Wednesday, December 4, 2013

One More Take on Pacquiao’s Tax Case

JOE LOUIS – Former Heavyweight Boxing Champion of the World.  He was widely considered as one of the greatest and most beloved boxers in the sport’s history.  After the attacks on Pearl Harbor, he donated money to the government, and even provided entertainment and uniforms to thousands of army troops. 

However, Louis began accumulating tax liabilities.  He had to come out of retirement to help pay off tax debts.  I used to see him in Las Vegas welcoming guests on behalf of the Caesar’s Palace Hotel.  He died before he was able to fully repay the U.S. IRS (Internal Revenue Service).

MANNY PACQUIAO – First and only eight-division world boxing champion and the second highest paid athlete in the world. He was at a time rated as the best pound-for-pound boxer in the world by some sporting news and boxing websites, including ESPN, Sports Illustrated, Sporting Life, Yahoo! Sports,, BoxRec and the Ring.  He is adored by Filipinos and admired by boxing fans worldwide.  After his victory over Rios in Macau, he has been going around visiting the Visayan areas devastated by typhoon Yolanda and distributing relief goods to victims.

However, Pacquiao is now facing a battle with the BIR (Bureau of Internal Revenue) regarding some tax liabilities in 2008 and 2009.  Instead of negotiating and settling the alleged tax debts, he decided to convert it into a political and propaganda war where he thought he could win.  In fact, he attracted support from a few Anti-Aquino naysaying columnists and lately, Vice President Binay.

It is unfortunate that Pacquiao and VP Binay decided to follow this route.  If Pacquiao persists, he may have to suffer the consequences and feel the brunt of the law.  Binay who is only a breath away from being the country’s Chief law enforcer and tax collector, may just have mistakenly disqualified himself from ascending to be one.

Based on the facts known so far, and applying them to both the PHL and U.S. tax laws, this is my take.

In 2008 Pacquiao, who fought Marquez, Diaz, and De la Hoya that year, shared in HBO Pay-Per-View revenues, had numerous product endorsements, and paid P125 million in taxes.

In 2009, Pacquiao fought Hatton and Cotto plus again shared in HBO PPV revenues and had several more profitable endorsements.  For his declared income of P50 million, he paid only P7.4 million. The published purse earnings of Pacquiao on the Hatton and Cotton fights were $12 million and $35 million, respectively. That’s about P2 billion.

BIR noticed a couple of things: one, the sudden drop of tax liability (P125M vs. P7.4M); and two, a misdeclaration or under-declaration of income.  The law requires that ALL income from ALL sources should be declared.

This precipitated the BIR audit of Pacquiao’s income tax returns of 2008 and 2009.  A Letter of Authority dated July 27, 2010 was served on Pacquiao informing him that the taxman was coming.

Subsequently, Pacquiao and wife Jinkee were required to submit a list of documents that included the U.S. Income Tax Return (1040 NR) or Receipt – “either the original, duplicate original, or a duly certified or authenticated copy”.

The spouses submitted instead a certification from Top Rank that taxes were paid on Pacquiao’s behalf.  It is obviously unacceptable.  Certification must come from the IRS.  The claim of Top Rank’s Bob Arum that “Pacquiao’s tax payments are made in the form of withholding taxes and via electronic payments” will not hold either.

A certified or verified ITR from the IRS would help BIR determine: one, Pacquiao’s gross income from ALL sources in the U.S.; two, how much he ACTUALLY PAID as taxes claimable as Foreign Tax Credit; and three, whether the deductions or expenses claimed in the U.S. ITR (1040NR) were also claimed in PHL ITR (1701).
In Pacquiao’s PHL ITR in 2008, he was assessed an extra P400 million for failure to substantiate some expenses, and failure to pay VAT (Value-Added Taxes).

In his 2009 PHL ITR, it is very clear that he under-declared, did not pay VAT, and failed to prove any claim of a Foreign Tax Credit.  It is also possible that some expenses are disallowable.

Bob Arum could be telling the truth about paying Pacquiao’s Withholding Taxes via electronic payments.  I am familiar with the system.  I regularly use it for clients.  The problem is, according to the rules, “the amount of foreign tax that qualifies is not necessarily the amount of tax withheld by the foreign country. Only the legal and actual foreign tax liability that you paid or accrued during the year qualifies for the credit.  The amount of the deductible foreign tax must be reduced by any refunds of foreign tax made.”

This is why the IRS ITR is necessary.  It would show the ACTUAL amount paid as taxes creditable as Foreign Tax – NOT the taxes withheld.  It is even very probable that a refund was made but it did not necessarily go to Pacquiao.
Why the hesitation?  It should not take that long to obtain a certified copy of Pacquiao’s U.S. ITR from the IRS.  It is for the benefit of the Pacquiao couple.  They have had two years to deal with it.  It may not absolve them of 100% tax liability but it could certainly reduce it.

Pacquiao should realize that failure to deal with it sooner only compounds the problem because of the interest charges, penalties, and lack of legal options left for all parties.

Will the certified IRS ITR copy spell more trouble or worse for certain people?  I wonder.

Let me reiterate – politicizing and publicizing this tax case is a mistake for Pacquiao.  For VP Binay to ride on it is not wise either.  He is giving Pacquiao a false sense of security. Meanwhile, the current tax liability of P2.2 billion continues to grow.  And this is just the civil liability!

Politics and publicity will not give Pacquiao a tax and/or legal cover. There have been too many celebrities including high-earning athletes who have fallen victims to their own false sense of invincibility.

There are two things that we cannot avoid and/or evade: DEATH and TAXES!  Facing them would require deep senses of humility, inevitability, and mortality!

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