Saxon

Retry with preformatted text:

~/t $ cat unexpectedVariableResults.xsl 
<?xml version="1.0" encoding="UTF-8"?>
<!DOCTYPE xsl:stylesheet
[
<!ENTITY builtinPhrases '
<phrases source="doctype">
  <phrase>Hello world</phrase>
</phrases>'>
]>
<xsl:stylesheet xmlns:xsl="http://www.w3.org/1999/XSL/Transform"
                xmlns:xsd="http://www.w3.org/2001/XMLSchema"
                exclude-result-prefixes="xsd"
  version="2.0">

<xsl:variable name="additionalPhrases" as="element(phrases)">
  <phrases source="variable">
    <phrase>Don't worry, be happy</phrase>
  </phrases>
</xsl:variable>
  
<xsl:variable name="builtinPhrases" as="element(phrases)+">
  <xsl:copy-of select="$additionalPhrases"/>
  &builtinPhrases;
</xsl:variable>

<xsl:output method="text"/>

<xsl:template match="/">
  <xsl:value-of select="system-property('xsl:product-name'),
                        system-property('xsl:product-version')"/>
  <xsl:text>&#xa;</xsl:text>
  <xsl:value-of select="$builtinPhrases/@source"/>
  <xsl:text>&#xa;</xsl:text>
</xsl:template>

</xsl:stylesheet>~/t $ xslt2 unexpectedVariableResults.xsl unexpectedVariableResults.xsl 
SAXON HE 9.8.0.15
doctype variable
~/t $ 

I think the essential issue here is that

$builtinPhrases/@source

sorts nodes into document order, and document order is unpredictable for nodes in different trees. Clearly the nodes constructed by xsl:copy-of and those constructed by expanding the entity are in different trees.

We've often tried to keep things intuitive by making document order across trees equate to the sequence of execution - if node A was created before node B, then node A is before node B in document order. That's been more an accident of the implementation than a deliberate design principle. One problem with it is that it can only be maintained in a multithreaded environment if threads communicate. So we've tended to move more towards distributed allocation of node identifiers rather than sequential allocation - which means in effect that it's truly random.

Try to get into the habit of using "!" rather than "/" if you don't actually want deduplication and sorting into document order. It means breaking the habits of a lifetime, but this expression should almost certainly be written as

$builtinPhrases!@source

Excellent observation and suggestion, Mike! Please forgive me for not having considered that. I figured it must have been something straightforward.

. . . . . . Ken