House bill taxing POGOs hurdles panel

MANILA, Philippines — As debates rage over whether to tax offshore gaming operations in the Philippines, the House committee on ways and means approved yesterday a measure subjecting the multibillion-peso industry to franchise and withholding taxes.

The panel unanimously approved House Bill No. 5267, which seeks to require Philippine offshore gaming operators  (POGOs)
to pay a five percent franchise tax and 25 percent withholding tax for foreign workers earning at least P600,000 annually.

The bill will now be scheduled for plenary debate on second reading.

Albay Rep. Joey Salceda, committee chairman and proponent of the bill, said the measure is expected to raise taxes of around P45 billion every year.

HB 5267 seeks to amend Presidential Decree 1869, the law covering the powers of the Philippine Amusement and Gaming Corp. (Pagcor), by directly imposing a franchise tax on the P200-billion POGO industry.

Currently, Pagcor collects only a regulatory fee of two percent on POGOs or P8 billion per year, and plans to remit only P400 million to the Bureau of Internal Revenue (BIR).

The proposed law intends to directly impose a franchise tax on POGOs by requiring them to register with the BIR first before they are given a license by Pagcor.

“It’s essentially just tweaking PD 1869, that the five percent franchise tax should be directly imposed on them,” Salceda explained to reporters after the committee’s approval of the bill.

This proposed measure runs counter to the opinion of Solicitor General Jose Calida that the government cannot impose taxes on POGOs based on the “source of income” principle under the country’s tax code.

“Ultimately, an offshore-based operator’s income is the placement of bets on its online betting facility – which are derived from sources (outside) the Philippines,” Calida explained.

But Salceda claimed otherwise. “The bets are made by people outside the Philippines but are enabled by manpower and facilities inside the Philippines. So there is value-added or income derived here, and therefore taxable. Under basic accounting principle, costs are recognized when revenues are recognized,” the lawmaker-economist and expert in taxation said.

Salceda also pointed out that the solicitor general’s legal opinion is tantamount to giving tax exemption to POGOs, “the grant of which is intrinsically the duty of Congress.”

The lawmaker stressed that at least 138,000 Chinese workers in POGO hubs in Pasay, Las Piñas and Parañaque and the 119,000 work permits issued by Department of Labor and Employment (DOLE) to them are a proof “that these firms are operating inside Philippine territory and are deriving income from it.”

“But the exigent issue is that Pagcor merely charges two percent regulatory fee on POGOs instead of five percent franchise tax in lieu of other taxes. They collect only P8 billion per year from this two percent and propose to remit P400 million. Congress seeks to amend PD 1869 by imposing the five percent directly on POGOs licensed by Pagcor, which in turn is mandated to collect it. Thus, instead of remitting P400 million to BIR, they will remit P20 billion,” Salceda pointed out.

He added that such measure could also help government regulate POGOs, explaining that at least 100 POGO firms are illegally operating, while 60 of those licensed by Pagcor have temporarily closed shop.

He said POGO is an emerging industry and could account for 1.2 percent of the country’s total gross domestic product.

‘Misplaced, misguided’

Calida’s position also took a beating from senators, with Senate Minority Leader Franklin Drilon calling it “misplaced and misguided.”

“First, the OSG is in no business to interpret our tax laws. The interpretation of the country’s tax laws is lodged within the Bureau of Internal Revenue (BIR) and the Department of Finance (DOF),” Drilon said.

He said only the BIR commissioner may interpret provision of the National Internal Revenue Code (NIRC), subject to review by the secretary of finance.

He added it’s the position of economic managers to have POGOs taxed.

“The opinion of the OSG is erroneous, misplaced and misguided. It does not serve the interest of the country. Who will benefit from it?” Drilon said. “I do not think that we are prepared to face the consequences that may arise from such an erroneous opinion.”

Under Section 42 of the NIRC, Drilon said the government can derive income from compensation for labor or personal services performed in the Philippines.

“POGOs provide a service and the service is completed in the Philippines since all the betting occurs and is completed in the Philippines,” he said.

Drilon explained that the person who offers the bet, the one who operates the gaming operation and the one who accepts the bet are all in the Philippines and even the one who tells the bettor if he wins or loses is in the Philippines.

“It is clear that the whole activity is conducted in the Philippines and, therefore, is subject to the jurisdiction of the Philippines,” Drilon said.

“Because if you say otherwise, then Pagcor would have no authority over them,” he pointed out.

If the opinion of the OSG is followed, then the companies in the Philippines that manufacture goods for foreign buyers or even the business processing outsourcing companies should also not be subject to tax, he said.

Sen. Joel Villanueva, chairman of the committee on labor and employment, said regardless of the industry, any foreign entity operating in the country must pay the appropriate taxes in accordance with prevailing laws.

“If you don’t pay taxes, your operations are illegal, plain and simple,” Villanueva said. “If this is the argument that some POGOs are using to run away from taxes, their contention does not have a leg to stand on.”

He said the BIR has already begun clamping down on tax-dodging POGO firms so these companies must settle their obligations and duties to the government, “just like any other business entity running their operations here in our country.”

At the Senate deliberations on the proposed budget of the National Economic and Development Authority, officials vowed to make representations with the OSG to reverse its opinion.

The DOF also did its own rebuff of Calida’s argument and said POGOs are being taxed all along, in accordance with existing laws.

“First of all, the primary jurisdiction to interpret tax code provisions lies with the BIR. Thus, since POGOs are providing services to their counterparts in the Philippines, they are subject to income tax,” Finance Secretary Carlos Dominguez said.

“The same is true for VAT, which also is imposed on services rendered in the Philippines,” the DOF chief said.

The BIR said more POGOs and their service providers are starting to remit proper taxes to the government amid an intensified crackdown against delinquent operators.

Latest data showed withholding tax collections from the POGO industry from January to August had already reached P1.63 billion. This is higher than the P1.4 billion initially reported by the BIR to the DOF.

The BIR is now monitoring 218 POGO service providers who employ 108,914 foreign workers. The taxpayer registration and issuance of tax identification numbers (TIN) to these foreign employees are ongoing.

No new license

Meanwhile, Pagcor has temporarily suspended the issuance of new licenses to offshore gaming operators.

“It’s a self-declared moratorium that could be lifted any time,” said Victor Padilla Jr., Pagcor vice president for offshore gaming.

Pagcor chairperson Andrea Domingo, he said, informed congressmen yesterday about the suspension. He did not say what prompted the temporary suspension.

Answering questions from Rep. Elpidio Barzaga Jr. of Dasmariñas City in Cavite, Padilla said he agreed with Calida that POGOs are not subject to Philippine tax.

“They are not doing business here, they derive income abroad,” he said.

However, he agreed with Barzaga that POGO agents and service providers are doing business and making income in the country and should therefore pay local taxes.

Another congressman, Alfredo Garbin Jr. of party-list Ako Bicol, said POGOs should be treated as resident foreign corporations doing business in the country “because their core operations are done here.”

Padilla also admitted that there are “more than 100 illegal POGOs” over which he said Pagcor has no control.

But Minority Leader Bienvenido Abante Jr. said the gaming agency should be able to trace and identify illicit operators and help law enforcers go after them.

“If you are not doing that or unwilling to do it, then I smell corruption,” he said.

Pagcor officials also admitted that they have contracted an auditor for P5.9 billion for 10 years to audit the gross earnings of POGOs.

The admission prompted Rep. Jose Singson Jr. of Probinsyano Ako to comment that the average P600 million a month Pagcor is paying its auditor is “too much,” considering that it is just earning roughly P6 billion a year from POGOs. — With Jess Diaz, Paolo Romero, Lawrence Agcaoili