Tax on Prizes from Small Town Lotteries

The circular is issued pursuant to Section 10 of Republic Act No. 1169, as amended by B.P. Blg. 42 and P.D. No. 1157, and addresses the taxability of prizes from small town lotteries.
The circular relies on Section 4 of Republic Act No. 1169, which provides a specific tax exemption limited to PCSO horse race sweepstakes and sale of tickets therein.
The circular applies Section 21(c)(1) of the National Internal Revenue Code (Tax Code) on withholding tax rules for winnings from Philippine Charity Sweepstakes.
The circular applies Section 21(a) of the Tax Code on income tax treatment when the amount of the prize does not exceed the statutory threshold.
The circular applies Section 50(a) of the Tax Code on the withholding responsibility of the party paying the prize.

The circular clarifies that the holding of small town lotteries is not embraced within the tax exemption reserved for PCSO horse race sweepstakes and ticket sales.
The circular directs that prizes from small town lotteries follow the final tax and income tax rules based on the prize amount.
The circular requires the party paying the prize to perform the withholding of the applicable tax before paying the prize to the winner.
The circular states that the income derived by the party conducting the small town lottery is subject to income tax.
All concerned are enjoined to disseminate the circular through broad publicity.

Small town lotteries must be endorsed by a resolution passed by the Sangguniang Panlalawigan or Sangguniang Panglunsod.
The endorsement requirement is tied to PCSO rules and regulations that govern experimental runs of various numbers games for the Small Town Lottery.

Prizes awarded in small town lotteries are subject to a final tax of 20% if the amount of the prize exceeds P3,000.00, pursuant to Section 21(c)(1) of the Tax Code.
If the prize is less than P3,000.00, the prize is subject to income tax pursuant to Section 21(a) of the Tax Code.
The circular applies the classification based on the prize amount using the threshold P3,000.00:
- More than P3,000.00 → final tax of 20% under Section 21(c)(1).
- Less than P3,000.00 → income tax under Section 21(a).
The circular distinguishes small town lotteries from the tax exemption applicable only to PCSO horse race sweepstakes and their ticket sales under Section 4 of Republic Act No. 1169.

The party authorized by the PCSO to conduct the small town lottery and that pays the prize must withhold the applicable tax before paying the prize to the winner.
For prizes subject to the 20% final tax (when the prize amount exceeds P3,000.00), withholding is required under Section 50(a) of the Tax Code.
Withholding is performed to ensure that the applicable tax is collected prior to release of the prize amount to the winner.

The income derived by the party conducting the small town lottery is subject to income tax.
The circular therefore requires that the lottery operator’s own income remains within the scope of income taxation.

The circular states that under Section 4 of Republic Act No. 1169, the tax exemption applies only to the holding of horse race sweepstakes by the PCSO and the sale of tickets in those sweepstakes.
The circular clarifies that the holding of small town lotteries is not covered by the Section 4 exemption.
Under Section 21(c)(1) of the Tax Code, Philippine Charity Sweepstakes winnings are not subject to the 20% withholding tax, and the circular uses this rule to explain why small town lottery prizes follow different tax treatment.

All concerned must give BIR Revenue Memorandum Circular No. 74-90 the widest publicity possible.