be computed only if the income derived from each foreign country and from all
sources is determined. (Sec. 34[C,4])

Example:

(1) Gains or profits derived from the sale of shares of stock of a domestic corporation, even if consummated abroad, should be deemed as income from
Philippine Sources. (Sec. 42(E))

(2) The filing up of the subscription form by the Philippine Subscriber to the Time or Newsweek magazine is the activity that produces the income consisting
of the subscription payments. Since such payments are made in the Philippines and, therefore, come from the Philippines, the source of the income is
this country although the printing and publication of the magazine is done abroad. Hence, they are subject to the 35% withholding tax. (BIR Ruling No.
094, May 28, 1990).
 The word “source” conveys one essential idea, that of origin, and the origin of the income in question is the Philippines. (Comm. Vs British Overseas
Airways Corporation, 149 SCRA 395 [1987])

(3) The revenue derived by a foreign airline company from the sales of airplane tickets through its agent here in the Philippines is taxable income coming
from the Philippine territory. It is sufficient that the income is derived from activities within this country. The word “source” conveys one essential
idea, that of origin, and the origin of the income derived from the sales of airplane tickets is the Philippines. (Comm. V. Japan Air Lines, Inc., 202 SCRA
450 [1991])

(4) Transfer of assets from the books of the parent company to the subsidiary company’s book.- Where SPI (parent company) acquired a company in the
Netherlands but the assets were retained in the Netherlands and continued to be used for the subsidiary company’s operations, the recording in the
books of SPI to reflect such acquisition with no physical transfer in the Philippines and the subsequent transfer of such assets in the book of its subsidiary
don not involve any Philippine tax liability or consequence.
 TRANSFER OF ASSETS - It is a general rule that the State can levy a tax only upon persons, property, income or acts of business that are within its
territorial limits and bans it from collecting a tax on subject or objects outside those limits (Manila Gas Corporation vs. Comm. of Int. Rev., 62 Phil
895). There being no physical transfer of assets to the Philippines were made during the acquisition of the Netherlands corporation by SPI
Technologies, Inc. but only a recording in the books of the latter was made to reflect such acquisition, the subsequent transfer of such assets in
the books of its subsidiary does not involve any Philippine tax liability or consequence. (BIR Ruling No. 126-99 dated August 17, 1999)
(5) Fees collected by domestic corporation for non-resident foreign corporation.- as mere collecting agent for a non-resident foreign corporation (X. Co.), a
domestic corporation (Y Co.) is not subject to Philippine tax on the fees collected for, and to be delivered to, the former.
 Gross receipts subject to tax under the Tax Code do not include monies or receipts entrusted to the taxpayer which do not belong to him/her
and do not redound to the taxpayer’s benefit, However, the gross commission earned by the domestic corporation from services performed
outside the Philippines is subject to 32% (now 35%) regular corporate income tax and to 10% (now 12%) VAT. (BIR Ruling No. 009-05, August 2,
2005)
 Y Co. shall maintain separate books of accounts and shall not issue its own official receipts for the service fees it collects for and in behalf of X Co.
Thus, the service fees collected in the Philippines by Y co., as agent of X Co. do not constitute income for Y Co. and are not subject to Philippine
tax. (BIR Ruling No. 010-05, August 2, 2005)
Gross Income from Sources Gross Income from sources PARTLY WITHIN Gross Income from Sources
WITHIN the Philippines Sec. 42 (A)(1) And PARTLY WITHOUT the Philippines WITHOUT the Philippines Sec. 42(C)(1)
INTEREST INTEREST
1. Interest derived from sources within the Other than those derived from sources within the
Philippines, and Philippines as provided in paragraph (1) of
2. Interest on bonds, notes or other interest- Subsection (A) of this section;
bearing obligations of residents, corporation or
otherwise Example:
1. Interest earned from deposits on banks located
outside the Philippines; and
2. Interest on loans where the debtor is not a
resident of the Philippines

Interest received by non-resident foreign corporations

 With respect to interest received by non-resident foreign corporations under Sec 42(A)(1),  the Government’s right to levy and collect income tax on the
interest income is NOT planted on the condition that the activity or labor and the sale from which the interest income flowed had its situs in the
Philippines.
 The provision speaks of obligation of residents, corporate or otherwise, nothing that speaks of the act or activity of non-resident foreign corporations in the
Philippines, or place where the contract is signed.

Example:
(1) The residence of the obligor who pays its interest rather than the physical location of the securities, bonds or notes or the place of payment is the
determining factor of the source of interest income. Accordingly, if the obligor is a resident of the Philippines, the interest payment paid by him can have
no other source than within the Philippines. The interest is not paid by the bond, note, or other interest-bearing obligations but by the obligor. (National
Development Corp. v CIR, 151 SCRA 472 [1987])
Gross Income from Sources Gross Income from sources PARTLY WITHIN Gross Income from Sources
WITHIN the Philippines Sec. 42 (A)(2) And PARTLY WITHOUT the Philippines WITHOUT the Philippines Sec. 42(C)(2)
DIVIDIENDS received: DIVIDENDS
1. From a domestic corporation and Other than those derived from sources within the
2. From a foreign corporation,1 unless less than Philippines as provided in paragraph (1) of
50% of the GROSS INCOME of such foreign Subsection (A) of this section;
corporation for the three-year period ending
with the close of its taxable year preceding the Example:
declaration of such dividends (or for such part 1. Dividends received from a Foreign Corporation
of such period as the corporation has been in LESS than 50% of its gross income is from
existence) was derived from sources within the sources within the Philippines.
Philippines as determined under the
provisions of this Section; but only in an
amount which bears the same ratio to such
dividends as the gross income of the
corporation for such period derived from
sources within the Philippines bears to its gross
income from all sources.

TAX situs Dividend Income2

 (1) Dividend Income have Philippine situs = if at
least 50% of the foreign corporation’s gross income
for the immediately preceding three-year period
was derived from sources within the Philippine;
 (2) Dividend Income do not have a Philippine situs
= if the gross income from Philippine sources of such
foreign corporation within the same period DID NOT
EXCEED the 50% threshold.
Note: Dividend Income from (declared by) Foreign Corporation Philippine situs
(see above Philippine Situs
The reportable dividends declared by a foreign corporation that are subject formula)
to the regular income tax may be summarized as follows: 1. Resident Citizen 5-32% 5-32%
5-32% Not subject to
Classification of Shareholder Dividends with a Dividends without a 2. Non-resident Citizen
Philippine Tax
1
The dividends declared by a FOREIGN CORPORATION may or may not subject to Philippine tax, depending on the tax situs of such dividends and the tax classification of the recipient stockholder.
2
Following the principle of income taxation under Section 23 of the NIRC:
 If the recipient stockholder is a resident citizen or a domestic corporation  the entire amount of the dividends (regardless of the tax situs) shall be subject to Philippine income tax. The same would form part of the taxpayer’s taxable
income that is subject to the ordinary income tax a(and not to ordinary tax on dividends)
 On the other hand, if the recipient stockholder is a non-resident citizen, a resident alien, a non-resident alien, a resident foreign corporation  the tax situs of the dividends should be taken into consideration. SPECIFICALLY:
a. IF THE DIVIDENDS DO NOT HAVE A PHILIPPINE SITUS  such dividends shall not be taxable in the Philippines;
b. If THE DIVIDENDS HAVE A PHILIPPINE SITUS  a portion of the same shall form part of the taxpayers’ taxable income that is subject to the ordinary income tax, expressed in the ff. formula:
Gross income from Philippines x Amount of dividends declared by a foreign corporation
Portion of the reportable dividends = Gross Income from ALL sources
 5-32% Not subject to
3. Resident Alien
Philippine Tax
4. Non-resident alien 5-32% Not subject to
(engaged in trade or Philippine Tax
business)
5. Non-resident alien (not 25% Not subject to
engaged in trade or Philippine Tax
business)
6. Domestic Corporation 30% 30%
7. Resident Foreign 30% Not subject to
Corporation Philippine Tax
8. Non-resident Foreign 30% Not subject to
Corporation Philippine Tax
 Gross Income from Sources
Gross Income from Sources Gross Income from sources PARTLY WITHIN
WITHOUT the Philippines Sec. 42(C)(3)
WITHIN the Philippines Sec. 42 (A)(3) And PARTLY WITHOUT the Philippines
SERVICES When the personal service or labor is performed partly COMPENSATION
Compensation for labor or personal services performed within and partly outside the Philippines and NO Compensation for labor or personal services performed
in the Philippines; accurate allocation can be made, the following formula without the Philippines;
may be used:

No. of days labor

Was performed Total

In the Philippines X compensation = Income within

the Philippines
Total No. of days received
Labor was performed
Gross Income from Sources Gross Income from sources PARTLY WITHIN Gross Income from Sources
WITHIN the Philippines Sec. 42 (A)(4) And PARTLY WITHOUT the Philippines WITHOUT the Philippines Sec. 42(C)(4)
RENTALS and ROYALTIES RENTALS AND ROYALRIES
Rentals and royalties from property located in the Rentals or royalties from property located without
Philippines or from any interest in such property, the Philippines or from any interest in such
including rentals or royalties for - property including rentals or royalties for the use
of or for the privilege of using without the
a. The use of or the right or privilege to use in the
Philippines any copyright, patent, design or model, Philippines, patents, copyrights, secret processes
plan, secret formula or process, goodwill, and formulas, goodwill, trademarks, trade brands,
trademark, trade brand or other like property or franchises and other like properties; and
right;
b. The use of, or the right to use in the Philippines any Example:
industrial, commercial or scientific equipment; (1) Income from sale of trademarks.- the income
c. The supply of scientific, technical, industrial or from the sale of trademarks by a US Company
commercial knowledge or information; to a Philippine company is considered business
d. The supply of any assistance that is ancillary and
profits, not royalties, under the RP-US Tax
subsidiary to, and is furnished as a means of
Treaty.
enabling the application or enjoyment of, any such
property or right as is mentioned in paragraph (a),  Hence, since the US Company has no
any such equipment as is mentioned in paragraph permanent establishment in the
(b) or any such knowledge or information as is Philippines, the gain derived by the US
mentioned in paragraph (c); Company from the sale of the
e. The supply of services by a nonresident person or his trademarks is NOT subject to Philippine
employee in connection with the use of property or income tax and, consequently, to
rights belonging to, or the installation or operation withholding tax. (BIR Ruling No. 641-04,
of any brand, machinery or other apparatus December 17, 2004)
purchased from such nonresident person;
f. Technical advice, assistance or services rendered in
connection with technical management or
administration of any scientific, industrial or
commercial undertaking, venture, project or
scheme; and
g. The use of or the right to use:
i. Motion picture films;
ii. Films or video tapes for use in connection with
television; and
iii. (iii) Tapes for use in connection with radio
broadcasting.
Gross Income from Sources Gross Income from sources PARTLY WITHIN Gross Income from Sources
WITHIN the Philippines Sec. 42 (A)(5) And PARTLY WITHOUT the Philippines WITHOUT the Philippines Sec. 42(C)(5)
Sale of Real Property Sale of Real Property
Gains, profits and income from the sale of real Gains, profits and income from the sale of real
property located in the Philippines; property located WITHOUT the Philippines
 Gross Income from Sources Gross Income from sources PARTLY WITHIN Gross Income from Sources
WITHIN the Philippines Sec. 42 (A)(6) And PARTLY WITHOUT the Philippines Sec. 42(E) WITHOUT the Philippines
SALE OF PERSONAL PROPERTY SALE OF PERSONAL PROPERTY3 No provision/s related
Gains, profits and income from the sale of personal Gains, profits and income from the sale of personal
property as determined in Subsection (E) of this property, subject to the following rules:
Section. A. Income is treated as partly from sources
within and partly from sources without the
Philippines if:
i. Produced 4(in whole or in part) by
the taxpayer within and Sold5
without the Philippines; or
ii. Produced (in whole or in part) by
the taxpayer without and sold
within the Philippines
B. Income is treated as derived entirely from
sources within the country where the
property is sold if:
i. Purchased of personal property
within and its sale without the
Philippines; or
ii. Purchased of personal property
without and its sale within the
Philippines

Note: In BIR Ruling DA-576-99 (October 6, 1999), the BIR ruled

that the determination of tax situs involves consideration of
two factors:
a. The place where the sale of personal property
occurred; and
b. The place where such personal property was
manufactured.
 if the personal property was both produced/ manufactured
and sold outside the Philippines, the income derived therefrom

3
Article 416 and 417 of the New Civil Code
Article 416. The following things are deemed to be personal property:
1) Those movables susceptible of appropriation which are not included in the preceding article;
2) Real property which by any special provision of law is considered as personalty;
3) Forces of nature which are brought under control by science; and
4) In general, all things which can be transported from place to place without impairment of the real property to which they are fixed. (335a)
Article 417. The following are also considered as personal property:
1) Obligations and actions which have for their object movables or demandable sums; and
2) Shares of stock of agricultural, commercial and industrial entities, although they may have real estate. (336a)
4
“produced” includes created, fabricated, manufactured, extracted, processed, cured, or aged; Sec. 42(F) NIRC
5
“sold” or “sale” includes exchange or exchaneged; Sec. 42(F) NIRC
 will be regarded as sourced entirely outside the Philippines.
EXCEPTION TO THE RULE:
That gain from the sale of shares of stock in a
domestic corporation shall be treated as derived
entirely form sources within the Philippines
regardless of where the said shares are sold.

Note: The transfer by a non-resident alien or a

foreign corporation to anyone of any share of stock
issued by a domestic corporation shall not be
effected or made in its book unless:
(1) the transferor has filed with the
Commissioner a bond conditioned upon the
future payment by him of any income tax
that may be due on the gains derived from
such transfer, or
(2) the Commissioner has certified that the
taxes, if any, imposed in this Title and due
on the gain realized from such sale or
transfer have been paid.

It shall be the duty of the transferor and the

corporation the shares of which are sold or
transferred, to advise the transferee of this
requirement.

Note:
(1) INCOME TAX; Gains derived by a non-resident corporation not engaged in trade or business in RPexempt from income tax –
 Any gain derive by Maha Ahmed Al-Juffali Food Distribution Systems Establishment (MAJ), a non-resident foreign corporation engaged in the wholesale of foodstuff/confectionery products,
from selling Gandour products to Gandour Philippines, Inc. (GPI), a domestic corporation engaged in the manufacture, export and wholesale of goods such as candies, gums, sweets,
chocolates, preserved fruits and confectionary goods in Saudi Arabia, under a Distributorship Agreement, will not be considered as Philippine source income and therefore exempt from the
Philippine corporate income tax and withholding tax under Section 28(B)(1) of the Tax Code of 1997 and to the final withholding tax imposed under Section 57 of the same Code except capital
gains tax under subparagraph 5(c) at the rate of 35% based on gross income during each taxable years, provided that effective January 1, 1998, the rate of income tax shall be thirty-four
percent, January 1, 1999, 33% and January 1, 2000 and thereafter, 32%. (BIR Ruling No. 126-98 dated September 8, 1998)
 the BIR held that gains derived by a foreign seller under a distributorship agreement were considered income from sources, hence, not subject to Philippine tax since the Philippine
Company/purchaser took delivery of the product Freight on Board (FOB) Suadi Arabia or country of origin and title thereto was transferred upon delivery on abroad.
(2) In PF Collier vs CIR (CTA Case No. 4355), the CTA applied the theory that the situs of sale of personal property for taxation purposes is the place where the sale is perfected and consummated.
 The contract of sale is perfected at the moment there is a meeting of the minds upon the thing which is the object of the contract and the price and is consummated upon delivery of the
object of the contract. (BIR Ruling Ni, 503-04, September 24, 2004)