Is P200 billion in taxes yearly leaking from POGOs?

The best salesmen are the unemployed. They didn’t even know they had it until they began selling online during the pandemic. But maybe the government doesn’t need to train their eyes on these online sales by our small entrepreneurs to tax them, yet.

Maybe we should talk numbers and take a look at real tax money that Philippine offshore gaming operators (POGOs) and their network of gamblers should be paying. Our estimate is that any-where from P200 billion to more than P300 billion per year in taxes could be leaking. And if our data analytics estimates are wrong using our method, it is interesting that an International Monetary Fund (IMF) report broadly corroborates our figures. Read on.

A casino’s gross gaming revenue (GGR) is not really a gross amount. It’s a net amount in that it is net of winnings. Winnings are subject to 20 percent final withholding tax. The Philippine Amusement and Gaming Corp. (PAGCOR) 2019 financial statements show however that in addition to domestic GGR, it had earnings from POGOs coming from the two percent license fees (based supposedly on GGRs of these POGOs). In PAGCOR’s financial statements, this accounts for eight percent of its total revenue from gaming operations.

Another important fact is that as of 2019, there are officially about 183,000 alien employment permits issued to foreign (Chinese) personnel employed by POGOs. We can assume that this group of foreign workers are tax compliant. However, an estimate by a reputable real estate consultant, Leechiu Property Consultants, puts the numbers of POGO workers at 470,000 and this number has been picked up by the Senate Blue Ribbon committee.

From the 2019 license fees paid to PAGCOR, registered POGOs earned P286.7 billion or an estimated GGR per head/personnel of P1.5 million. We can then derive the undeclared or unaccounted revenue of POGOs based on the estimated unregistered foreign (Chinese) nationals working here. We can also have an estimate of the winnings of foreign gamblers in the POGO circuit (Filipinos are not allowed to access POGO games) using published hold ratios of casinos, or the ratio of what they keep of the bets after paying the winners. For POGOs, we used a reasonable hold ratio of 30 percent. (This rate sets the profile of online gamers to general skills, or only playing for fun vs the high rollers that really win big time.) These are the estimated key leakages.

Tax on winnings. The 20 percent withholding tax uncollected from the winning offshore gamers using an amount derived from PAGCOR financials is P134 billion. If we include the estimated winnings from the undeclared amounts, then we should increase the leakage on tax on winnings to P290 billion. There is a strong legal basis to tax these winnings as Philippine source because the license is issued here, the operations are here, and all the personnel running the offshore gaming operations are here. If the gamers are Chinese nationals, they cannot even hide behind the Philippine-China tax treaty because online gaming is declared illegal in China. (If it is legalized there, we should renegotiate the treaty to exclude that income from treaty protection.) Fact is, winners couldn’t care less if they are subject to 20 percent tax in the Philippines because they would still keep 80 percent. It’s a game of chance anyway, not of  tax planning.

Withholding tax on compensation. There are easily more than 200,000 foreign POGO personnel without work permits. Assuming they only earn P30,000 a month, at an income tax rate of 20 percent, the leakage is easily more than P6 billion per year on uncollected individual tax. And the corollary social issue is why employment and opportunity are being denied to our capable countrymen in favor of Chinese personnel.

Franchise tax. In addition to PAGCOR’s two percent license fee, POGOs should be paying five percent franchise tax. The estimated uncollected franchise tax alone from the undeclared POGO revenue is more than P15 billion for one year.

Income tax. The offshore POGOs can do everything through the local POGO operations. If POGOs made an estimated P286.7 billion (net of winnings of gamers) in 2019, reduce that even by 50 percent for expenses, and we can still earn 15 percent withholding tax or P20 billion on dividends that are constructively remitted from the accounted amounts alone (excluding the substantial unreported amounts). These constructively remitted dividends are technically Philippine source because everything happens here, regardless of the structure. Besides, the licenses of offshore POGO companies make them technically companies that do business in the Philippines.

Our ballpark amounts using the above derivative methods are actually corroborated by a 2018 report by the IMF Committee on Estimating Casino Revenues and Transfers for the Philippine Balance of Payments Statistics. However, the IMF report bears higher estimates of gaming revenue and winnings than ours, but within the ballpark. A P200 to P300 billion tax leakage per year from POGOs are amounts not drawn from air, after all.

Can we set things right for our countrymen? Can we help the government fund its stimuli programs? Will the government act with transparency and determination on these unprecedented amounts of uncollected tax and potential tax fraud from POGO operations? To borrow the words of a nationalist author: we can be a jellyfish, or we can find our spine.

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Alexander B. Cabrera is the chairman and senior partner of Isla Lipana & Co./PwC Philippines. He is the chairman of the Integrity Initiative, Inc. (II, Inc.), a non-profit organization that promotes common ethical and acceptable integrity standards. Email your comments and questions to [email protected]. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.