BIR Ruling [DA-308-04]

June 7, 2004 BIR RULING [DA-308-04] 108; PD 1869; VAT Ruling No. 30-99; DA-036-2002; DA-310-2003 Sycip Salazar Hernandez & Gatmaitan Attorneys-At-Law SSHG Law Centre, 105 Paseo de Roxas, Makati City Attention: Attys. Carino. C. Laforteza Ernesto S. Taio, Jr. Jennifer L. Pasic-Lomibao Counsel Gentlemen : This refers to your letter dated January 29, 2004, requesting on behalf of your client, Berkswell Investments Limited ("Berkswell"), for a confirmation of your opinion that based on Section 13(2)(b) of Presidential Decree No. 1869 or the Philippine Amusement and Gaming Corporation ("PAGCOR") Charter, the earning or income to be derived by Berkswell in the lease of slot machines and network system under the Contract of Lease with PAGCOR is exempt from income tax and any form of charges, fees and levies. However, the lease rental of said machines and system is subject to the 10% value-added tax. It is represented that Berkswell is a corporation duly organized and registered under the laws of the British Virgin Islands; that PAGCOR, on the other hand, 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 1869; that on or around September 24, 2003, PAGCOR and Berkswell entered into a Contract of Lease over a minimum of one Hundred and Fifty (150) slot machines including the network system, for use in a VIP Club slot machine arcade to be established by PAGCOR; that the lease is for a period to commence on the opening of the slot machine VIP Club and actual operation of the slot machines and will be coterminous with the franchise of PAGCOR; that Berkswell shall receive from PAGCOR a monthly rental equivalent to forty percent (40%) of the slot machines revenues after deducting the players' winnings/prizes and all applicable taxes; and that in support of your request, you submitted a copy of the Contract of Lease between Berkswell and PAGCOR. 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." ScEaAD 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 Berkswell is under contractual relationship with PAGCOR by virtue of the aforesaid contract, this Office is of the opinion as it hereby holds that the exemption from taxes, fees and charges enjoyed by PAGCOR is extended to Berkswell pursuant to Section 14(2)(b) of PD 1869. ( BIR Ruling No. DA-36-2002 dated August 26, 2002 ) Therefore, Berkswell is exempt from income tax and consequently to the withholding tax 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.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group