In a pivotal decision, the Supreme Court clarified the tax obligations of the Philippine Amusement and Gaming Corporation (PAGCOR), distinguishing between its income from gaming operations and other related services. The Court affirmed that PAGCOR’s income from gaming operations is subject only to the 5% franchise tax, as stipulated in its charter under Presidential Decree (PD) No. 1869. However, income derived from other related services is subject to corporate income tax, as per Republic Act (RA) No. 9337. This ruling provides clarity on PAGCOR’s tax liabilities, ensuring compliance while upholding the privileges granted by its charter.

Navigating the Tax Maze: Does PAGCOR’s Franchise Shield Extend to All Earnings?

PAGCOR, a government instrumentality, holds a unique position in the Philippine legal landscape due to its dual role as both a gaming operator and regulator. Created under PD No. 1869, PAGCOR was granted a franchise that included specific tax exemptions. Section 13(2) of PD No. 1869 states:

“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 [PAGCOR]; nor shall any form of tax or charge attach in any way to the earnings of [PAGCOR], except a Franchise Tax of five (5%) percent of the gross revenue or earnings derived by [PAGCOR] from its operation under this Franchise…”

This provision seemed to provide PAGCOR with broad tax immunity. However, the introduction of RA No. 8424, and later RA No. 9337, brought changes to the tax regime affecting government-owned and controlled corporations (GOCCs), including PAGCOR. RA No. 9337 amended Section 27(C) of the National Internal Revenue Code (NIRC), removing PAGCOR from the list of GOCCs exempt from income tax. This legislative change sparked a legal battle between PAGCOR and the Commissioner of Internal Revenue (CIR) concerning the extent of PAGCOR’s tax obligations. This case stemmed from assessments issued by the CIR for deficiency income tax, Value-Added Tax (VAT), and Fringe Benefit Tax (FBT) for the taxable years 2005 and 2006, totaling a substantial amount. PAGCOR contested these assessments, arguing that its franchise granted it comprehensive tax exemptions, shielding it from such liabilities. The legal proceedings eventually reached the Supreme Court, leading to the landmark decision that clarified the scope of PAGCOR’s tax privileges.

The central legal question revolved around whether PAGCOR’s franchise tax exemption under PD No. 1869 extended to all its income or only to its income from gaming operations. The CIR argued that RA No. 9337 effectively removed PAGCOR’s income tax exemption, making it subject to ordinary corporate income tax and VAT. PAGCOR countered that its franchise tax was in lieu of all taxes, including income tax and VAT, and that RA No. 9487, which extended PAGCOR’s franchise, restored its original tax privileges.

The Supreme Court, in its analysis, distinguished between PAGCOR’s income from gaming operations and its income from other related services. The Court referenced its previous ruling in Philippine Amusement and Gaming Corporation v. Bureau of Internal Revenue, where it upheld the validity of RA No. 9337 in removing PAGCOR from the list of GOCCs exempt from corporate income tax. However, the Court clarified that this removal only applied to PAGCOR’s income derived from other related services, not its income from gaming operations. The Court emphasized that PD No. 1869 granted PAGCOR a specific tax privilege for its gaming operations, which was not repealed by RA No. 9337.

“Under P.D. 1869, as amended, [PAGCOR] is subject to income tax only with respect to its operation of related services. Accordingly, the income tax exemption ordained under Section 27(c) of R.A. No. 8424 clearly pertains only to [PAGCOR’s] income from operation of related services. Such income tax exemption could not have been applicable to [PAGCOR’s] income from gaming operations as it is already exempt therefrom under P.D. 1869, as amended…”

The Court underscored that the franchise tax of 5% on PAGCOR’s gross revenue from gaming operations was “in lieu of all taxes,” which included corporate income tax. Therefore, PAGCOR’s income from gaming operations remained exempt from income tax, while its income from other related services was subject to corporate income tax. Furthermore, the Court addressed the issue of PAGCOR’s liability for VAT, referencing Section 6 of RA No. 9337, which retained Section 108 (B) (3) of RA No. 8424. This provision subjected services rendered to entities exempt under special laws to a zero percent rate, effectively exempting PAGCOR from VAT. The Court cited its earlier decision in Commissioner of Internal Revenue v. Acesite (Phils.) Hotel Corporation, where it held that PAGCOR’s tax exemption under PD No. 1869 extended to indirect taxes like VAT.

In summary, the Supreme Court held that:

Income Source	Tax Treatment
Gaming Operations	Subject to 5% franchise tax, in lieu of all other taxes
Other Related Services	Subject to corporate income tax
Value-Added Tax (VAT)	Exempt

The Court also addressed PAGCOR’s liability for Fringe Benefit Tax (FBT), affirming that PAGCOR, as an employer, was responsible for withholding and remitting FBT on fringe benefits provided to its employees. The Court reasoned that PAGCOR had not provided sufficient evidence to prove that the car plan benefits extended to its officers were necessary for its business or convenience. Consequently, PAGCOR was liable for the assessed deficiency FBT, including surcharges and interests.

FAQs

What was the key issue in this case?	The central issue was to determine the extent of PAGCOR’s tax obligations, specifically whether its franchise tax exemption covered all its income, including income from gaming operations and other related services, and whether it was liable for VAT and FBT.
Is PAGCOR exempt from income tax?	PAGCOR is exempt from income tax only on its income derived from gaming operations. Its income from other related services is subject to corporate income tax.
What is the franchise tax rate for PAGCOR?	The franchise tax rate for PAGCOR is 5% of the gross revenue or earnings derived from its gaming operations.
Is PAGCOR required to pay VAT?	No, PAGCOR is exempt from the payment of Value-Added Tax (VAT) due to its special tax privileges under PD No. 1869.
What are ‘other related services’ in PAGCOR’s context?	‘Other related services’ refer to necessary services, shows, and entertainment that PAGCOR is authorized to operate, the income from which is considered separate from its gaming operations.
Is PAGCOR liable for Fringe Benefit Tax (FBT)?	Yes, PAGCOR is liable for FBT as a withholding agent for fringe benefits provided to its employees, unless it can prove that such benefits are necessary for its business.
Did RA No. 9337 repeal PAGCOR’s tax exemptions?	RA No. 9337 did not repeal PAGCOR’s franchise tax exemption on income from gaming operations but removed its exemption from corporate income tax on income from other related services.
What was the basis for PAGCOR’s VAT exemption?	PAGCOR’s VAT exemption is based on Section 108 (B) (3) of RA No. 8424, as retained by RA No. 9337, which subjects services rendered to entities exempt under special laws to a zero percent rate.
What is the significance of RA No. 9487?	RA No. 9487 extended PAGCOR’s franchise, effectively reinstating its rights and privileges under PD No. 1869, including its franchise tax exemption on income from gaming operations.

This Supreme Court decision clarifies the tax landscape for PAGCOR, providing a clear framework for understanding its obligations and privileges. The ruling strikes a balance between ensuring PAGCOR’s contribution to national revenue and preserving the incentives granted under its franchise. It serves as a reminder of the importance of carefully interpreting tax laws and considering the specific context in which they apply.

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: PAGCOR vs. CIR, G.R. Nos. 210704 & 210725, November 22, 2017