In a consolidated decision, the Supreme Court clarified the tax obligations of the Philippine Amusement and Gaming Corporation (PAGCOR). The Court affirmed that while PAGCOR is subject to corporate income tax on income from related services, its income from gaming operations remains exempt, subject only to a 5% franchise tax. This ruling reconciles PAGCOR’s charter with amendments to the National Internal Revenue Code, providing clarity on the scope of PAGCOR’s tax privileges and liabilities.

Navigating Tax Exemptions: Can PAGCOR Keep Its Winnings?

This case revolves around consolidated petitions questioning the tax liabilities of PAGCOR, a government instrumentality authorized to operate and regulate gambling activities in the Philippines. The central legal question is whether PAGCOR is exempt from certain taxes, specifically income tax and Value-Added Tax (VAT), considering various legislative changes affecting its charter and tax obligations.

PAGCOR was established through Presidential Decree (PD) No. 1869, granting it a franchise with rights to operate gambling casinos and other gaming activities. Section 13(2) of PD No. 1869 stipulates that PAGCOR is exempt from all kinds of taxes, except a 5% franchise tax on its gross revenue, which is “in lieu of all kinds of taxes.” However, Republic Act (RA) No. 8424, the National Internal Revenue Code of 1997 (1997 NIRC), initially included PAGCOR among government-owned or -controlled corporations (GOCCs) exempt from income tax. Subsequently, RA No. 9337 amended Section 27(C) of the 1997 NIRC, removing PAGCOR from this list, thereby seemingly subjecting it to income tax.

The Bureau of Internal Revenue (BIR) assessed PAGCOR for deficiency income tax, VAT, and Fringe Benefit Tax (FBT) for the taxable years 2005 and 2006, leading to a dispute that culminated in this Supreme Court case. The Court of Tax Appeals (CTA) partially granted PAGCOR’s petition, canceling the VAT assessments but affirming the income tax and FBT liabilities. Both PAGCOR and the Commissioner of Internal Revenue (CIR) appealed to the CTA En Banc, which affirmed the CTA Division’s decision. This prompted PAGCOR and the CIR to file separate petitions for review with the Supreme Court.

The Supreme Court’s analysis hinged on interpreting the interplay between PAGCOR’s charter (PD No. 1869), the 1997 NIRC, and subsequent amendments. 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’s exclusion of PAGCOR from the list of GOCCs exempt from corporate income tax. However, the Court also considered PAGCOR’s argument that its franchise tax under PD No. 1869 should be in lieu of all taxes.

The Court emphasized the importance of harmonizing different statutes to avoid conflicts. It stated that RA No. 9337 did not repeal the tax privilege granted to PAGCOR under PD No. 1869 regarding its income from gaming operations. What RA No. 9337 withdrew was PAGCOR’s exemption from corporate income tax on its income derived from other related services, previously granted under Section 27(C) of RA No. 8424. The Court quoted its earlier decision:

After a thorough study of the arguments and points raised by the parties, and in accordance with our Decision dated March 15, 2011, we sustain [PAGCOR’s] contention that its income from gaming operations is subject only to five percent (5%) franchise tax under P.D. 1869, as amended, while its income from other related services is subject to corporate income tax pursuant to P.D. 1869, as amended, as well as R.A. No. 9337.

The Court further explained that a special law, like PD No. 1869, prevails over a general law, such as RA No. 9337, regardless of their dates of passage. Therefore, the 5% franchise tax under PAGCOR’s charter remains the sole tax applicable to its income from gaming operations.

Regarding the Fringe Benefit Tax (FBT), the Court cited Commissioner of Internal Revenue v. Secretary of Justice, where it ruled that FBT is not covered by the tax exemptions provided under PD No. 1869. The Court reiterated that PAGCOR, as a withholding agent, is responsible for withholding and remitting FBT on fringe benefits granted to its employees, unless it can prove that such benefits are necessary for its business or convenience.

PAGCOR’s claim that it should not be held liable for surcharges and interests due to its good faith reliance on tax exemptions was also addressed. The Court distinguished this case from others where surcharges and interests were deleted due to the taxpayer’s reliance on specific BIR rulings. In this instance, PAGCOR did not provide any particular BIR issuance or ruling that explicitly declared it exempt from income tax or FBT. The Court noted that:

Here, PAGCOR fails to point to any particular BIR issuance or ruling which categorically declared that it is not subject to income tax and/or FBT. Instead, PAGCOR relies on the opinions of the Office of the Government Corporate Counsel, and the OSG and the Resolutions issued by the Department of Justice – government offices bereft of any authority to implement or interpret tax laws.

As a result, the Court upheld the imposition of interests and surcharges as mandated by law.

Addressing the CIR’s petition concerning VAT, the Court referred to Philippine Amusement and Gaming Corporation v. Bureau of Internal Revenue, citing Commissioner of Internal Revenue v. Acesite (Phils.) Hotel Corporation, which affirmed PAGCOR’s exemption from VAT under its charter. The Court emphasized that Section 6 of RA No. 9337 retained Section 108 (B) (3) of RA No. 8424, which subjects services rendered to entities exempt under special laws to a zero percent rate. The Court cited Acesite, where it was held that:

A close scrutiny of the above provisos clearly gives PAGCOR a blanket exemption to taxes with no distinction on whether the taxes are direct or indirect.

The Court clarified that the legislative intent was for PAGCOR to remain exempt from VAT even with the enactment of RA No. 9337, thus affirming the CTA’s cancellation of the deficiency VAT assessments.

FAQs

What was the key issue in this case?	The key issue was determining the extent of PAGCOR’s tax exemptions, specifically regarding income tax, VAT, and FBT, in light of legislative changes to the National Internal Revenue Code.
Is PAGCOR exempt from income tax?	PAGCOR is exempt from income tax only on its income derived from gaming operations, subject to a 5% franchise tax. Income from other related services is subject to corporate income tax.
Is PAGCOR liable for VAT?	No, PAGCOR is exempt from the payment of VAT under its charter, PD No. 1869, as affirmed by the Supreme Court.
What is 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 Section 6 of RA No. 9337, which subjects services rendered to entities exempt under special laws to a zero percent rate.
Is PAGCOR liable for Fringe Benefit Tax (FBT)?	Yes, PAGCOR is liable for FBT as a withholding agent on fringe benefits granted to its employees, unless it can prove that such benefits are necessary for its business.
What happens if PAGCOR fails to withhold and remit FBT?	If PAGCOR fails to withhold and remit FBT, it becomes personally liable for the tax arising from the breach of its legal duty as a withholding agent.
Can PAGCOR claim good faith to avoid surcharges and interests?	No, PAGCOR cannot claim good faith to avoid surcharges and interests unless it can point to a specific BIR issuance or ruling that categorically declared it exempt from the assessed taxes.
What is the effect of RA No. 9337 on PAGCOR’s tax exemptions?	RA No. 9337 removed PAGCOR from the list of GOCCs exempt from corporate income tax, but it did not repeal PAGCOR’s VAT exemption or the 5% franchise tax on income from gaming operations.
What is the significance of PD No. 1869 in this case?	PD No. 1869, PAGCOR’s charter, is a special law that grants PAGCOR certain tax exemptions, including the 5% franchise tax in lieu of all taxes on income from gaming operations and VAT exemption.

In conclusion, the Supreme Court’s decision provides clarity on PAGCOR’s tax liabilities, distinguishing between income from gaming operations and other related services. While PAGCOR enjoys certain tax exemptions under its charter, it is also subject to specific tax obligations, such as the payment of corporate income tax on income from related services and the withholding and remittance of FBT.

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