BIR Ruling No. 316-13

August 8, 2013 BIR RULING NO. 316-13 RA 7459; Sec. 24 (B) of the Tax Code; 000-00 Jovito Rey E. Gonzales Officer-in-Charge Office of the Director Technology Application & Promotion Institute Department of Science and Technology DOST Bldg., Gen. Santos Avenue Bicutan, Taguig City Dear Sir : This refers to your letter dated May 7, 2013 requesting for a legal opinion on the issue whether or not cash awards/prizes to be given to the regional and national winners of the National/Regional Invention is Tax Exempt. It is represented that Technology Application & Promotion Institute (TAPI) is created by virtue of Executive Order No. 128 on 30 January 1987, is one of Department of Science and Technology (DOST)'s service agencies whose primary responsibility is to promote the commercialization of technologies and market the services of other operating units of the Department; that on 28 April 1992, TAPI's function was expanded by virtue of Republic Act (RA) No. 7459 otherwise known as the "Inventors and Invention Incentives Act of the Philippines". Among others, TAPI administers the Invention Development Assistance Fund for the initial experiments and prototype development and other invention-development related activities and TAPI shall be responsible in the conduct of the National/Regional Invention Contest purposely to provide presidential rewards for patented inventions in the form of cash rewards. The itemized cash awards for both regional and national level, are as follows: acHITE National Invention Contest First Second Category Prize Prize Third Prize Outstanding Invention (Tuklas Award) P150,000 P100,000 P50,000 Outstanding Utility Model P100,000 P50,000 P25,000 Outstanding Industrial Design P100,000 P50,000 P25,000 Outstanding Creative Research (Likha Award) P50,000 P25,000 P15,000 Outstanding Student Creative Research (Sibol Award) College Level P50,000 P25,000 P15,000 Outstanding Student Creative Research (Sibol Award) High School Level P50,000 P25,000 P15,000 Regional Invention Contest elimination round for the National Invention Contest cEISAD First Second Category Prize Prize Third Prize Outstanding Invention (Tuklas Award) P25,000 P15,000 P10,000 Outstanding Utility Model P20,000 P10,000 P5,000 Outstanding Industrial Design P20,000 P10,000 P5,000 Outstanding Creative Research (Likha Award) P20,000 P10,000 P5,000 Outstanding Student Creative Research (Sibol Award) College Level P20,000 P10,000 P5,000 Outstanding Student Creative Research (Sibol Award) High School Level P20,000 P10,000 P5,000 Inasmuch as National Invention Contest has been given to TAPI and DOST by operation of law as incentive to inventor, it is your contention that the provisions of cash awards/prizes may be tax exempt under RA No. 7459. 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", 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. "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. AcHaTE "The technologies, their manufacture or sale, shall also be exempt from payment of license fees, permit fees, customs duties and charges on imports." Although RA No. 7459 exempts from taxes the income derived from the technologies or inventions from the date of the first commercial sale until the tenth year thereof, the said law cannot be used as legal basis to exempt winners of National/Regional Invention Contest from paying the applicable taxes. However, pursuant to Sec. 32 (B) (7) (c) of the Tax Code, as amended, provides that: "Section 32. Gross Income . xxx xxx xxx (B) Exclusions from Gross Income . The following items shall not be included in gross income and shall be exempt from taxation under this Title: xxx xxx xxx (7) Miscellaneous Items . xxx xxx xxx (c) Prizes and Awards . Prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement but only if: (i) The recipient was selected without any action on his part to enter the contest or proceeding; and (ii) The recipient is not required to render substantial future services as a condition to receiving the prize or award." From the above provision, it can be gleaned that for the awards/prizes to be awarded to the individual inventor/s to qualify for exclusion from gross income, it must comply with the two (2) requisites laid down, namely: SEIcHa (1) The recipient was selected without any action on his part to enter the contest or proceeding; and (2) The recipient is not required to render substantial future services as a condition to receiving the prize or award. If the winners of National/Regional Invention Contest therein are selected without any action on their part in entering the contest proceeding and are not required to render substantial future services as a condition to receiving the prizes or awards, this Office is of the opinion as it hereby holds that the awards to be given under National/Regional Invention Contest may be exempt from income tax and consequently from the withholding tax. Moreover, Section 24 (B) of the Tax Code, as implemented by Section 2.57-1 of Revenue Regulations No. 2-98, as amended, 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 except Philippine Charity Sweepstakes and Lotto winnings, 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 from 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 . . ." Under the withholding tax system, prizes and winnings in the amount exceeding PhP10,000.00 shall be subject to withholding. However, if the prize 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 and declare the amount of his prize/winning in his income tax return, which amount shall be subject to tax under Section 24 (A) of the same Code. ISTECA In view of the foregoing, if the parties substantially failed to comply with the provision of Sec. 32 (B) (7) (c) of the Tax Code, as amended, the cash awards/prizes to be awarded to the individual inventor/s amounting to more than P10,000.00 are subject to the 20% final withholding tax whereas the cash awards/prizes amounting to P10,000.00 or less shall be subject to tax under Section 24 (A) of the Tax Code. Please be guided accordingly. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue