Lucky Circle Corporation

July 31, 2008 BIR RULING [DA-(VAT-015) 097-08] 004-05 Lucky Circle Corporation 23rd Floor, Unit 2304-B West Tower Philippine Stock Exchange Centre Exchange Road, Ortigas Center Pasig City Attention: Mr. Rhederick B. Inciong Chief Financial Officer Gentlemen : This refers to your letter dated May 12, 2008 stating that Lucky Circle Corporation (LCC) is a corporation duly organized and existing under the laws of the Philippines; that it owns and manages a number of retail outlets which are selling the Philippine Charity Sweepstakes Office (PCSO) products; that PCSO is the one granting franchises to the lotto outlets; that in consideration thereof, LCC receives a certain percentage from the sales of lotto and sweepstake tickets; that LCC is a subsidiary of Loto Pacific Leisure Corporation (Loto Pacific) which is also in the same line of business; that on the other hand, PCSO is created under P.D. No. 1157, as amended, to raise and provide funds through holding and conducting charity sweepstakes races, lotteries and other similar activities, by way of selling tickets thereof; that the funds will promote the health programs, medical assistance and services and other charities of national character enunciated by the government; that in order to fully attain the objectives and undertaking, as mandated, the PCSO is likewise exempted from all taxes in conducting all its charity sweepstakes races, lotteries and other similar activities and the sale of tickets thereof under Section 4 of P.D. No. 1157, as amended; and that since PCSO is exempt from all taxes, and the action of LCC in selling lotto and sweepstakes tickets for and in behalf of PCSO, it is likewise exempt from taxes. TcADCI Based on the foregoing representations, you now request for a ruling that the LCC, as a franchisee of PCSO, is exempt from value-added tax, income tax and other revenue taxes pursuant to Presidential Decree (P.D.) 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 P.D. No. 1157, provides that "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." CSHEAI 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. 41878 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: "Where 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)" 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. aHCSTD 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 tickets and other PCSO products by LCC constitute the gross receipts of PCSO and LCC is bound to account to PCSO whatever amount collected less the commission earned by LCC. IN VIEW OF THE FOREGOING, since the sale of tickets by PCSO is exempt from all taxes, the sale of the tickets and other PCSO products by LCC is likewise exempt from all taxes. Necessarily, the sale of said tickets and PCSO products by LCC, as the authorized agent of PCSO, is not subject to value-added tax imposed under the Tax Code of 1997, as amended by Republic Act (R.A.) No. 9337. cDTHIE 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, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service