In a dispute between the Commissioner of Internal Revenue (CIR) and the Philippine Amusement and Gaming Corporation (PAGCOR), the Supreme Court clarified the extent of PAGCOR’s tax exemptions. The Court ruled that while PAGCOR is exempt from value-added tax (VAT) due to its charter, Presidential Decree No. 1869, it is still liable for withholding taxes on fringe benefits and expanded withholding taxes, subject to certain exceptions. This decision reconciles general tax laws with PAGCOR’s special charter, impacting how government-owned corporations are taxed and their obligations as withholding agents.

Navigating Tax Exemptions: Can PAGCOR Claim Shelter from VAT?

The case arose from assessments issued by the Bureau of Internal Revenue (BIR) against PAGCOR for alleged deficiency value-added tax (VAT), final withholding tax on fringe benefits, and expanded withholding tax. PAGCOR contested these assessments, arguing that it was exempt from all taxes except the 5% franchise tax stipulated in its charter, Presidential Decree No. 1869 (P.D. No. 1869). The dispute reached the Secretary of Justice, who initially ruled in favor of PAGCOR, declaring it exempt from all taxes save for the franchise tax. The CIR then sought to annul the Secretary of Justice’s resolutions, leading to the Supreme Court case.

At the heart of the controversy was Section 13(2) of P.D. No. 1869, which states:

(2) Income and other Taxes – (a) Franchise Holder:

No tax of any kind or form, income or otherwise, as well as fees, charges or levies of whatever nature, whether National or Local, shall be assessed and collected under this Franchise from the Corporation; nor shall any form of tax or charge attach in any way to the earnings of the Corporation, except a Franchise Tax of five percent (5%) of the gross revenue or earnings derived by the Corporation from its operation under this Franchise. Such tax shall be due and payable quarterly to the National Government and shall be in lieu of all kinds of taxes, levies, fees or assessments of any kind, nature or description, levied, established or collected by any municipal, provincial or national government authority.

The CIR argued that Republic Act No. 7716 (R.A. No. 7716), which restructured the value-added tax (VAT) system, had effectively repealed or amended PAGCOR’s tax exemption. The CIR relied on Section 3 of R.A. No. 7716, which imposes VAT on the sale of services, and Section 20, which contains a repealing clause for special laws relative to franchise taxes. The CIR contended that PAGCOR’s gambling operations fell under the definition of “sale or exchange of services” and were not among those expressly exempted from the 10% VAT.

The Court, however, disagreed with the CIR’s interpretation. Citing a basic rule of statutory construction, the Court emphasized that a special law, like PAGCOR’s charter, cannot be repealed or modified by a subsequently enacted general law, like R.A. No. 7716, unless the latter expressly provides for such repeal. Since R.A. No. 7716 did not expressly repeal PAGCOR’s charter, the Court concluded that the general repealing clause in R.A. No. 7716 did not apply to PAGCOR. This approach upholds the principle that specific laws should be treated as exceptions to general laws.

Furthermore, the Court considered Section 4 of R.A. No. 7716, which enumerates transactions exempt from VAT, including those exempt under special laws. While R.A. No. 7716 amended Section 103 of the National Internal Revenue Code (NIRC) to remove the VAT exemption for certain entities under special laws, such as the Philippine Airlines (PAL), it did not include PAGCOR in the exceptions. This omission indicated that Congress did not intend to repeal PAGCOR’s VAT exemption. The principle of expressio unius est exclusio alterius—the express mention of one thing implies the exclusion of another—supports this interpretation.

The Court also addressed the issue of withholding taxes, distinguishing between PAGCOR’s liability for VAT and its responsibility as a withholding agent. The Court clarified that while PAGCOR is exempt from VAT, this exemption does not extend to its obligation to withhold taxes on income payments to its employees and other parties. Specifically, the Court ruled that PAGCOR is liable for final withholding tax on fringe benefits (FBT) related to the car plan it granted to its qualified officers and employees. This is because FBT is considered a final income tax on the employee, which the employer (PAGCOR) is required to withhold and remit to the BIR. To avoid the FBT, PAGCOR would have to prove that the car plan was necessary to its business or for its convenience, which it failed to do in this case.

However, the Court found that PAGCOR was not liable for FBT on membership dues and fees paid for the benefit of its clients and customers, as these payments were not considered fringe benefits to its employees. Similarly, the Court canceled the assessment for expanded withholding tax (EWT) on payments made by PAGCOR to the Commission on Audit (COA) for audit services, citing Revenue Regulations (RR) 2-98, which exempts national government instrumentalities from withholding tax. The Court also cancelled the EWT assessment on prizes and other promo items, as these were already subject to a 20% final withholding tax. This demonstrates the Court’s effort to avoid double taxation.

Regarding the remaining portion of the assessment for deficiency expanded withholding tax, the Court upheld the BIR’s assessment. PAGCOR failed to provide sufficient evidence to support its claim that it was not liable for EWT on reimbursements for over-the-counter purchases by its agents, tax payments, security deposits, and importations. The Court reiterated the presumption of correctness of tax assessments, placing the burden on the taxpayer (PAGCOR) to prove that the assessment was erroneous. Because PAGCOR did not sufficiently discharge this burden, the Court upheld the validity of the assessment, except for the specific items previously mentioned.

In summary, the Supreme Court’s decision clarifies the scope of PAGCOR’s tax exemptions, balancing its special charter with the general principles of tax law. While PAGCOR is exempt from VAT, it remains liable for withholding taxes, subject to certain exceptions. This decision underscores the importance of statutory construction and the need for taxpayers to provide sufficient evidence to support their claims of tax exemption.

FAQs

What was the key issue in this case?	The key issue was whether PAGCOR is liable for VAT and withholding taxes, considering its charter grants it certain tax exemptions. The CIR argued that R.A. No. 7716 effectively repealed PAGCOR’s VAT exemption, while PAGCOR maintained its exemption under P.D. No. 1869.
Did the Supreme Court rule that PAGCOR is exempt from all taxes?	No, the Court clarified that while PAGCOR is exempt from VAT, this exemption does not extend to its obligation to withhold taxes on income payments to its employees and other parties. PAGCOR remains liable for withholding taxes, subject to specific exceptions.
What is the basis for PAGCOR’s VAT exemption?	PAGCOR’s VAT exemption is based on Section 13(2) of its charter, P.D. No. 1869, which grants it exemption from all taxes except the 5% franchise tax. The Court held that R.A. No. 7716 did not expressly repeal this exemption.
Is PAGCOR liable for withholding tax on fringe benefits?	Yes, the Court ruled that PAGCOR is liable for final withholding tax on fringe benefits (FBT) related to the car plan it granted to its qualified officers and employees. However, it is not liable for FBT on membership dues and fees paid for the benefit of its clients and customers.
What is the significance of R.A. No. 7716 in this case?	R.A. No. 7716, which restructured the VAT system, was central to the CIR’s argument that PAGCOR’s VAT exemption had been repealed. The Court, however, found that R.A. No. 7716 did not expressly repeal PAGCOR’s charter, preserving its VAT exemption.
What evidence is needed to claim exemption from expanded withholding tax?	To claim exemption from expanded withholding tax, the taxpayer must provide sufficient and convincing proof to establish its non-liability. PAGCOR failed to do so for certain payments, leading the Court to uphold the BIR’s assessment.
What is the effect on a claim of VAT exemption if a business deals with PAGCOR?	Services rendered to PAGCOR as an exempt entity are subject to zero percent (0%) VAT rate. This effectively exempts entities dealing with PAGCOR from VAT on those transactions.
What is the rule on assessments issued by the BIR?	The Court reiterated the presumption of correctness of tax assessments, placing the burden on the taxpayer (PAGCOR) to prove that the assessment was erroneous. Good faith of the tax assessors and the validity of their actions are presumed.

The Supreme Court’s decision provides valuable guidance on the tax treatment of government-owned corporations with special charters. It highlights the importance of express language in repealing or amending existing laws and underscores the need for taxpayers to maintain adequate records to support their claims of tax exemption.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: Commissioner of Internal Revenue vs. Secretary of Justice and Philippine Amusement and Gaming Corporation, G.R. No. 177387, November 09, 2016