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Looking beyond Pagcor’s privatization

With regards the government’s move to privatize casinos currently under the Philippine Amusement and Gaming Corp. (Pagcor), foremost attention should be given to keeping its revenue stream for the government, directly or indirectly, at current levels at the very least.

Pagcor is the third highest revenue earner for the government after the Bureau of Internal Revenue (BIR) and the Bureau of Customs (BOC). Last year, the state-run corporation reported gross gaming revenues generated by its 46 casinos at P32 billion.

Like its sibling, the Philippine Charity Sweepstake Office, Pagcor’s earnings are channeled to the President’s social amelioration funds, often—but not exclusively—used to respond to disasters and calamities such as typhoons and earthquakes.

While the sale of all 46 Pagcor casinos is expected to fetch some P500 billion in cold cash, ceding the operations to interested private casino operators would result in a drop of at least P25 billion annually for the government.

But this can be avoided if care is taken to ensure that those who will take over the Pagcor casinos will remit the corresponding profits enjoyed by the government through taxation and other fees. This means streamlining existing tax incentives currently enjoyed by Pagcor contract holders and licensees.

Tax incentive review

This calls to mind the Philippine tax case of Bloomberry Resorts and Hotels Inc., operator and owner of Solaire Resort & Casino, versus the BIR on accusations by the Philippine agency that Bloomberry failed to pay corporate income taxes.

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In this case, the Supreme Court, in its final verdict, ruled that “income from gaming operations is subject only to five percent franchise tax under PD No. 1869, as amended, while its income from other related services is subject to corporate income tax.”

This is because Bloomberry, being a Pagcor licensee, is not subject to corporate income tax on all income derived from its gaming operations. On the other hand, earnings from other “related services” such as entertainment and hotel and restaurant operations should be taxed.

The current Pagcor charter states that aside from a franchise tax of five percent, no taxes or charges shall in any way, attach the earnings of state-owned corporation. Thus, this holds true for all its Pagcor licensees and contract holders.

With Pagcor relinquishing its involvement in casino operations, a review of the tax structure for gaming companies must be updated to enable the government to continue enjoying the same level of earnings, or more, that it had enjoyed in the past.

Early warning

As the role and influence of Pagcor in the fast-growing gaming industry are expanded and strengthened as proposed in the bill, there is concern that this agency may become another lucrative place for corruption similar to the malady affecting two powerful regulators and major sources of government revenues, the BIR and BOC.

Those who are crafting the bill that will change Pagcor must keep this in mind and ensure that enough safeguards are put in place. Also critical is the screening and selection process to be implemented in choosing the key personnel of the agency. Once the crooked ones are in place, it would undermine the credibility of the agency and getting rid of them is a big challenge. Just look at the situation at the BIR and the BOC.

Focusing on regulation

In the Senate bill that will pave the way for Pagcor’s privatization, focus is on promoting a level playing field in the gambling industry. Pagcor will no longer be allowed to operate gambling and gaming activities, and instead will focus only on regulation.

The bill also calls for Pagcor casinos to be privatized one year after the bill is enacted into law. Hopefully, this should carry a provision that will deal with the possibility that not all of the casinos will be sold within the prescribed period.

The bill also stipulates the need to expand Pagcor’s regulatory authority to include gaming and gambling activities, premises and technologies, including online gaming sites, while at the same time, making sure that the gaming industry will not be used for illegal activities such as money laundering and terrorist financing.

Pagcor will have to play a more active role now in the government’s anti-money laundering campaign, especially with the passage of the expanded law that includes casinos, even those internet- and shipping-based.

Hopefully, the separation of regulatory and casino operations functions will prevent cyber criminals from exploiting legal weaknesses in the Philippine financial system that could lead to explosive incidents like the Bangladesh central bank heist last year.

While focusing solely on regulatory functions, this doesn’t mean that Pagcor (whose name will be changed to Philippine Amusement and Gaming Authority or PAGA) will not be able to continue contributing significantly to the government coffers.

PAGA model

As most Filipinos who’ve gone to Las Vegas to experience world-class gaming have noticed, the gaming regulatory agencies there are not exactly pushovers. The Nevada State Gaming Control Board and the Nevada Gaming Commission are reputably one of the best in the world.

Both regulatory bodies bring in about $12 billion a year in earnings from the operations of gaming machines, professional licenses, entertainment shows, and many others. They are in a position to police the gaming industry by crafting and implementing additional regulations, even for online gaming.

This can be PAGA’s model as it moves to embrace its new role in the country’s fledgling, but very promising gaming industry. When word about Pagcor’s privatization leaked out last year, many gaming companies from Las Vegas and Macau reportedly sent feelers.

Strong potential

With strong gaming revenues in the Philippines estimated to reach some P250 billion by 2020, it is understandable why many of the international gaming operations are interested in exploring their options on the Pagcor assets.

The Philippines is also seen to emerge as the largest entertainment market in ASEAN. The trend in gaming in the Asia-Pacific region continues go after a mass market appeal, targeting tourists not just for casino fun, but also for more non-gaming related attractions.

The Philippines, with its strong program to attract overseas holiday revelers, stands a better chance. Hopefully, with the government’s Build Build Build program continuing at full speed, this will become a bigger plus-factor for potential gaming industry investors.

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Should you wish to share any insights, write me at Link Edge, 25th Floor, 139 Corporate Center, Valero Street, Salcedo Village, 1227 Makati City. Or e-mail me at reydgamboa@yahoo.com. For a compilation of previous articles, visit www.BizlinksPhilippines.net.

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