BIR Ruling [DA-204-06]

April 3, 2006 BIR RULING [DA-204-06] Ms. Teresa M. Tinamisan [emailprotected] M a d a m : This refers to your e-mailed letter dated March 17, 2006 requesting for opinion on the 20% tax imposed on prizes exceeding PhP10,000.00. As represented, you joined a text-based game called "Karaoke Idol" sponsored by Entertainment Gateway (EG) through Smart Communications. Said game has a daily prize of PhP5,000.00 for the person who garners the highest score for the day (top scorer of the day). There is no limit on how many times one can win in this game as verified with the EG. You won twelve (12) times on various dates. Your winnings should have been PhP5,000.00/day for twelve (12) days or a total of PhP60,000.00. However, EG informed you that they withheld 20% tax on your total winnings of PhP60,000.00, hence, you received only PhP48,000.00 net of the withholding tax. You felt that this is unfair since it is your opinion that had EG regularly given out the prize on the day that you won, you should have received the full PhP5,000.00 winning without the tax since this is less than PhP10,000.00. Rather EG lumped the prizes so that they exceeded PhP10,000.00, thus, subject to the 20% withholding tax. In reply, please be informed that pursuant to Section 24(B)(1) of the Tax Code of 1997, a final tax at the rate of twenty percent (20%) is imposed, among others, upon prizes and winnings derived by individuals from sources within the Philippines, viz: "(B) Rate of Tax on Certain Passive Income: (1) Interests, Royalties, Prizes, and Other Winnings. A final tax at the rate of twenty percent (20%) is hereby imposed upon the amount of interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and form trust funds and similar arrangements: royalties, . . . : prizes (except prizes amounting to Ten thousand pesos (P10,000.00) or less which shall be subject to tax under Subsection [A] of Section 24); and other winnings (except Philippine Charity Sweepstakes and Lotto winnings], derived from sources within the Philippines . . ." (Emphasis ours.) CDAEHS Under the final withholding tax system, the amount of income tax withheld by the withholding agent is constituted as a full and final payment of the income tax due from the payee on the said income. The liability for payment of the tax rests primarily on the payor as withholding agent (Section 2.57(A) of Revenue Regulations No. 2-98, as amended). Under Section 57(A) of the Tax Code of 1997, the organizer is considered as the withholding agent required by law to withhold such tax in the same manner and subject to the same conditions as provided in Section 58 of the same Code. The tax on prizes and winnings is imposed on the winner although the responsibility for the withholding of such tax is entrusted by law upon the payor. The exemption under Section 24(B)(1) of the Tax Code of 1997 refers to exemption from the requirement of withholding (on the part of the payor) and not exemption from the payment of income tax (on the part of the winner). Clearly, prizes and winnings are subject to income tax regardless of the amount. Under the withholding tax system, prizes and winnings in the amount exceeding PhP10,000.00 shall be subject to withholding. However, if the prizes is PhP10,000.00 or less, there will be no requirement on the part of the payor for the withholding of the 20% final tax but the income recipient (winner) is required to file an income tax return as prescribed in Sections 51 and 52 of the Tax Code of 1997 and declared the amount of his prize/winning in his income tax return, which amount shall be subject to tax under Section 24(A) of the Tax Code of 1997. To rule that prizes and winnings of winners on won on separate games and days should be lumped, would be adding or incorporating matters not provided in the law by administrative ruling. What is clear from the above provision is that prizes and winnings in the amount less than PhP10,000.00 won per game or raffle draw is not subject to the 20% withholding tax. Since your PhP5,000.00 winning per game per day is less than PhP10,000.00, the said prize should be exempt from the requirement of withholding, therefore, not subject to the 20% withholding tax under Section 24(B)(1) of the Tax Code of 1997. However, you are required to file an income tax return and declare the amount of your prize/winning in the said return, which amount shall be subject to tax under Section 24(A) of the Tax Code of 1997. Please be guided accordingly. Very truly yours, Commissioner of Internal Revenue By: (SGD.) PABLO M. BASTES, JR. OIC-Head Revenue Executive Assistant Legal Service