Wednesday, October 12, 2016

Gaming industry wins tax bet

“More than the clarity we need to have about what MUST change, we need to have even more clarity about what MUST NOT change...”

-- Assegid Habtewold, The 9 Cardinal Building Blocks: For Continued Success in Leadership


Ambiguity in our laws almost always leads to controversy requiring court intervention. If by plain reading, the intent of the law is not apparent, the court will dutifully exercise its power to interpret, and apply relevant statutory construction rules to clarify the vagueness in the law.

In August, in a very instructive fashion, the Supreme Court exercised its power to interpret in a case involving one of the licensees of the Philippine Amusement and Gaming Corporation (PAGCOR), a government-owned and controlled corporation (GOCC). With that decision (G.R. No.212530 dated Aug. 10, 2016), the SC has put an end to the confusion about the tax obligation of PAGCOR and its licensees.

According to the SC, since it has already been clarified back in 2014 that PAGCOR’s tax exemption is undisturbed with respect to its income from gaming operations, the latter’s licensees would still enjoy their tax exemption granted under the PAGCOR Charter or Presidential Decree (PD) No. 1869, as amended by Republic Act (RA) No. 9487. The licensees only need to pay 5% franchise tax, in lieu of all taxes.

As a backdrop, the tax-exemptions of PAGCOR and its licensees were shaken when RA 9337 amended the 1997 Tax Code in 2005, removing PAGCOR from the list of tax-exempt GOCCs previously provided under the old Tax Code. By virtue of such removal, some concluded that PAGCOR became subject to income tax as a regular corporation. As expected, PAGCOR questioned the constitutionality of RA 9337, but in March 2011, the SC upheld the legality of amendatory law (G.R. No. 172087 dated March 15, 2011). 

Of course, nobody was surprised when the Bureau of Internal Revenue (BIR) immediately assessed PAGCOR for back taxes. Based on newspaper accounts, PAGCOR paid close to a billion pesos in deficiency income taxes in 2011. The BIR wanted more revenue; hence, PAGCOR’s licensees were also targeted. Thus, the BIR issued Revenue Memorandum Circular (RMC) No. 33-2013 dated April 17, 2013 declaring that PAGCOR, in addition to the 5% franchise tax on its gross revenue under Section 13(2)(a) of its charter, was now subject to regular 30% corporate income tax under the Tax Code. The RMC further states that PAGCOR’s licensees, being entities duly authorized and licensed by it to perform gambling casinos, gaming clubs and other similar recreation or amusement places, and gaming pools, are now likewise subject to income tax.

A licensee of PAGCOR challenged RMC 33-2013 reasoning that it violates PAGCOR’s charter (PD 1869, as amended by RA 9487), an existing and valid law. The licensee argued that the deletion of PAGCOR from the list of tax-exempt entities under the Tax Code did not repeal the clear tax exemption of PAGCOR’s contracting parties under Section 13(2)(b) of the charter.

Separately, PAGCOR likewise questioned the RMC claiming that it is erroneously implementing the March 2011 ruling of the SC. Thus, PAGCOR sought the SC’s clarification on the matter.

In the clarificatory ruling (G.R. No. 215427 dated Dec. 10, 2014), the SC confirmed that its March 2011 ruling upheld only the constitutionality of RA 9337 removing PAGCOR from the list of tax-exempt entities; it made no distinction as to which income of PAGCOR is subject to corporate income tax. The SC therefore recognized that PAGCOR earns two types of income: (1) those from gaming operations which are within its franchise; and (2) those income from other related services. The High court conducted a side-by-side study and interpretation of the relevant provisions of PAGCOR’s charter as against RA 9337 and came up with a clear and very instructive conclusion. 

The SC declared that, as a result of the removal of PAGCOR from the list of tax-exempt entities, it became subject to regular income tax but only with respect to its income from related services. PAGCOR’s income and revenue from gaming operations conducted under its franchise remain subject to 5% franchise tax, in lieu of all taxes, as provided under Section 13 of its charter. PAGCOR’s tax exemption or preferential taxation under PD 1869 exists independently from the Tax Code and was not repealed by RA 9337. It is a canon of statutory construction that a special law prevails over a general law -- regardless of their dates of passage -- and the special law is to be considered as remaining an exception to the general law. RA 9337 did not make any clear declaration to change the taxation of PAGCOR under its charter. The SC said that if the lawmakers had intended to withdraw PAGCOR’s tax exemption on its gaming income, then Section 13(2)(a) of PD 1869 should have been amended expressly in RA 9487, or at the very least, such withdrawal should have been mentioned in the repealing clause of RA 9337. The SC emphasized that repeal of law by implication is not favored. 

In a nutshell, the SC declared that PAGCOR had always been exempt from income tax on its revenue from gaming operations whether or not it was treated as a tax-exempt entity under the Tax Code. However, PAGCOR is now subject to income tax on its income from other related services because of its removal from the list of tax-exempt entities.

Consistent with this pronouncement, the SC ruled that the tax exemption of PAGCOR’s licensees on their income from gaming operations is likewise undisturbed.

It can be said then that PAGCOR, together with its licensees, had won its bet.

While the SC’s eagle eye in interpreting the perceived inconsistency between PD 1869 and RA 9337 is commendable, such painstaking effort could have been avoided had the lawmakers’ intention regarding PAGCOR’s tax status was made very clear.

In view of the government’s initiatives for comprehensive tax reform, we are currently on the cusp of what could be major changes in tax legislation, those that will affect not just a particularly industry but all taxpayers in general. I hope the lawmakers keep the PAGCOR decision in mind when reforming our tax laws yet again so that any change (or no change) is very clear, leaving no room for interpretation or ambiguity. 

The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The firm will not accept any liability arising from the article.

Brando C. Cabalsi is a director at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network. 

(02) 845-2728 

brando.cabalsi@ph.pwc.com

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