Cayañga, Zuñiga and Angel

August 21, 2007 BIR RULING [DA-460-07] DA-045-2004; Sec. 1 (C) RA 9337; R.A. 7716; Sec. 13 (2) (b) PD 1869; Sec. 27, NIRC Cayaga, Zuiga and Angel 2nd Flr. One Corporate Plaza 845 Arnaiz Ave. Legaspi Village Makati City Attention: Atty. Aureen Soriano Gentlemen : This refers to your letter dated September 9, 2005 requesting for a ruling on whether the tax exemption being enjoyed by the Philippine Amusement and Gaming Corporation (PAGCOR) under Section 13 (2) (b) of Presidential Decree (PD) No. 1869 may be extended to your client by virtue of its Contract of Lease with the former. It is represented that your client, Pacific Digital Amusement Systems, Incorporated (" Pacific Amusements ", for brevity) is a corporation duly organized under Philippine laws and has exclusive proprietary rights to a gaming system software and owns the hardware, equipment and accessories to operate electronic games. It is further represented that Pacific Amusements and PAGCOR executed a Contract of Lease on August 8, 2005 whereby the former leased its electronic gaming system, including gaming kiosks/terminals and a fully equipped electronic amusement station in Miramar Hotel for a period of one year. The said contract also provided that PAGCOR shall pay Pacific Amusements a monthly variable rent amounting to forty percent (40%) of the gross revenues of the gaming system's operation at the station after deducting the players' winnings/prizes and all applicable taxes due to the Bureau of Internal Revenue. EcHAaS In reply, please be informed that Section 13 (2) (b) of PD 1869 is no longer applicable to your client as PAGCOR, starting November 1, 2005, no longer enjoys exemption from income taxes with the implementation of Republic Act (RA) No. 9337. Section 1 (C) of RA 9337 states that: Section 1. Section 27 of the National Internal Revenue Code of 1997, as amended, is hereby further amended to read as follows: "(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 Insurance System (GSIS), the Social Security System (SSS), the Philippine Health Insurance Corporation (PHIC), and the Philippine Charity Sweepstakes (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." It can be seen here that RA 9337 omitted PAGCOR from the list of government corporations that are exempt from income taxation under Section 27 of the Tax Code of 1997. As a result, PAGCOR is now regarded as liable for income taxes imposed on domestic corporations along with its 10% (now 12% starting February 1, 2006) VAT liability under RA 7716. And since there is no longer any income tax exemption to speak of, it follows that PAGCOR has no exemption privileges to extend to Pacific Amusements under Section 13 (2) (b) of P.D. 1869. Accordingly, this office is of the opinion that since there is no longer any basis on PAGCOR's part to claim exemption from income taxes, it follows that Pacific Amusements is taxable on income gained from its Contract of Lease with the former starting November 1, 2005. In addition, all transactions entered into by your client as a seller of goods and services or lessor of properties are subject to VAT. 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. DacTEH Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service