Pacquiao's Tax Problems: Basic Taxation on Income Derived Abroad

There has been much controversy regarding the tax problems or alleged tax liability of Philippine boxing idol Manny Pacquiao. Unfortunately, much of the noise is caused by people's lack of understanding of the basics of Philippine taxation and Pacquiao's own mishandling of his tax problems, including the inordinate focus on emotional appeals that fail to address the issue.

The issue is whether or not Pacquiao should be held liable to pay the amount of taxes assessed from him by the BIR. While it is a matter for the tax court to resolve, it is a chance for us to understand the current tax problems Pacquiao is facing if we take a glimpse of Philippine tax laws on income derived from abroad.

Except for OFWs, every resident citizen like Pacquiao is obliged to pay taxes for income derived within and outside the Philippines. To start with, one must report his gross income, or all income from whatever source, to the BIR for the latter to determine his taxable income which is gross income less personal and additional exemptions. A resident citizen who has earned income in another country and has paid taxes thereon in that foreign country must therefore declare said income to the BIR and then claim the said taxes paid as a tax credit. This way the taxpayer can avoid double taxation. Tax exemptions, deductions or credits are to be strictly construed against the taxpayer, therefore, the latter must show adequate proof that he is entitled to such. Under our tax system, it is not the BIR's duty to look for proof of exemption. The taxpayer is presumed to not having paid his taxes to the foreign state on income earned there and it is his duty to prove otherwise if he wants to avoid double taxation.

Now, before we conclude this topic on taxation of income derived from abroad, let us take note of the differences among tax deduction, tax exclusion and tax credit. Tax deduction is included in the gross income but is later deducted; tax eclusion is not included in the computation of gross income by virtue of a law or treaty; tax credit is paid beforehand and is deducted from the tax liability of the taxpayer. It is the latter which our boxing champion Pacquiao is claiming before the BIR.

A tax credit is the right of an income taxpayer under the law to deduct from his income tax payable the income tax he has paid to a foreign country for earning derived there. Just like any right or privilege it subject to limitations. For example, the taxpayer must establish to the satisfaction of the BIR Commissioner the total amount of income he derived from abroad, the tax paid to which is claimed as a tax credit, and all other information which the BIR needs in order to verify and compute such tax credit.

This, I think, is the bone of contention in the Pacquiao tax issue. The BIR maintains that Pacquiao failed to establish to their satisfaction the tax credit he is claiming. What Pacquiao should do is to sit with his lawyers and accountants and plot out the remedies he could avail under the law to comply with and/or challenge the BIR's tax assessment, instead of ranting before the media in an emotional appeal to spare him from his tax woes and banking on his status as the people's champ.