BIR Ruling [DA-387-04]

July 19, 2004 BIR RULING [DA-387-04] P.D. 1869, 108, 119 DA-045-2004 Venus Varela & Associates Law Office 22 Asteroid, Bel-Air Makati City Attention: Atty. Joachin T. Venus, Jr. Gentlemen : This refers to your undated letter requesting on behalf of your client, MIO Associates Corporation (MIO) for exemption from the payment of income tax and consequently from withholding tax as well as charges, fees or levies pursuant to Section 13(2)(a) and (b) of P.D. No. 1869. It is represented that MIO entered into a contractual relationship with the Philippine Amusement and Gaming Corporation (PAGCOR) to supply specialized equipment for their casino operations particularly in the games of Stud Poker, Pai-Gow and Mini-Baccarat as well as to operate Pachinko and Pachisuro Arcade at CF Paraaque; and that you are of the opinion that by virtue of your contractual relationship with PAGCOR, you are exempted from the payment of all national and local taxes, including VAT. In reply, please be informed of the following pertinent provisions of Section 13(2)(a) and (b) of P.D. No. 1869, which state: "Sec. 13. Exemptions . (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 shall 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 the 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 exemptions herein granted for earnings derived from 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." PAGCOR's legislative franchise under P.D. 1869 has been amended by R.A. No. 7716, otherwise known as the Expanded Vat Law (the EVAT Law). Pursuant to R.A. No. 7716, PAGCOR became subject to the 10% VAT, effective January 1, 1996, in lieu of the 5% franchise tax prescribed under its Charter. That, PAGCOR's liability for the 10% VAT, in lieu of the 5% franchise tax prescribed under its Charter, had already been resolved in VAT Ruling No. 004-96 dated May 14, 1996, and reiterated in VAT Ruling No. 030-99 dated March 18, 1999. As can be gleaned from the aforequoted provision of the Charter of PAGCOR, it can be inferred that PAGCOR is exempt from all kinds of taxes. But while it is true that it is subject only to the franchise tax, which is in lieu of all kinds of taxes, this 5% franchise tax had already been replaced by VAT. Section 108 of the Tax Code of 1997 (then Sec. 106 of the Tax Code, as amended) provides that all franchise grantees which are not subject to the franchise tax under Section 119 of the Tax Code of 1997 shall be considered as "other franchise grantees" subject to the 10% VAT. Let it be stressed that PAGCOR is neither a radio and/or television broadcasting company whose annual gross receipts for the preceding year does not exceed P10,000,000.00 nor an electric, gas, or water utility company, which is subject to the franchise tax imposed under Section 119 of the same Code. It is for this reason that PAGCOR's sale of goods, properties or services is now subject to the 10% VAT although its Charter subjects it only to the 5% franchise tax. Thus, all transactions entered into by PAGCOR as seller of goods and services or lessor of properties are subject to VAT. Be that as it may, since MIO is under contractual relationship with PAGCOR by virtue of the aforesaid contract, this Office holds that the exemption from taxes, fees and charges enjoyed by PAGCOR is extended to MIO pursuant to Section 13(2)(a)(b) of P.D. No. 1869. However, all transactions entered into by MIO as seller of goods and services or lessor of properties are subject to VAT. This ruling is being issued on the basis of 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