“Then you will know the truth, and the truth will set you free.”
— John 8:32
CHICAGO (FAXX/jGLi) – If Manny Pacquiao will not play his cards well, he might end up as a modern-day Cinderella. But minus his slippers and his golden carriage!
In my phone interview Thursday, Jan. 2, with Manny Pacquiao’s Top Rank promoter Bob Arum, Arum said he filed withholding taxes for Manny at 30 percent rate with the United States Internal Revenue Service (U.S. I.R.S.). He asked me to confirm the regularity of his filing withholding taxes with some tax authorities.
A friend of mine from the City of Angels (Los Angeles), California, Angel Y. Dayan (http://www.taxwork.com/), a Filipino American Certified Public Accountant (CPA), told me Arum underpaid the withholding taxes of Manny by 9.6 percent, an information confirmed to me by another CPA, James Maertin (www.jamesdance.com), back East.
Maertin said, “Yes, a nonresident alien has to pay tax on U.S. earnings. These would be considered effectively connected with a U.S. trade or business, so subject to the regular tax brackets. If the taxpayer’s earnings are in excess of the highest bracket, then he will pay that rate only on the amount in excess of that bracket’s threshold. The earnings below that will be taxed at each of the lower rates. Also, the personal exemption and any itemized deductions will first be deducted to come to taxable income.”
Dayan also told me that if Arum remitted 30 percent to the IRS, Manny would have to pay the 9.6 percent difference when he pays his income tax to the IRS at the end of the year. If we are to believe some reports that Manny has an estimated $85-M net worth, then, what is 9.6 percent, which is only $8.1-M?
Arum insists that as a resident alien, Manny is not obliged to pay income tax as a Green Card holder (Permanent Resident) because he has not reached the threshold of his stay in the US to be penalized as “Green Card” taxpayer.
“We are very careful on that,” Arum told me, adding that he did not allow Manny to train in the U.S. anymore because if he overstays in the U.S., the U.S. is going “to tax Manny’s worldwide income.”
TRICKY 183-DAY RULE
I found out that an obscure regulation called “Treasury Regulations Under Code Sec. 7701(b) Definition of Resident Alien” enforced by the U.S. Treasury Department has been in the books in the 80’s. It says if a resident alien stays in the U.S. for 183 days (six months and one day) or more in three years but not more than 30 days for the current year, he will be paying taxes as if he were a Green Card holder or a U.S. Citizen.
This regulation says, under the Substantial Presence Test, if Manny doesn’t want to pay his income tax as a Green Card holder, “each day of presence in the current year is counted as a full day. Each day of presence in the first preceding year is counted as one-third of a day and each day of presence in the second preceding year is counted as one-sixth of a day. … (A)ny fractional days resulting from the above calculations will not be rounded to the nearest whole number.”
Bottom line. An individual, like Manny, is not a “Green Card” taxpayer if he is “not physically present for more than 30 days during the current year, (and) the substantial presence test will not be applied for that year even if the three-year total is 183 or more days. For purposes of the substantial presence test, it is irrelevant that an individual was not present for more than 30 days in the first or second year preceding the current year.”
Arum is right this is so convoluted. I suggest Manny look for a very good CPA!
Just like Cinderella, who lost her glass slipper and her golden carriage at the stroke of 12 midnight, Manny might also lose a fortune if he lets Uncle Sam turn into his wicked step-sister!
The nasty thing about this regulation is that if Manny did not breach the 183-day threshhold, he could still be penalized if he was not truthful in filling up Form TDF 90-22.1 (Report of Foreign Bank and Financial Accounts or FBAR). He could be fined not more than $500,000 and imprisoned for not more than five years “for failure to report or for false or fraudulent report.”
There is even mentioned of a “civil penalty not to exceed $10,000 per violation” and up to “a civil monetary penalty equal to the greater of $100,000 or 50 percent of the balance in the account at the time of the violation.”
Fortunately for Manny, I stumbled on a little-known “Income Tax Convention between the Philippines and the U.S.” that capped the remittance of a Filipino resident alien in the U.S. at 30 percent, just like what Arum ordered!
PH-US INCOME CONVENTION CAPS INCOME TAX AT 30 IN US, 35 PERCENT IN PH
This was signed in 1976 between Philippine Finance Secretary Cesar Virata and U.S. Treasury Secretary William E. Simon that reduced the statutory rates of 30 percent of withholding tax in the U.S. by a Filipino resident alien and 35 percent in the Philippines by a Green Card Holder or U.S. Citizen in the Philippines. This also allowed Filipino resident alien to be present in the U.S. for less 90 days in a year to be exempted from tax payment for “personal services” when remuneration exceeds $10,000.
This convention also allows the Philippines to collect “1- to 3 percent” worldwide income tax of Filipino resident alien in the U.S. despite relief “from double taxation” that the convention was trying to accomplish.
In other words, based on this convention, in Manny’s campaigns in the U.S. since 2006 when he fought Erik Morales and earned his first $2-M up to 2010 when he earned $25-M against Antonio Margarito and another $25-M against Juan Manuel Marquez in 2012, the Philippine government stands to collect “1- to 3 percent” from those fights.
Will the U.S. waive its “39.6 percent” highest income tax rate for Manny to reconcile with the convention’s 30 percent cap? This remains to be seen.
I found out however, the U.S. has been notorious for breaking some treaties. This Philippine-US Convention, one of the 37 similar treaties that the Philippines signed with other countries, including China, may not be an exception. Hello? Did I mention China? Yes, Macau is in China, the recent battleground of Manny! Perhaps, the BIR should review this treaty if the Philippines can ask Manny, Arum, Freddie Roach, etc. to pay income taxes from that fight. If not, it can ask the Philippine government to re-do terms of this treaty and other treaties with other countries to keep in line with its treaty with the U.S.!
In Medellín v.Texas, 552 U.S. 491 (2008), the U.S. Supreme Court held that even if an international treaty may constitute an international commitment, it is not a binding domestic law unless Congress has enacted statutes implementing it or unless the treaty itself is “self-executing.” Also, the Court held that decisions of the International Court of Justice are not binding domestic law and that, without authority from the U.S. Congress or the Constitution, the President of the United States lacks the power to enforce international treaties or decisions of the International Court of Justice.
My unsolicited advice to Manny: “Just tell the truth!”