SOURCES OF INCOME

INCOME FOR INCOME TAX PURPOSES: can be:

1. From sources within the Philippines
2. From sources outside the Philippines
3. From sources partly within and partly outside the Philippines

RULES ON SITUS (whether earned within or outside the Philippines):

1. Interest – the situs of interest income is the residence of the debtor. Thus, if the debtor is a resident of the Philippines, it is considered earned within the
Philippines.

2. Dividends – the following are considered earned WITHIN the Philippines, dividends received from:
a. A domestic corporation;
b. A foreign corporation, unless less than 50% of the gross income of such foreign corporation for the 3 year period ending with the close of its taxable
year preceding the declaration of such dividends (or for such part of such period as the corporation has been in existence) was derived from sources
within the Philippines; 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 bear to its gross income from all sources.

In summary: if the gross income from the PH of the foreign corporation in relation to its worldwide gross income is:
i. Less than 50% - all are treated as income from without the Philippines;
ii. 50% or more – that same percentage is treated as earned within the Philippines in relation to the dividend received.

This rule has been upheld by the BIR in BIR Ruling No. 102-1994 (dated May 4, 1994), BIR Ruling No. 252-1991 (dated November 20, 1991), BIR
Ruling [DA-594-1999] dated October 7, 1999 and BIR Ruling [DA-632-2004] (dated December 14, 2004), among others.

However, the BIR issued RMC No. 62-2021, clarifying that if the dividends received from a foreign corporation shall be treated as earned within or
outside, as follows:
i. Less than 50% - treated as without
ii. More than 50% - treated as within.

Note that under the CREATE Act, dividends received by a domestic corporation from a foreign corporation may now be exempt if it complies with the
following requisites:
i. Such dividends actually received or remitted into the Philippines are reinvested in the business operations of the domestic corporation in the
Philippines within the next taxable year from the time the foreign-sourced dividends were received
ii. The foreign sourced dividends shall only be used to fund the working capital requirements, capital expenditures, dividend payments, investment
in domestic subsidiaries, and infrastructure projects; AND
iii. The domestic corporation holds directly at least 20% of the outstanding shares of the foreign corporation and has held the shareholdings for a
minimum of 2 years at the time of dividend distribution.

3. Services – where performed. Thus, if performed within the Philippines, it is considered earned herein.

4. Rentals and Royalties – where the property is located or the place of use of the intangible. As such, if the property or any interest in such is located in
the Philippines, rentals and royalties therefrom are considered earned within the Philippines.

5. Sale of real property – where the real property is located. As such, gains, profits and income from the sale of real property located in the Philippines are
considered earned herein.

6. Sale of Personal Property

Purchase: where the property is sold. If the personal property was purchased outside the Philippines, but sold herein, the gains, profits and income derived
therefrom are considered earned within the Philippines. On the other hand, even if it was purchased in the Philippines and sold outside, gains therefrom
shall be treated earned from outside the Philippines.

Produced: if the personal property is produced in the Philippines and sold outside, it shall be treated as derived from sources partly within and partly
without the Philippines.

Except: sale of shares of stock of a domestic corporation, which shall be considered entirely within the Philippines even if sold outside.

7. Income partly within and partly without the Philippines:

This applies to:

a. Sale of personal property produced in the Philippines but sold outside the Philippines;
b. Sale of personal property produced outside the Philippines but sold within the Philippines;
c. Income from transportation and
d. Other services rendered partly within and partly without.

In these cases, the net income may first be computed by deducting the expenses, losses, or other deductions apportioned or allocated thereto and a
ratable part of any expenses, losses or other deductions which cannot definitely be allocated to some items or class of gross income; and the portion of
such net income attributable to sources within the Philippines may be determined by processes and formulas of general apportionment prescribed by the
Secretary of Finance.