Taxes are the lifeblood of the government, so they say. Thus, almost all activities can be subject to tax–receiving prizes and winnings included. However, the power of taxation is not without exemption as provided by law.
Thus, the 1997 National Internal Revenue Code (“NIRC”) was enacted to provide for all forms of national taxation by the Bureau of Internal Revenue (“BIR”) with supplemental application of the Local Government Code (“LGC”) for local taxes. It is also the BIR that issues revenue regulations (“RR”) and revenue memorandum orders (“RMO”) that provide for implementing rules and guidelines of the NIRC.
Two decades later, the NIRC was amended by Republic Act No. 10963 (“R.A. No. 10963”), or the Tax Reform for Acceleration and Inclusion, otherwise known as the TRAIN Law, which introduced several changes in taxation to the Philippines. To date, the NIRC, as amended by the TRAIN Law, and other RRs lay down the tax treatment for different kinds of activities.
In the wake of the recent Tokyo 2020 Summer Olympics, our Filipino medallists received many gifts, donations, prizes, and awards from sponsors, government officials, local government units, and the national government. Now comes the question of whether or not these prizes, awards and winnings are taxable under the law.
GROSS INCOME
Inclusions and Exclusions
As a general rule, any income received is subject to income tax. One’s taxable income means the gross income less allowable deductions. To arrive at the gross income —
or, an individual’s total income subject to tax before allowable deductions and other business expenses —there are inclusions and exclusions.
The law specifies the types of income that form part and those that are excluded from the computation of a taxpayer’s gross income. Inclusions, while subject to allowable deductions, are generally taxable income. The exclusions, on the other hand, may be subject to a different form of tax or be exempt from tax altogether.
Gross Income includes:
(1) Compensation for services, including but not limited to fees, salaries, wages, commission, and other similar items;
(2) Gross income derived from the conduct of trade or business or the exercise of a profession;
(3) Gains derived from dealings in property;
(4) Interests;
(5) Rents;
(6) Royalties;
(7) Dividends;
(8) Annuities;
(9) Prizes and winnings;
(10) Pensions; and
(11) Partner’s distributive share from the net income of the general professional partnership.
Exclusions from Gross Income are:
(1) Life Insurance;
(2) Amount received by insured as return of premium;
(3) Gifts, bequests, and devises;
(4) Compensation for injuries and sickness;
(5) Income exempt under treaty;
(6) Retirement benefits, pensions, gratuities, etc. ;
(7) Miscellaneous items (income derived by foreign government, income derived by the government or its political subdivisions, prizes and awards, prizes and awards in sports competition, 13th month pay and other benefits, GSIS, SSS, Medicare and other contributions, gains from sales of bonds, debentures, or other certificate of indebtedness, and gains from redemption of shares in mutual fund income).
GIFTS, PRIZES, AND WINNINGS
Under the NIRC, as amended, gifts, bequests, and devises are excluded from gross income. Additionally, prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, or literary achievement are excluded from gross income.
This is subject to the condition that the recipient was selected without entering the contest or proceeding, and the recipient is not required to render future services as a condition to receiving the prize or award. The NIRC, as amended, further provides that all prizes and awards given to athletes in local and international sports competitions and tournaments, whether here or abroad, are excluded from gross income.
In the area of sports, Republic Act No. 10699 (“R.A. No. 10699”) —
or the National Athletes and Coaches Benefits and Incentives Act — provides cash incentives to athletes who have represented the country in international sports competitions and win gold, silver, and bronze medals. These are considered prizes and awards in sports competitions, which the law provides to be excluded from the gross income of the recipient athlete.
It should be noted that while prizes and winnings granted to athletes are excluded from gross income, they may be subject to 20% final tax on passive income, as provided under the TRAIN Law and the RR No. 8-2018. However, prizes and Philippine Charity Sweepstakes and Lotto winnings amounting to P10,000 or less are not subject to the 20% final tax. Essentially, prizes and winnings less than P10,000 are not taxed.
While gifts, bequests, and devises are excluded from gross income, the donor may be subject to donor’s tax. This shall apply to any gratuitous transfer of property between two or more persons whether the gift is direct or indirect, real or personal, tangible or intangible. The TRAIN Law has amended the rate for donor’s tax, which is now at 6% of the total amount of gifts in excess of P250,000 for donations made during the calendar year.
All told, there are different tax treatments for income, gifts, prizes, awards, and cash received. These are subject to different conditions and requirements imposed by the NIRC, as amended by the TRAIN Law, as well as other regulations issued by the BIR.