BIR Ruling [DA-444-04]

August 20, 2004 BIR RULING [DA-444-04] 108; P.D. 1869 VAT Ruling No. 30-99; DA-310-2003 Perlas, De Guzman, Antonio & Herbosa Law Firm Unit 2603, 26/F Antel Global Corporate Center Doa Julia Vargas Avenue near corner Meralco Avenue Ortigas Center, Pasig City Attention: Atty. Rodolfo P. De Guzman, Jr. Counsel Gentlemen : This refers to your letter dated July 1, 2004, requesting on behalf of your client, Global Leisure Resources Limited ("GLRL"), for a confirmation of your opinion that GLRL, by virtue of its contractual relationships with the Philippine Amusement and Gaming Corporation (PAGCOR) is exempt from income tax and consequently to the withholding tax. It is represented that GLRL is a corporation duly organized, existing and registered in Hong Kong under the Companies Ordinance, with Registration No. 865651 and with principal office address at 1803 Wheelock House, 20 Pedder Street, Central Hong Kong; that PAGCOR, on the other hand, is a government-owned and -controlled corporation which has the exclusive franchise to operate gambling operations pursuant to its charter, Presidential Decree No. 1869 dated July 11, 1983; that on May 7, 2004, PAGCOR and GLRL entered into a contract whereby GLRL undertook to establish slot machine arcades at the 1st, 2nd and 3rd Floors of Binondo Suites Manila, providing the same structure for slot machines, including the software and hardware necessary for their computerized operation and networking; that in consideration, GLRL will receive a certain percentage of the gross revenue after taxes; and that PAGCOR, on the other hand, will directly operate and manage the arcades and as such, will be responsible for operational expenses, as well as salaries and other benefits of PAGCOR employees in the arcade. EcaDCI 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." 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 GLRL 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 GLRL pursuant to Section 14(2)(b) of PD 1869. ( BIR Ruling No. DA-310-2003 dated September 23, 2003 ) Therefore, GLRL 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. TacESD 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