Pacific Online Systems Corporation

January 22, 2009 BIR RULING [DA-(VAT-011) 033-09] R.A. 1157; 27 & 105; DA (VAT-015) 097-2008 Pacific Online Systems Corporation 2201-A, 22/F West Tower Philippine Stock Exchange Centre Ortigas Center, Pasig City Attention: Mr. Rhederick B. Inciong CFO & VP, Finance & Administration Gentlemen : This refers to your letter dated November 27, 2008 requesting for a ruling on the tax consequence on your distribution or sale of Scratch Tickets of the Philippine Charity Sweepstakes Office (PCSO). It is represented that Pacific Online Systems Corporation ("Pacific Online") is a publicly listed domestic corporation. Pacific Online has exclusive agreement with the PCSO to provide equipment for its lottery operations in Visayas and Mindanao Regions. On July 12, 2007, AB Gaming and Leisure Specialists, Inc. ("AB Gaming") and Pacific Online entered into a Deed of Assignment with concurrence of the PCSO, whereby AB Gaming effectively assigned to Pacific Online its contract with PCSO as master distributor of the Scratch Tickets. These Scratch Tickets, which are PCSO products, are similar to the previous ones offered under the Cash and Car Promo that PCSO had with AB Gaming, the sale of which was granted an exemption from the value-added tax (VAT) by the BIR under BIR Ruling No. 004-05 dated July 28, 2005. In line therewith, you are requesting that the sale of Scratch Tickets by Pacific Online shall be exempt from the VAT, income tax and other revenue taxes pursuant to Presidential Decree (PD) No. 1157. In reply thereto, please be informed that Section 27 (C) of the Tax Code of 1997, provides that " (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 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." The above-cited provisions specifically excepted GSIS, SSS, PHIC and PCSO from the payment of regular corporate income tax. Since PCSO is one of the government-owned and controlled corporations mentioned, it is therefore exempt from the payment of income tax. Corollarily, Section 4 of Republic Act 1169, as amended by PD No. 1157, provides that ITSCED "SEC. 4. Holding of Sweepstakes. The Office shall hold charity horse race sweepstakes under such regulations as shall be promulgated by the Board in accordance with Republic Act Numbered Three hundred and nine: Provided, however, That when the holding of a sweepstakes race to determine prizes is impossible due to war, public calamity, or other unforeseen or fortuitous event, or when there is no sufficient number of horses to determine the major prizes, the Board of Directors may determine the procedure to be followed in the distribution of prizes in the most just, equitable and expeditious manner. The horse races and the sale of tickets in the said sweepstakes shall be exempted from all taxes, except that each ticket shall bear a twelve-centavo internal revenue stamp and that from the total prize fund as provided herein from the proceeds of the sale of tickets, there shall be deducted an amount equivalent to five per centum (5%) of such total prize fund, which shall be paid to the Bureau of Internal Revenue not later than ten days after each sweepstakes in lieu of the income tax heretofore collected from sweepstakes prize winners: Provided, however, that any prizes that may be paid out from the resulting prize fund, after said five per centum has been deducted, shall be exempt from income tax. The tickets shall be printed by the Government and shall be considered government securities for the purpose of penalizing forgery or alteration." Accordingly, the sale of tickets made by PCSO, in order to raise and provide funds through holding and conducting charity sweepstakes races, lotteries and other similar activities, for which they are created shall be exempt from all taxes. In the case of "Andres C. Rivas et al. vs. Hon. Alvin Garcia, in his capacity as City Mayor of Cebu City, Hon. Renato V. Osmea, in his capacity as Vice-Mayor of Cebu City and Philippine Charity Sweepstakes Office, (CA-G.R. SP No. 14878 dated February 13, 1998)", the Court held, thus: "Whether the Petitioners, are government employees or not, and whether they have been contracted by the PCSO under separate contracts, are irrelevant. What is primordial is that the Petitioners are mere agents of the PCSO, performing functions vested in the PCSO, namely, the sale of lotto tickets. The proceeds of the sales constitute government funds which they are bound to account to the PCSO. In fine, the nature of the business or activity the Petitioners are engaged in, which is the sale of lotto tickets, is expressly exempted from regulation and control and all forms of taxation, by local government units." (Emphasis supplied) The Court of Appeals, further ruled, that: "Whether the exemption is clear and mandatory, the Courts, if we may borrow the language of the New York State Supreme Court, cannot 'insert qualifying clauses or add conditions not contained in the act' ( Williams, Institutional versus City of New York, 89 New York Supplement, page 304). Conditional statutory exemptions are to be given a reasonable, natural and practical interpretation to effectuate the purpose for which the exemption is granted. ( idem, supra, page 645)" ASaTCE Thus, in BIR Ruling No. 004-05 dated July 28, 2005, this Office held that "Since AB Gaming, in the sale of the CASH and CAR PROMO tickets and collecting the proceeds thereof for remittance to PCSO, is acting in representation and on behalf of PCSO, i.e. , PCSO being the principal and AB Gaming is the agent, the power and authority granted to AB Gaming carries with it the privileges and obligations inherent in the personality of PCSO specifically pertaining to tax exemption as stated in Section 4 of P.D. 1157. In view of the foregoing and since the sale of tickets by PCSO is exempt from all taxes, the sale of the CASH and CAR PROMO tickets by AB Gaming is likewise exempt from all taxes. Necessarily, the sale of CASH and CAR PROMO tickets by AB Gaming as the authorized agent of PCSO is not subject to value-added tax imposed under the Tax Code of 1997." Based on the foregoing circumstances, PCSO, as principal, is exempt from the regular corporate income tax and VAT, and its agent is likewise exempt from said taxes. The sale of Scratch Tickets by Pacific Online constitutes the gross receipts of PCSO, and Pacific Online is bound to account to PCSO whatever amount collected less the commission earned by it. IN VIEW OF THE FOREGOING, since the sale of tickets by PCSO is exempt from all taxes, the sale of the Scratch Tickets by Pacific Online is likewise exempt from all taxes. Necessarily, the sale of said tickets by Pacific Online, as the authorized agent of PCSO, is not subject to VAT imposed under the Tax Code of 1997, as amended by Republic Act (R.A.) No. 9337. 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service