BIR Ruling [DA-136-02]

August 26, 2002 BIR RULING [DA-136-02] P.D. 1869 138-98 SGV & Co. 6760 Ayala Avenue 1226 Makati City Attention: J.A. Osana Gentlemen : This refers to your letter dated May 17, 2002, on behalf of your client, Pacific Palm Corporation (Pacific), requesting confirmation of your opinion that Pacific, by virtue of its contractual relationships with the Philippine Amusement and Gaming Corporation (PAGCOR) is exempt from any tax, income or otherwise, as well as charges, fees or levies and shall be subject only to 10% VAT pursuant to Section 13 of Presidential Decree No. 1869 in relation to Sections 27(C) and 108 of the Tax Code of 1997. It is represented that Pacific is a domestic corporation duly organized under Philippine laws and registered with the Securities and Exchange Commission with Registration No. A200113704; that PAGCOR is a government-owned and-controlled corporation which has the exclusive franchise to operate gambling casinos and conduct other games of chance pursuant to its charter, Presidential Decree No. 1869 dated July 11, 1983; that on September 21, 2001 and October 8, 2001, PAGCOR and Pacific entered into two contracts or agreements whereby Pacific undertook to establish slot machine arcades at the 2nd, 3rd and 5th levels of Pan Pacific Hotel in Malate, Manila and at the basement level of Networld Hotel in Pasay City, providing the same with structure for slot machines, including the software and hardware necessary for their computerized operation and networking; that in consideration Pacific will receive a certain percentage of the gross revenues after taxes; that PAGCOR, on the other hand, will directly operate and manage the arcades and as such, will be responsible for operational expenses, including marketing and promotion, as well as salaries and other benefit of PAGCOR employees in the arcade. In reply, please be informed of the following pertinent provisions of Section 13(2)(a) and (b) of P.D. No. 1869, which provide, viz: (2) Income and other taxes (a) Franchise Holder: No tax of any kind or form, income or otherwise, as well as fees, charges or levies of whatever nature, whether National or Local, shall be assessed and collected under this Franchise from the Corporation, nor shall any form of tax or charge attach in any way to the earnings of the Corporation, except a Franchise Tax of five (5%) percent of the gross revenue or earnings derived by the Corporation from its operation under this Franchise. Such tax shall be due and payable quarterly to the National Government and shall be in lieu of all kinds of taxes, levies, fees or assessments of any kind, nature or description, levied, established or collected by any municipal, provincial, or national government authority. (b) Others: The exemption herein granted for earnings derived from the operations conducted under the franchise, specifically from the payment of any tax, income or otherwise, as well as any form of charges, fees or levies, shall inure to the benefit of and extend to corporation(s), association(s), agency(ies), or individual(s) with whom the Corporation or operator has any contractual relationship in connection with the operations of the casino(s) authorized to be conducted under this Franchise and to those receiving compensation or other remuneration from the Corporation or operator as a result of essential facilities furnished and/or technical services rendered to the Corporation or operator." DCcSHE In VAT Review Committee Ruling No. 030-99 dated March 18, 1999, it has been ruled that all legislative franchise grantees, except only "electric, gas and water utilities" have been expressly subjected to the 10% VAT pursuant to Section 102, old NIRC, as amended by R.A. No. 7716 (now Sec. 108, Tax Code of 1997). It is equally clear that R.A. No. 8241 did not restore the old tax exemption privilege of PAGCOR under its legislative franchise because its amendment as far as franchise grantees are concerned is limited only to "radio and/or television broadcasting." Therefore, upon effectivity of Section 102 (now Sec. 108) of the NIRC, as amended by R.A. No. 7716, PAGCOR ceased to be embraced by the franchise tax. Instead, it became subject to the 10% VAT, in lieu of all other taxes, pursuant to Sec. 13 of P.D. No. 1869 (i.e. PAGCOR's Charter), as amended by Sections 3 and 12 of R.A. No. 7716. Likewise, Section 27(C) of the Tax Code of 1997, provides, viz: "Sec. 27. Rates of Income Tax on Domestic Corporation . xxx xxx xxx "(C) Government-owned or -Controlled Corporations, Agencies or Instrumentalities. The provisions of existing special or general laws to the contrary notwithstanding, all corporation, agencies, or instrumentalities owned or controlled by the Government, except the Government Service Insurance System (GSIS), the Social Security System (SSS), the Philippine Health Insurance Corporation (PHIC), the Philippine Charity Sweepstakes Office (PCSO) and the Philippine Amusement and Gaming Corporation (PAGCOR), shall pay such rate of tax upon their taxable income as are imposed by this Section upon corporations or associations engaged in a similar business, industry, or activity." Since Pacific is under contractual relationship with PAGCOR by virtue of the aforesaid contracts or agreements, this Office is of the opinion as it hereby holds that the exemption from taxes, fees and charges enjoyed by PAGCOR is extended to Pacific pursuant to Section 14(2)(b) of PD 1869. ( BIR Ruling No. 138-98 dated September 25, 1998 ) Therefore, Pacific is exempt from any tax, income or otherwise, as well as charges, fees or levies and shall be subject only to 10% VAT pursuant to Section 13(2)(b) of Presidential Decree No. 1869 in relation to Section 108 of the Tax Code of 1997. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it shall be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) EDMUNDO P. GUEVARA Deputy Commissioner Legal and Inspection Group