IT is an elementary rule in taxation that a foreign corporation, whether or not engaged in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines.

Section 42(A)(3) in relation to Section 42(C)(3) of the Tax Code treats compensation for labor or personal service as income from Philippine sources if the service is performed in the country. The income from services performed outside the Philippines is, therefore, considered income from sources outside the country, which is not subject to final withholding tax (FWT) and final withholding VAT. This provision has been cited in numerous tax rulings as the basis for tax exemption.