Manila * Cavite * Laguna * Cebu * Cagayan De Oro * Davao

Since 1977

TAX.3503-1 NARANJO/SIAPIAN/WONG/GUDANI
SOURCES OF INCOME OCTOBER 2023

LECTURE NOTES
CLASSIFICATION OF INCOME AS TO SOURCES
1. Income derived from sources within
2. Income derived from sources without
3. Income derived from sources partly within and partly without
RULES IN DETERMINING SOURCE OF INCOME
Type of Income Rule
a. Interest Residence of the debtor:
1. Within - if debtor is a resident of the Philippines
2. Without - if debtor is a non-resident
b. Dividends
• From domestic corporation Within
• From foreign corporation (based Predominant test is applied:
on the ratio of the gross income of 1. Within - If predominant income is from the Philippines,
the foreign corporation for the i.e. more than 50%
preceding 3 years prior to 2. Without - If predominant income is from without the
declaration of dividends) Philippines, i.e. more than 50%
c. Income from services Place where service is rendered:
1. Within - if rendered within
2. Without – if rendered without
d. Rent Location of property:
1. Within – if property is located within
2. Without – if property is located without
e. Royalties Where employed or place of use:
1. Within – if royalty is used within
2. Without – if royalty is use without
f. Gain on sale of real property Location of property:
1. Within – if property is located within
2. Without – if property is located without
g. Gain on sale of personal property G.R. Place of sale
1. Within – if property is sold within
2. Without – if property is sold without

(purchased in one country and sold in Exception: If taxpayer is PRODUCER/MANUFACTURER, the source
another ) is partly within, partly without
1. Partly Within, Partly Without – if manufactured/produced
within, but sold without
2. Partly Within, Partly Without – if manufactured/produced
without but sold within
h. Gain on sale of shares of stocks in a 1. Within - if the issuer of shares of stock is a domestic
domestic corporation (personal property) corporation
2. Without – if the issuer of shares is a foreign corporation
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.
• The list above is NOT exclusive. The source can be based on “activity”.
END

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 Manila * Cavite * Laguna * Cebu * Cagayan De Oro * Davao
Since 1977

TAX.3503-2.1 NARANJO/SIAPIAN/WONG/GUDANI
SOURCES OF INCOME OCTOBER 2023

DISCUSSION QUESTIONS

Transaction Within or Taxable or Final tax or

Without Exempt Normal tax
or N/A
1. Nicanor, a Filipino citizen residing in the Philippines borrowed
money from Inday, a Filipino working abroad. Interest income
is Php 10,000.00
2. Nicanor, a Filipino citizen residing in the United States
borrowed money from Inday, a Filipino working abroad.
Interest income is Php 10,000.00
3. Nicanor, a Filipino citizen residing in the United States
borrowed money from Inday, a Filipino working in Makati City,
Philippines. Interest income is Php 10,000.00
4. Nicanor, a Filipino citizen residing in the United States invested
in XYZ Corporation established under the laws of the
Philippines. The Corporation, which earned gross income (for
the last three years) in the United States amounting to Php
100M and another Php 200M within the Philippines declared
dividends. Nicanor will receive Php 100,000.00
5. Nicanor, a Filipino citizen residing in the Philippines invested in
XYZ Corporation established under the laws of the United
States. The Corporation, which earned gross income (for the
last three years) in the United States amounting to Php 200M
and another Php 100M within the Philippines declared
dividends. Nicanor will receive Php 100,000.00
6. BlackPink, a popular band in Korea held a one-night concert in
the Philippines and were paid Php 1 Million.
7. Sarah G, a Filipina singer/actress held a one-night concert in
Canada. She was paid Php 1 Million ($20,000). Tax withheld
and paid is Php 300,000.00 ($6,000).
8. Jordan Clarkson, with Filipino descent playing in the NBA, was
paid $1M for playing with Utah Jazz.
9. Nicanor, a Filipino citizen residing in the United States invested
in XYZ Corp., a corporation established under the laws of the
Philippines. He sold the shares of stocks with a gain of Php 1M
in the Philippines.
10. Lui Viton Corp. sold LV bags in the Philippines. Gross income
amounted to Php 10 Million.
11. Lui Viton Corp. sold LV bags in the United States. Gross
income amounted to Php 10 Million.
12. Marikina Shoe Corp sold shoe products in the Philippines.
Gross profit amounted to Php 10 Million.
13. Marikina Shoe Corp exported shoe products to the United
States. Gross profit amounted to Php 10 Million ($200,000)
14. Nicanor, a Filipino citizen residing in the Philippines invested
in ABC Corp, a corporation established under the laws of the
Philippines. He sold the shares of stocks with a gain of Php 1M
in the Philippines to Bryan, an NRC.
15. Bryan, an NRC bought shares of stocks of ABC Corp, a
domestic corporation, from Nicanor, a resident citizen for Php
1 Million. He sold the same shares in the US to Rian, an
American Citizen. Bryan earned Php 1Million.
16. Rian, an American citizen residing in the US, bought shares of
stocks of ABC Corp, a domestic corporation from Bryan, a non-
resident citizen. He had a gain of Php 1 Million.
17. Nicanor, a Filipino citizen residing in the Philippines invested
in ABC Corp, a corporation established under the laws of the
US. He sold the shares of stocks with a gain of Php 1M in the
Philippines to Bryan, an NRC.
18. Nicanor, a Filipino citizen residing in the United States
invested in ABC Corp, a corporation established under the

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laws of the US. He sold the shares of stocks with a gain of Php
1M in the Philippines to Bryan, a resident citizen.
19. The National Basketball Association opened an NBA store in
the Philippines. It earned Php 1M.
20. ABC Corp., a domestic corporation, opened a Jolibae fastfood
restaurant in Manila. It paid Jolibae Foods Corp Php 1 Million
as franchise fee.
21. Albert, a Filipino citizen living in Canada, opened a Jolibae
fastfood restaurant in Edmonton, Alberta, Canada. He paid
Jolibae Foods Corp Php 1 Million as franchise fee.
22. Albert, a Filipino citizen residing in Quezon City, sold a parcel
of land located in Macababy, Pampanga in the amount of Php
3M. Zonal value is Php 2M while assessed value is 1M. Land is
classified as capital asset.
23. Albert, a Filipino citizen who migrated in Canada, sold a parcel
of land located in Edmonton, Alberta in the amount of $
100,000.
24. Albert, a Filipino citizen residing in Quezon City, sold a parcel
of land located in Edmonton, Alberta in the amount of $
100,000. He bought the property last year for Php $ 50,000.
Tax paid on capital gains in Canada is $ 5,000.
25. The Wakanda Overseas Airways Corp., a non-resident foreign
corporation, offers flight going to the US and back to
Wakanda. In between flights, it stops-over the Philippines to
pick passengers up going to the US or Wakanda. WOAC’s
ticketing agent sold tickets in the amount of Php 1M.

MULTIPLE CHOICE QUESTIONS:

1. S1 – Nicanor, an NRC based in Canada opened a bank account in ABC Bank, a DC. The source of the
interest income of Nicanor is derived from within the Philippines.
S2 – Nicanor, an RA, opened a bank account in ABC Bank, a DC. The source of the interest income of
Nicanor is derived from within the Philippines.
S3 – Nicanor, an NRAETB opened a bank account in ABC Bank, a DC. The source of the interest income
of Nicanor is derived from within the Philippines.
S4 – Nicanor, an NRANETB opened a bank account in ABC Bank, a DC. The source of the interest
income of Nicanor is derived from within the Philippines.
Which is FALSE?
a. S1
b. S2
c. S3
d. S4
e. None

FACTS: Somesung Philippines Corp, a foreign corporation established under the laws of South Korea
and is doing business in the Philippines, manufactures cellphone products and accessories.
2. The cellphones sold in the Philippines is derived from ____ and it is:
a. Within, Taxable
b. Within, Exempt
c. Without, Taxable
d. Without, Exempt
e. Partly Within and Without
3. The cellphones sold in the United States is derived from ____ and it is:
a. Within, Taxable
b. Within, Exempt
c. Without, Taxable
d. Without, Exempt
e. Partly Within and Without
4. If Somesong Philippines will declare dividends, the income of an RC is derived from ____ and it is:
a. Within, Taxable
b. Within, Exempt
c. Without, Taxable
d. Without, Exempt
e. Cannot be determined

FACTS: Somesung Corp, a domestic corporation manufactures cellphone products and accessories.

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5. The cellphones sold in the Philippines is derived from ____ and it is:
a. Within, Taxable
b. Within, Exempt
c. Without, Taxable
d. Without, Exempt
e. Partly Within and Without
6. The cellphones sold in the United States is derived from ____ and it is:
a. Within, Taxable
b. Within, Exempt
c. Without, Taxable
d. Without, Exempt
e. Partly Within and Without

FACTS: Nicanor and ABC Corp., both subscribed shares at Somesung Corp,
7. If Nicanor (RC) will sell his shares in Somesung (assuming it’s a domestic corporation), the shares of
stocks if sold in the Philippines is derived from ____ and it is:
a. Within, Taxable
b. Within, Exempt
c. Without, Taxable
d. Without, Exempt
e. Partly Within and Without
8. If Nicanor (RC) will sell his shares in Somesung (assuming it’s a domestic corporation), the shares of
stocks if sold outside the Philippines is derived from ____ and it is:
a. Within, Taxable
b. Within, Exempt
c. Without, Taxable
d. Without, Exempt
e. Partly Within and Without
9. If Nicanor (RC) will sell his shares in Somesung (assuming it’s a foreign corporation), the shares of
stocks if sold in the Philippines is derived from ____ and it is:
a. Within, Taxable
b. Within, Exempt
c. Without, Taxable
d. Without, Exempt
e. Partly Within and Without
10. ABC Corp. (DC) will sell its shares in Somesung (assuming it’s a foreign corporation), the shares of
stocks if sold within the Philippines is derived from ____ and it is:
a. Within, Taxable
b. Within, Exempt
c. Without, Taxable
d. Without, Exempt
e. Partly Within and Without
11. ABC Corp. (RFC) will sell its shares in Somesung (assuming it’s a foreign corporation), the shares of
stocks if sold within the Philippines is derived from ____ and it is:
a. Within, Taxable
b. Within, Exempt
c. Without, Taxable
d. Without, Exempt
e. Partly Within and Without

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