Final Withholding Tax on Raffle Prizes Such as Cars or Real Estate in the Philippines

Introduction

In the Philippines, raffle prizes, including high-value items like cars and real estate, are considered taxable income under the country's tax laws. This stems from the principle that any economic benefit or gain received by an individual, whether in cash or in kind, forms part of their gross income unless explicitly exempted. The tax imposed on such prizes is typically a final withholding tax, which serves as the full and final payment of the income tax liability on that specific income item. This means the prize winner does not need to include the value of the prize in their annual income tax return for further taxation.

The rationale behind taxing raffle prizes is to ensure equity in the tax system, treating winnings from games of chance or promotional activities as income similar to salaries, business profits, or investments. However, the administration of this tax becomes more complex when prizes are non-cash assets like vehicles or properties, as it involves valuation, withholding mechanisms, and potential additional documentary requirements. This article provides a comprehensive overview of the final withholding tax on such raffle prizes, grounded in Philippine tax laws, particularly the National Internal Revenue Code (NIRC) of 1997, as amended by subsequent legislation such as the Tax Reform for Acceleration and Inclusion (TRAIN) Law (Republic Act No. 10963) and the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act (Republic Act No. 11534).

Legal Framework

The primary legal basis for taxing raffle prizes is found in the NIRC, specifically:

Section 24(B)(1) for resident citizens, resident aliens, and non-resident aliens engaged in trade or business, which imposes a final tax on certain passive income, including prizes and winnings.
Section 25(B) for non-resident aliens not engaged in trade or business, with a similar but flat rate application.
Section 32(A), which defines gross income to include prizes and awards, except those specifically excluded.

Revenue Regulations (RR) issued by the Bureau of Internal Revenue (BIR) further clarify the application. Key regulations include:

RR No. 2-98 (as amended), which details the withholding tax on income payments.
RR No. 6-2018, implementing TRAIN Law changes to prizes and winnings.
RR No. 16-2005, on the taxation of income from sources within the Philippines.

Under these provisions, prizes from raffles, lotteries, or similar promotional activities are classified as "other winnings" or "prizes" subject to final tax. The TRAIN Law, effective from January 1, 2018, standardized the tax treatment by removing previous exemptions for certain winnings (e.g., Philippine Charity Sweepstakes Office or PCSO prizes over P10,000 are now taxable at 20%).

For context, raffles are often conducted by private entities such as corporations, malls, or organizations for marketing purposes. Unlike government-regulated lotteries, private raffles must comply with Department of Trade and Industry (DTI) permits, but tax obligations remain under BIR jurisdiction.

Taxable Prizes and Scope

Not all raffle prizes are taxable at the final withholding rate. The tax applies only if the prize value exceeds P10,000. Prizes P10,000 or below are exempt from final withholding tax but may still be included in the winner's gross income if not otherwise excluded.

Inclusions: High-value items like cars (e.g., sedans, SUVs) and real estate (e.g., residential lots, condominiums, houses) are fully taxable based on their value. Other examples include appliances, gadgets, or vacations, but this article focuses on cars and real estate due to their complexity.
Exclusions: Prizes that are de minimis (small value, non-recurring benefits up to certain limits under RR No. 10-2008, as amended) or those awarded in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievements (without any qualification or competition) under Section 32(B)(7)(c) of the NIRC. However, raffle prizes rarely qualify for these exclusions as they involve chance rather than merit.
Special Rule for Non-Cash Prizes: The tax is computed on the fair market value (FMV) of the prize, not its cost to the organizer. This ensures the tax reflects the actual economic benefit to the winner.

Raffle prizes won by non-residents may be subject to different rules, but in the Philippine context, we assume prizes are awarded to Philippine residents unless specified otherwise.

Rate of Tax

The final withholding tax rate on raffle prizes exceeding P10,000 is:

20% for resident citizens, resident aliens, and non-resident aliens engaged in trade or business.
25% for non-resident aliens not engaged in trade or business.

This rate is applied to the gross amount of the prize (FMV for non-cash items). For example:

A car with an FMV of P1,500,000 would incur a withholding tax of P300,000 (20% of P1,500,000).
A real estate property valued at P5,000,000 would incur P1,000,000 in tax.

Note that prior to the TRAIN Law, certain winnings had lower rates or exemptions, but these have been unified.

Valuation of Non-Cash Prizes

Determining the taxable base for cars and real estate is critical and often contentious:

Cars and Vehicles:
- Valuation is based on the acquisition cost to the organizer or the FMV, whichever is higher.
- FMV is typically the depreciated value as per BIR guidelines or the market price from authorized dealers (e.g., referencing Land Transportation Office or LTO registration values).
- If the car is brand new, the manufacturer's suggested retail price (MSRP) may be used.
- Additional features (e.g., custom modifications) are included in the valuation.
Real Estate:
- Valuation uses the higher of: (1) the acquisition cost, (2) the zonal value as determined by the BIR under Revenue Memorandum Orders (e.g., latest zonal valuation schedules), or (3) the FMV as appraised by a licensed appraiser or as per the local assessor's office.
- For condominiums or houses, this includes the value of improvements.
- Transfer documents (e.g., Deed of Assignment) must reflect the correct value to avoid under-declaration penalties.

In practice, the organizer often engages a third-party appraiser to establish the FMV, which must be documented for BIR audit purposes. Under-valuation can lead to deficiency assessments.

Withholding and Payment Mechanism

The final withholding tax is withheld at source by the payer (raffle organizer), who acts as the withholding agent:

For Cash Prizes: The tax is deducted directly from the prize amount before handover.
For Non-Cash Prizes like Cars or Real Estate:
- The winner cannot take possession until the tax is paid.
- The organizer may require the winner to pay the tax upfront (as an advance), which the organizer then remits to the BIR.
- Alternatively, some organizers shoulder the tax as part of the promotion, effectively grossing up the prize value (e.g., if tax is P300,000, the organizer pays it, but the winner's taxable income remains the net prize FMV).
- Remittance is done via BIR Form 1600 (Monthly Remittance Return of Final Income Taxes Withheld) by the 10th day of the following month.
- The organizer issues BIR Form 2307 (Certificate of Creditable Tax Withheld at Source) to the winner as proof of withholding.

For real estate transfers, additional steps include:

Execution of a Deed of Donation or Assignment (since raffles are not sales).
Payment of Documentary Stamp Tax (DST) under Section 196 of the NIRC (1.5% of the FMV or consideration, whichever is higher), which is separate from the withholding tax.
Registration with the Registry of Deeds, where Capital Gains Tax (CGT) does not apply as it's not a sale, but the withholding tax substitutes for income tax.

For cars, transfer involves LTO registration, where the winner pays motor vehicle user's charge and other fees, but these are not income taxes.

Responsibilities of the Organizer and Winner

Organizer (Withholding Agent):
- Secure DTI permit for the raffle.
- Compute and withhold the tax.
- Remit to BIR and file returns (e.g., Annual Information Return via BIR Form 1604-CF).
- Report the prize in alphanumeric tax codes for audit trails.
- Failure to withhold exposes the organizer to liability for the tax plus penalties.
Winner:
- Declare the prize if required (though final tax means no further declaration in ITR).
- Pay the tax if not shouldered by organizer.
- For real estate, handle transfer taxes and registration costs.
- Non-residents must ensure compliance with treaty benefits if applicable (e.g., reduced rates under double taxation agreements).

Exemptions and Special Cases

De Minimis Prizes: As noted, prizes ≤ P10,000 are exempt from final tax.
PCSO and PAGCOR Winnings: Post-TRAIN, winnings > P10,000 from PCSO lotteries or PAGCOR casinos are subject to 20% tax, similar to private raffles. However, small PCSO prizes remain exempt.
Corporate Winners: If a corporation wins (rare), the prize is treated as other income subject to regular corporate income tax (25% under CREATE), not final withholding.
Charitable Raffles: If proceeds benefit charity and prizes are donated, potential exemptions apply, but the prize itself remains taxable to the winner unless qualified under Section 32(B).
Force Majeure or Cancellation: If a raffle is canceled, no tax applies, but claimed prizes cannot be revoked without tax implications.

Penalties for Non-Compliance

Violations under the NIRC include:

Failure to Withhold/Remit: 25% surcharge, 12% interest per annum, and compromise penalties (up to P50,000).
Under-Declaration of Value: Deficiency tax plus 50% surcharge if fraudulent.
Non-Filing of Returns: Fines from P1,000 to P25,000, plus potential criminal liability under Section 255.
BIR audits can retroactively assess up to 3 years (or 10 years if fraud).

Conclusion

The final withholding tax on raffle prizes like cars or real estate in the Philippines ensures that windfall gains contribute to national revenue while simplifying compliance through at-source deduction. Organizers must prioritize accurate valuation and timely remittance to avoid penalties, while winners should be aware that the "free" prize comes with tax obligations that could significantly reduce its net benefit. As tax laws evolve—potentially influenced by future amendments—stakeholders are advised to consult BIR rulings or tax professionals for case-specific guidance. This framework promotes transparency in promotional activities and upholds the integrity of the Philippine tax system.