Can BIR tax Marlisa Punzalan on her X-Factor prize?

Can BIR tax Marlisa Punzalan's X-Factor Prize?

There has been a significant discussion on this question online and I thought I'd throw in my two cents.

Source: http://www.zeibiz.com/wp-content/uploads/2014/11/marlisa-punzalan-x-factor-asutralia-album-cover.jpg

Can BIR tax Marlisa Punzalan on her X-Factor winnings?

No, Marlisa Punzalan cannot be taxed by the BIR on her X-Factor winnings.

Many factors come into play to answer this question, namely nationality, residency, and source of income. As a general rule, only resident citizens and domestic corporations are taxed for income from inside and outside the country. They are, in other words, taxed for their income around the world. 

If a person is a Filipino but is not considered a resident (there's a widely accepted definition to this word for tax purposes, usually if the person resided outside the country for more than 183 days), she will only be taxed for the income sourced from within the Philippines. 

Resident Filipinos are taxed on their income worldwide while nonresident Filipinos are taxed on their income sourced from the Philippines only.

Marlisa Punzalan, based on online comments, is an Australian citizen residing in Australia. That makes her a nonresident alien and therefore, out of reach to the Bureau of Internal Revenue.

Assuming she is a Filipino, she still cannot be taxed on her X-Factor winnings because it is income from outside the Philippines. If anyone has the right to tax her, it would be Australia, not the Philippines.

Assuming Marlisa Punzalan is a resident Filipino taxed, can BIR sue her despite her minority?

The answer to that would be yes. Assuming the winner is a resident Filipino, BIR could tax her even if she is a minor. What is really being taxed is the income, not the person. She may be sued civilly and criminally albeit with the latter, she has the defense of minority. She cannot be jailed as a minor but she can certainly be made to pay taxes despite her age (but without the threat of jail time). The parents can act as her representatives in the legal proceedings.

Assuming Marlisa Punzalan is a resident Filipino, do you think BIR will really tax her?

No, I don't think so. If the family are all Australian residents, that would probably mean all their properties are in Australia. The amount of tax potentially to be collected will be less than the amount the BIR will spend just to run after the winnings. I also see difficulty with an attempt to attach real estate or garnish some funds.

How come Marlisa Punzalan's prize cannot be taxed but X-Factor Israel winner Rose Fontanes and Manny Pacquiaos' prizes are taxable?

 

Source: http://wiwibloggs.com/2014/01/15/rose-fostanes-wins-x-factor-israel/37036/

Source: http://www.tsmplug.com/boxing/timothy-bradley-vs-manny-pacquiao-iii-may-possible-2015/

 

One huge difference is that Marlisa Punzalan is not a resident Filipino. She is not even Filipino.

Rose Fontanes and Manny Pacquiao are all resident Filipinos and thus taxable on their income worldwide. There is a tiny bit of a special rule for Rose Fontanes though because she is an OFW. Registered OFWs are exempt from paying taxes on their contract pay. The X-Factor winnings are not part of the earnings from the overseas employment.

Why are people trying to differentiate prizes from winnings?

It would matter if the subject amount is more than P10,000. Prizes P10,000 or less are subject to the regular income tax rate of 5-32% whereas prizes over P10,000 are subject to the 20% final tax. With winnings (except PCSO and lotto winnings which are exempt), everything is subject to the final tax of 20%.

In layman's terms, prizes are those where you made an effort to achieve it. In this case, singing in a competition would technically be considered a prize. Winnings are those where a person does not make an effort. For example, placing your name in a raffle. If you have a prize of P10,000 or less, you place it in your ITR. Otherwise, you don't have to place it there because there would already be a final tax of 20% (perhaps there's another BIR form that needs to be filled up for this one though so don't quote me on this one).