INSTITUTE OF ACCOUNTS BUSINESS AND FINANCE

1st Sem
Department of Accountancy 2020
INCOME TAXATION

MODULE 3 – SOURCES OF INCOME

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
APPLICATION OF CONCEPTS AND EXERCISES
Types of Income Rule to Determine Source of Income
a. Interest Residence of the debtor (if debtor is a resident of the
Philippines, income is derived from within)
Illustration:

b. Dividends
1. From domestic corporation Source is derived from within if declared by a DC
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2. From foreign corporation (based Predominant test is applied.

on the ratio of the gross income
of the foreign corporation for the
preceding 3 years prior to
declaration of dividends)
If predominant income is from the Philippines, i.e.
more than 50% - source is derived from within
If predominant income is from without the
Philippines, i.e. more than 50% - source is derived
from without
Illustration:

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INSTITUTE OF ACCOUNTS BUSINESS AND FINANCE
1st Sem
Department of Accountancy 2020
INCOME TAXATION

c. Income from services Place where service is rendered (if rendered within,
the source is derived from within)
Illustration:

d. Rent Location of property (if located within, the source is

derived from within)
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e. Royalties Where employed or place of use (if used/employed

within, the source is derived from within)
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f. Gain on sale of real property Location of property (if located within, the source is
derived from within)
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g. Gain on sale of personal property G.R. Place of sale

purchased in one country and sold in Exception: If taxpayer is
another PRODUCER/MANUFACTURER, the source is partly
within, partly without
Illustration:

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INSTITUTE OF ACCOUNTS BUSINESS AND FINANCE
1st Sem
Department of Accountancy 2020
INCOME TAXATION

h. Gain on sale of domestic shares of Source of income is derived from within if the issuer
stocks (personal property) of shares of stock is a domestic corporation
Illustration:

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”.
Illustration:

END

References:
1. Republic Act No. 8424 – National Internal Revenue Code of 1997 (NIRC)
2. British Overseas Airways Corporation vs Commissioner of Internal Revenue

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