Exemption from Income Tax of Prizes for the Most Innovative New and Renewable Energy Systems

December 14, 2000 BIR RULING NO. 069-00 R.A. 7459, RR 19-93 Sec. 24.(B) 000-00 Philippine National Oil Company (Society for the Advancement of Technology Management in the Philippines) Rm. 249 School of Economics, University of the Philippines Diliman, Quezon City Gentlemen : This refers to your letter dated November 26, 1999 requesting for a ruling on exemption from income tax of the prizes that winning investors will receive from the Nationwide Contest for the Most Innovative New and Renewable Energy Systems organized in joint cooperation with Christopher Jordan, M.D. Inc., the Philippine National Oil Company (PNOC) and the Society for the Advancement of Technology Management in the Philippines (SATMP). It is represented that on November 9, 1999, the PNOC, together with other cooperators, launched the Nationwide Contest for the Most Innovative New and Renewable Energy Systems; that the contest which will run from November 10, 1999 to June 15, 2000 aims "to stimulate the development of new and renewable energy (NRE) systems and technologies using indigenous sources and resources; give recognition to the most innovative NRE system; contribute to the government's electrification of the countryside not being reached by the national power grid and promote environmental awareness through the use of environmentally-friendly energy sources"; that the ultimate goal is to evaluate and pilot-test the most promising NRE system and promote its commercialization; that the said nationwide contest is open to all Filipino investors, groups or institutions willing to share technical information about the system with the members of the screening committee; that the screening committee shall then conduct its evaluation to decide on the winning entries: that the top three (3) entries shall receive, among other, cash prizes, to wit: Grand prize US$ 12,000 plus PHP 500,000 Second prize US$ 2,000 plus PHP 100,000 Third prize US$ 1,000 plus PHP 50,000 that you posit that the prize that the winning entries shall receive is in reality a result of the top three (3) inventor's productive activity; that these inventions, after being declared as winning entries, would have undergone a series of evaluation by the Technical Review Committee composed of experts in different fields of technology; that the evaluation will be based on the detailed proposals submitted by the contestants composed of a complete technical information of the project emphasizing the extent of use of NRE of the system, originality of the design, nearness of technology to commercial stage, extent of use of local materials, replicability of the unit, potential to reduce the conventional fuel requirement of the country; potential to address environmental concerns and operability/maintainability of the units including a technical drawing or graphical representation of the unit or project; that you are one of the opinion that the grant of tax exemption from taxes of prizes as an incentive for an inventor's productive activity is consistent with the spirit of R.A. No. 7459 (otherwise known as the "Inventors and Inventions Incentives Act of 1991"), to encourage inventors to create such inventions that are beneficial to the people and contributes to national development and progress; that one of the fiscal incentives given to the inventor under the aforesaid Act is exemption from internal revenue taxes on income received; and that the consideration (or prizes in this case) that will be given to the inventors in pursuant to the above activity is necessarily income exempt from income tax. In reply, please be informed that pursuant to Sections 5 and 6 of Republic Act 7459, otherwise known as "The Inventors and Inventions Incentives Act of 1991", pertinent portions of which state that "Sec. 5. Tax Incentives . Inventors, as certified by the Filipino Inventors Society and duly confirmed by the Screening Committee, shall be exempt from payment of license fees, permit fees and other business taxes in the development of their particular inventions. This is an exception to the taxing power of the local government units. The certification shall state that the manufacture of invention is made on a commercial scale . EHCaDS "Inventors shall be exempt from paying any fees involved in their application for registration of their inventions." Sec. 6. Tax Exemptions . To promote, encourage, develop and accelerate commercialization of technologies developed by local researchers or adopted locally from foreign sources including inventions, any income derived from these technologies shall be exempt from all kinds of taxes during the first ten (10) years from the date of the first sale . Provided, that this tax exemption privilege pertaining to invention shall be extended to the legal heir or assignee upon the death of the inventor. "The technologies, their manufacture or sale, shall also be exempt from payment of license fees, permit fees, customs duties and charges on imports. (Emphasis supplied) the availment of tax exemption privileges on the income derived from the technologies or inventions shall start from the date of the first commercial sale until the tenth year thereof. Thus, the law specifically limits the period of availment of the tax incentives to the ten (10)-year period only. Likewise, the said period is deemed to have started when such invention products are sold on a commercial scale. Finally, pursuant to Section 2(e) of Revenue Regulations No. 19-93, the invention product or technology is deemed to have been sold on a "commercial scale" when the sale thereof exceeds P200,000 during any twelve (12) month period. In the light of the foregoing, this Office hereby holds that the consideration (or prizes) received, although a result of the top three (3) inventors' productive activity, is not income duly attributable to the sale on a commercial scale of the invention or technology. Such being the case, the propriety of considering the said prizes as income derived from the sale of the inventions or technologies, has no legal basis. Accordingly, the prizes to be awarded to the individual inventor/s shall be subject to the final tax of 20% imposed under Section 24(B) of the Tax Code of 1997 Very truly yours, (SGD.) DAKILA B. FONACIER Commissioner of Internal Revenue