Tests in determining whether income is earned for tax purposes

1. Realization/Severance test – there is no taxable income until there is a

separation from capital of something of exchangeable value thereby
supplying the realization or transmutation, which would result in the receipt
of income.
2. Claim of Right Doctrine – a taxable gain is conditioned upon the presence of
a claim of right to the alleged gain and the absence of a definite unconditional
obligation to return or repay that which would otherwise constitute a gain.
3. Economic Benefit Test – any economic benefit to the employee that
increases his net worth, whatever may have been the mode, which it is
effected, is taxable.
4. All-Events Test – for income or expense to accrue, this test requires:
a. The fixing of a right to income or liability to pay; and
b. The availability of the reasonable accurate determination of such
income or liability

Classification of income
1. Income derived entirely from sources within the Philippines
2. Income derived entirely from sources without the Philippines
3. Income derived from sources partly within and partly without the
Philippines

General principles of income taxation

1. Resident citizen – taxable on income derived from sources within and
without the Philippines.
2. Other individuals – taxable on income derived only from sources within the
Philippines.
a. Non-resident citizen – those citizens whose residence is not within
the Philippines.
i. A citizen who establishes to the satisfaction of the
Commissioner the fact of his physical presence abroad with a
definite intention to reside therein;
ii. A citizen who leaves the Philippines during the taxable year to
reside abroad, either as an immigrant or for employment on a
permanent basis;
iii. A citizen who works and derives from abroad and whose
employment thereat requires him to be physically present
abroad most of the time during the taxable year;
 iv. A citizen who has been previously considered as nonresident
citizen and who arrives in the Philippines at any time during
the taxable year to reside permanently in the Philippines.
b. Resident alien – those individuals whose residence is within the
Philippines and are not citizens thereof.
c. Non-resident aliens – those individuals whose residence is not
within the Philippines but temporarily in the country and are not
citizens thereof. They are:
i. Those engaged in trade or business within the Philippines; and
ii. Those who are not so engaged.
3. Domestic corporation – taxable on income derived from sources within and
without the Philippines.
4. Foreign corporation – taxable on income derived only from sources within
the Philippines.

Situs of income taxation

The source of an income is the property, activity, or service that produced the
income.

Income from sources within the Philippines:

1. Interests derived from sources within the Philippines, and interests on
bonds, notes, or other interest-bearing obligations of residents, corporate or
otherwise.
2. Dividends received from a:
a. Domestic corporation; and
b. Foreign corporation provided that at least 50% of its gross income for
the 3-year period ending with the close of its taxable year preceding
the declaration of such dividends was derived from sources within the
Philippines.
3. Compensation for labor or personal services performed in the Philippines;
4. Rentals and royalties from property located in the Philippines or from any
interest in such property.
5. Gains, profits and income from the sale of real property located in the
Philippines; and
6. Gains, profits and income from the sale of personal property, subject to the
following rules:
a. Income is treated as partly from sources within and partly from
sources without the Philippines if:
i. Produced, in whole or in part within and sold without the
Philippines; or
 ii. Produced, in whole or in part 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 within and sold without the Philippines; or
ii. Purchased without and sold within the Philippines

Income from sources without the Philippines:

1. Interests other than those derived from sources within the Philippines.
a. Interest earned from deposits on banks located outside the
Philippines, and interest on loans where the debtor is not a resident of
the Philippines.
2. Dividends other than those derived from sources within the Philippines
a. Dividends received from a foreign corporation less than 50% of its
gross income is from sources within the Philippines.
3. Compensation for labor or personal services performed without the
Philippines;
4. Rentals or royalties from property located without the Philippines or
royalties for the use of or for the privilege of using without the Philippines,
patents, copyrights, secret processes and formulas, goodwill, trademarks,
trade brands, franchises and other like properties; and
5. Gains, profits and income from the sale of real property located without the
Philippines.

Income from sources partly within and partly without the Philippines shall,
unless unmistakably from a source within or source without the Philippines, be
treated as derived from sources partly within and partly without the Philippines.

Personal property produced/purchased and sold

1. Gross income derived from the sale of personal property produced (in whole
or in part) by the taxpayer within the Philippines and sold within a foreign
country, or produced (in whole or in part) by the taxpayer within a foreign
country and sold within the Philippines is considered partly within and
partly without the Philippines.
2. Gross income derived from the purchase of personal property within and its
sale without the Philippines, or from the purchase of personal property
without and its sale within the Philippines is derived entirely from sources
within the country in which the property is sold.