In a significant ruling, the Supreme Court declared that prior to Republic Act No. 11590, offshore-based Philippine Offshore Gaming Operators (POGOs) were not liable for franchise tax, income tax, or other applicable taxes in the Philippines. The Court emphasized that absent a clear law, the Bureau of Internal Revenue (BIR) cannot impose taxes on entities, especially on income derived from sources outside the Philippines. This decision clarifies the scope of the Philippines’ taxing power and ensures that tax regulations are based on explicit statutory authority, providing relief to offshore-based POGOs from previous tax assessments.

Navigating the Murky Waters: Did Offshore POGOs Fall Within the Reach of Philippine Tax Laws?

This case consolidates petitions challenging the constitutionality of various tax issuances affecting Philippine Offshore Gaming Operators (POGOs), specifically focusing on whether offshore-based POGO licensees are liable for certain taxes prior to the enactment of Republic Act No. 11590. The petitioners, Saint Wealth Ltd. and several other POGO entities, contested the imposition of a five percent (5%) franchise tax and other taxes on income derived from non-gaming operations, arguing that these taxes lacked statutory basis and violated principles of territoriality and uniformity in taxation. The respondents, representing the Bureau of Internal Revenue (BIR) and the Department of Finance (DOF), maintained that the tax issuances were valid interpretations of existing laws and necessary for funding COVID-19 response measures.

The legal framework surrounding this case is complex, involving considerations of the Philippine Amusement and Gaming Corporation (PAGCOR) Charter, the National Internal Revenue Code (NIRC), and constitutional limitations on the power to tax. The PAGCOR Charter grants PAGCOR the authority to operate and license gambling casinos, gaming clubs, and other similar recreation or amusement places within the Philippines. However, this authority is coupled with a provision that PAGCOR and its licensees are exempt from all national and local fees and taxes in exchange for the payment of a five percent (5%) franchise tax. This exemption extends to entities with whom PAGCOR has a contractual relationship in connection with the operations of authorized casinos.

The central legal issue revolves around whether offshore-based POGOs, which conduct online gaming operations targeting customers outside the Philippines, fall under the ambit of Philippine tax laws. Petitioners argued that their income is derived from sources outside the Philippines, as all operations are located abroad, and thus, they should not be subjected to Philippine taxes. They contended that the BIR, through its Revenue Memorandum Circulars (RMCs), overstepped its authority by imposing taxes without a clear statutory basis and by treating offshore-based POGOs similarly to Philippine-based entities, violating the equal protection clause.

The Supreme Court sided with the petitioners, holding that prior to Republic Act No. 11590, there was no law imposing a franchise tax on POGOs. The Court clarified that the franchise tax liability of PAGCOR licensees only applies to those which operate casinos and other related amusement places, not extending to POGOs which derive profit from other means. This interpretation hinged on a strict construction of the PAGCOR Charter, emphasizing that laws imposing taxes must be clear and express.

“The rule is that a tax is never presumed and there must be clear language in the law imposing the tax. Any doubt whether a person, article or activity is taxable is resolved against taxation.”

Moreover, the Court addressed the territoriality principle, which limits the State’s power to tax income derived from sources within its jurisdiction. It found that offshore-based POGO licensees derive no income from sources within the Philippines because the income-generating activity—the placing of bets less the amount of payout—transpires outside the Philippines. Thus, the Court concluded that imposing income tax and other applicable taxes on offshore-based POGO licensees, when they do not derive income from sources within the Philippines, was unwarranted.

The Court also deemed Section 11(f) and (g) of the Bayanihan 2 Law unconstitutional for being riders, provisions that are not germane to the main subject of the law. It reasoned that the imposition of new taxes on POGOs was not an integral part of a temporary COVID-19 relief measure, and therefore, the provisions violated the “one subject, one title rule” of the Constitution. Consequently, the Court struck down the implementing tax issuances (RR No. 30-2020 and RMC No. 64-2020) for lacking legal basis.

The decision in Saint Wealth Ltd. v. Bureau of Internal Revenue provides significant clarity regarding the scope of Philippine tax authority over offshore gaming operations. It underscores the importance of clear statutory authorization for tax impositions and reinforces the principle that tax laws should not be expanded beyond their explicit terms. Furthermore, it highlights the constitutional constraints on legislative power, ensuring that laws adhere to the “one subject, one title rule” and do not include unrelated provisions. This ruling benefits offshore-based POGOs by clarifying their tax liabilities prior to the enactment of Republic Act No. 11590.

FAQs

What was the key issue in this case?	The key issue was whether offshore-based POGOs were liable for franchise tax, income tax, and other applicable taxes prior to the enactment of Republic Act No. 11590.
What is a Philippine Offshore Gaming Operator (POGO)?	A POGO is an entity that offers online games of chance via the internet to offshore authorized players, excluding Filipinos abroad, who have registered and established an online gaming account. They are licensed by PAGCOR.
What is the PAGCOR Charter?	The PAGCOR Charter is Presidential Decree No. 1869, which grants PAGCOR the authority to operate and license gambling casinos and gaming clubs within the Philippines. It also provides certain tax exemptions for PAGCOR and its licensees.
What is the “one subject, one title rule”?	The “one subject, one title rule” is a constitutional provision that requires every bill passed by Congress to embrace only one subject, which must be expressed in the title of the bill. This prevents the inclusion of unrelated provisions in a law.
What does “territoriality principle” mean in taxation?	The territoriality principle is a limitation on the State’s power to tax, restricting it to income derived from sources within its jurisdiction. This means that a country can only tax income that originates from its territory.
What is a “rider” in legislation?	A “rider” is a provision in a bill that is unrelated to the main subject matter of the bill. Inserting riders into legislation is generally prohibited to prevent surprise or fraud upon the legislature.
What is Revenue Memorandum Circular (RMC) No. 102-2017?	RMC No. 102-2017 is a BIR issuance that clarified the taxability of taxpayers engaged in Philippine Offshore Gaming Operations (POGOs), outlining the applicable taxes and regulations.
What is the significance of Republic Act No. 11590?	Republic Act No. 11590, enacted after the period in question in this case, specifically addresses the taxation of POGOs. It imposes a five percent (5%) gaming tax on their income and clarifies other tax-related matters, resolving previous uncertainties.
What did the Supreme Court rule regarding the Bayanihan 2 Law?	The Supreme Court ruled that Section 11(f) and (g) of the Bayanihan 2 Law were unconstitutional for being riders, as they imposed new taxes unrelated to the main subject of the law, which was COVID-19 relief and recovery.

In conclusion, the Supreme Court’s decision in this case clarifies the tax obligations of offshore-based POGOs prior to Republic Act No. 11590, reinforcing the importance of clear statutory authority for imposing taxes and upholding constitutional limitations on legislative power. This ruling provides valuable guidance for future tax regulations in the evolving digital economy.

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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: Saint Wealth Ltd. v. Bureau of Internal Revenue, G.R. No. 252965, December 07, 2021