Regulating and taxing POGOs

For sure, there is a need to raise taxes on Philippine overseas gaming operators (POGOs), given the current low fee of two percent imposed by the state regulatory agency Philippine Amusement and Gaming Corp. (PAGCOR) on gross gaming revenues.

How much the increase would be and how this is to be imposed will depend on succeeding deliberations by lawmakers and other industry stakeholders in the following months.

As with almost all proposed codification of tax regimes, it’s a numbers game where the state will often bat for higher rates, while the affected industry and other subscribed parties will call for status quo, or just a minimal – if possible, staggered – hike schedule.

The bill’s progress has been a blitzkrieg move by the Lower House’s Committee on Ways and Means, taking less than a month from the date of filing of House Bill 5267 to its passage on first reading, an indication that the government is bent on swooping down on POGOs to increase its revenue share.

Harsher realities

Since 2016 when PAGCOR started processing POGO applications to operate in the Philippines through an executive order issued by the President, the many harsher realities of online gaming surfaced even for this tax revenue-hungry government.

Despite PAGCOR reporting billions of pesos in earnings in 2017 and 2018, the Department of Finance (DOF) this year complained about how many POGO license holders were not remitting the income taxes of its employees, many of them foreign nationals. The Bureau of Internal Revenue (BIR) estimated lost revenues at billions of pesos.

This has largely stemmed from some POGOs not requiring their employed foreign nationals to acquire tax identification numbers, or for giving them jobs without the proper work permits.

Other problems related to the influx of Chinese workers in the POGO sector was the skyrocketing of rental rates of office and residential spaces in and around areas where POGO hubs are found. The social impact on affected communities, including the mushrooming of restaurants that would accept only Chinese customers, also elicited unfavorable reaction from locals.

Even the defense secretary, at one point, expressed concern about the existence of POGO hubs near military zones, being security threats and potential surveillance posts for intelligence gathering by the Chinese government.

Lucrative business

The global gaming industry is keenly following how the tax bill will go through the legislative debates. Currently, there is no formal position paper coming from POGOs on the proposed taxation schedule, since many of them want to keep a low profile.

The POGO business is a lucrative one, and the Philippines is an ideal haven for them to do business, with mostly affluent mainland Chinese bettors enamored by gambling. Here, they are able to run their operations away from the frowning Chinese government’s interference.

For years, many POGO companies have tried to do business below the regulatory radar, leading to what PAGCOR has reported to be about a hundred illegal operations still not registered, and consequently, not paying their fees and taxes.

Even among those that have PAGCOR licenses, many have been found by the BIR to either have been remiss in collecting and remitting income taxes from their employees, or failing to register as value-added tax payers, both of which are immutable violations of the country’s tax laws.

Favorable support

Since the filing of House Bill 5267 in early November, government agencies, as well as the Palace, have expressed support for the proposed new taxation scheme, even as the Office of the Solicitor General submitted its opinion that foreign-based POGOs’ incomes cannot be taxed.

Just how this observation by the OSG will affect the final version of the proposed law remains to be seen. More importantly, how the proposed strengthening of government’s capability to regulate the sector will have a bearing on how POGOs will adapt to survive the higher tax regime.

It’s no secret how there are more illegal online gaming operators than those registered, adept at dodging Philippine regulators and therefore avoiding payment of proper taxes. Will this be a model adopted by other prospective POGOs?

For now, it’s all thumbs up from the DOF and PAGCOR for House Bill 5267, which if passed into law would require POGOs to increase the five percent tax they pay on gross receipts from their operations as specified by their franchise licenses.

For foreign employees of POGOs earning a minimum annual salary of P600,000, they would have to pay an additional 25 percent tax on their salaries, wages, annuities, compensation, remuneration, honoraria, and allowances.

The proposed law is expected to raise some P45 billion in additional taxes for the national government. PAGCOR will collect the taxes and remit these to the BIR.

Regulatory weaknesses

Clearly, while the government wants a bigger share of the income of POGOs, there is a need to further scrutinize how the government can properly regulate them given the above-mentioned problems.

PAGCOR is not exactly the most efficient tax collection agency of the government given its past record of failing to bring in taxes from income derived by many POGO foreign nationals. It has even failed to ensure that all POGOs are VAT-registered.

We must also be mindful that the regulator’s head, Andrea Domingo, has personally expressed views that the higher taxes on POGOs would drive them away, which could infer that licensed POGOs would join the army of illegal operations which PAGCOR has no idea of how to control.

Keep in mind that taxation will only be successful if laws ensure there are no loopholes and its implementation is done without favor to anyone.

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