BIR Ruling [DA-229-06]

April 11, 2006 BIR RULING [DA-229-06] RA 9337 RMBSA 30th Floor, Citibank Tower 8741 Paseo de Roxas Makati City Attention: Atty. Owen S. Carsi Cruz and Atty. Jason L. Fernandez Gentlemen : This refers to your letter dated January 4, 2006 requesting, on behalf of your client, RGB, Ltd. (RGB), for a confirmation of your opinion that lease payments made by the Philippine Amusement and Gaming Corporation (PAGCOR) to RGB for the use of slot machines in its casinos pursuant to a Memorandum of Agreement dated May 6, 2005, which accrued prior to the effectivity of Republic Act No. 9337 on November 1, 2005 are exempt from all taxes except for the 10% Value-Added Tax (VAT), while those accruing from November 1, 2005 onwards shall be subject to the 7.5% final withholding tax and 10% VAT. It is represented that RGB is a non-resident foreign corporation organized and existing under the laws of Malaysia with office address at Lot 1, Room 1, 3rd Floor, Wisma Siamloh Jalan Keajuan, 87007 Federal Territory of Labuan, Malaysia; that PAGCOR is a government-owned and controlled corporation organized and existing under Presidential Decree No. 1869, as amended with the exclusive franchise to operate and maintain gambling casinos in the Philippines; that on May 6, 2005, RGB and PAGCOR entered into a Memorandum of Agreement in which RGB shall supply PAGCOR with varying quantities and brands/models of slot machines for use in the latter's casinos under a lease rental arrangement; that RGB shall be responsible for providing the necessary spare parts, technical support and training for the successful operation of the slot machines within the effectivity of the Agreement; and that in consideration for the lease of the slot machines, PAGCOR shall pay lease rentals to RGB based on a certain percentage of the machine's net winnings after taxes. In reply, please be informed that Section 13(2)(a) of P.D. No. 1869 provides, viz : "Section 13. Exemption . "xxx xxx xxx "(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 attached 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 individuals 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." cIETHa In BIR Ruling No. DA-468-03 dated December 9, 2003, this Office has already ruled on the matter when it said that "Since AFL and SIX-IN-ONE are under contractual relationship with PAGCOR for the operation of top of the line slot machines and network/link system and the resident agent of AFL responsible for all the technical and management services, respectively, this Office is of the opinion as it hereby holds that the exemption from taxes, fees and charges enjoyed by PAGCOR is effectively extended to AFL and SIX-IN-ONE." Thus, the exemptions granted to PAGCOR are effectively extended to RGB, Ltd. Therefore, RGB is exempt from income tax and consequently from withholding tax and shall be subject only to 10% VAT pursuant to Section 13(2)(b) of Presidential 1869 in relation to Section 108 of the Tax Code of 1997. (BIR Ruling No. DA-631-04 dated December 14, 2004) However, beginning November 1, 2005, the exemption from income tax enjoyed by PAGCOR was withdrawn by RA No. 9337. With the amendment introduced by RA No. 9337, the enumeration of tax-exempt GOCCs no longer includes PAGCOR. Section 27(C) of the Tax Code now states: "(C) Government-owned or Controlled Corporations, Agencies or Instrumentalities . The provisions of existing special or general laws to the contrary notwithstanding, all corporations, agencies, or instrumentalities owned or controlled by the Government, except the Government Service and Insurance System (GSIS), the Social Security System (SSS), the Philippine Health Insurance Corporation (PHIC), and the Philippine Charity Sweepstakes Office (PCSO), 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. In view of the withdrawal of PAGCOR's exemption from income tax, rental payments to RGB under the Agreement are now subject to the 7.5% withholding tax imposed on nonresident lessors of machineries and other equipment under Section 28(B)(4) of the Tax Code, which states: "SEC. 28. Rates of Income Tax on Foreign Corporations . xxx xxx xxx (B) Tax on Nonresident Foreign Corporation . xxx xxx xxx (4) Nonresident Owner or Lessor of Aircraft, Machineries and Other Equipment . Rentals, charters and other fees derived by a nonresident lessor of aircraft, machineries and other equipment shall be subject to a tax of seven and one-half percent (7 1/2%) of gross rentals or fees. Accordingly, this Office is of the opinion as it hereby holds that payments to RGB under the Agreement which accrued beginning November 1, 2005 are subject to a final withholding tax of 7.5% and the 10% VAT pursuant to Sections 28(B)(4) and 13(2)(b) of Presidential Decree No. 1869 in relation to Section 108 of the Tax Code of 1997. The rate of VAT, however, was increased from 10% to 12% beginning February 1, 2006. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will 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.) PABLO M. BASTES, JR. OIC-Head Revenue Executive Assistant Legal Service