Clarity

Felix Frankfurter, a former US Supreme Court Justice, once said: “Ambiguity lurks in generality and may thus become an instrument of severity.” While David Trimble, a member of the House of Lords of the UK, stated: “In the future, there cannot be room for ambiguity. They must make their position clear before they can expect anyone to respond to it.”

In 2013, the Bureau of Internal Revenue (BIR) issued Revenue Memorandum Circular (RMC) 23-2013 imposing, among others, Corporate Income Tax (CIT) and franchise tax on PAGCOR’s income derived from its gaming operations and CIT on its income from other related services. However, in 2014, the Supreme Court (SC) ruled that PAGCOR’s income from its gaming operations is only subject to a five percent franchise tax while its income from other related services is only subject to CIT.

The PAGCOR was given a three-pronged mandate: (1) Regulate, operate, authorize and license games of chance, games of cards and games of numbers, particularly casino gaming in the Philippines; (2) Generate revenues for the Philippine government’s socio-civic and national development programs. And, (3) Help promote the Philippine tourism industry. In this regard, it necessary that the tax treatment of PAGCOR’s operations be outlined given its vital role in the Philippine economy.

Thus, in March this year, the BIR issued RMC 32-2022 to give clarity on the tax treatment of PAGCOR, its licensees, and contractees, pursuant to current laws and recent jurisprudence.

Tax treatment of PAGCOR

RMC 32-2022 provides that PAGCOR’s income from its operation and licensing of gambling casinos, gaming clubs, and other similar recreation or amusement places, and gaming pools are subject to a five percent franchise tax, which shall be in lieu of other direct and indirect taxes such as CIT and value-added tax (VAT). On the other hand, PAGCOR’s income from “other related operations/services” shall be subject to CIT, VAT, and other applicable taxes.

Tax treatment of PAGCOR’s licensees

The ruling of the SC in the case of Bloomberry Resorts and Hotels, Inc. vs. BIR (GR 212530), provides guidance on the tax treatment of PAGCOR’s contractees and licensees. Like PAGCOR, its contractees and licensees shall be exempt from the payment of CIT realized from the operation of casinos upon payment of the five percent franchise tax since the law is clear that said exemption inures and extends to their benefit.

For VAT purposes, reference may be made to the cases of CIR vs. Acesite (Philippines) Hotel Corporation (GR 147295) and Thunderbird Pilipinas Hotel & Resorts, Inc. vs. CIR (GR 211327), wherein the SC clarified that the tax exemption of PAGCOR extends only to individuals or entities that have contracted (i.e., PAGCOR contractees, not licensees) with PAGCOR in connection with PAGCOR’s gaming operations. Thus, pursuant to the rulings in these cases, RMC 32-2022 states that revenues of PAGCOR licensees from gaming operations, involving sale of goods and/or services in the course of trade or business, are generally subject to VAT. In the event, however, that they will also contract with PAGCOR in connection with the latter’s gaming operations, then, the goods they provided and/or services performed to PAGCOR in relation to such gaming operations are subject to zero VAT. On the other hand, the income realized by PAGCOR’s licensees from “other related services/operations” shall be subject to the regular to CIT, VAT, and other applicable taxes.

Tax treatment of PAGCOR’s licensees

For the tax treatment of PAGCOR licensees located in freeports/ecozones, their income realized from services/operations that are duly registered with their concerned Investment Promotion Agency (IPA) shall be subject to either five percent gross income tax (GIT) or income tax holiday (ITH), whichever is applicable. Under the five percent GIT, the licensees are exempt from regular CIT and VAT. On the other hand, under ITH, they are exempt from regular CIT, but subject to VAT. Income realized from related services/operations that are not duly registered with the concerned IPA shall be subject to regular CIT, VAT, and other applicable taxes.

Tax treatment of PAGCOR’s contractees

Revenues derived by PAGCOR’s contractees from its contract with PAGCOR in connection with the latter’s gaming operations shall be exempt from regular CIT upon payment of the five percent franchise tax. However, the goods provided and/or services performed to PAGCOR by such contractees in relation to such gaming operations are subject to zero VAT. CIT, VAT, and other applicable taxes will apply on contractees whose income consists of non-gaming revenues or income from other related services.

In 2020, PAGCOR recorded over P36 billion in total revenues based on its annual report. Like many businesses that suspended operations due to the COVID-19 pandemic, PAGCOR was not spared from the impact of the global health crisis. But while the state-run gaming agency’s income from gaming operations significantly plummeted from its 2019 earnings, PAGCOR still managed to record substantial revenue. Of the P36 billion, PAGCOR paid over P1 billion worth of taxes to the BIR.

There is often a negative connotation associated with taxation: that the government wants to deprive citizens and companies of their income. However, it is important to keep in mind that taxes are crucial to enable the government to provide quality services to the people. When used correctly, taxes could fund government projects that help address the societal inequities that seem to get worse over time. But while collection of taxes must indeed be prioritized, the issuance of clear rules and regulations is of equal importance to keep taxpayers adequately informed of their duties and responsibilities as such.

Jalalin A. Macabangon is a tax supervisor from the tax group of KPMG R.G. Manabat & Co. (KPMG RGM&Co.), the Philippine member firm of KPMG International. KPMG RGM&Co. has been recognized as a Tier 1 tax practice and Tier 1 transfer pricing practice by the International Tax Review.

This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity.

The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or KPMG RGM&Co. For comments or inquiries, please email [email protected] or [email protected].