Quiason Makalintal Barot Torres & Ibarra

December 18, 2008 BIR RULING [DA-(VAT-056) 551-08] P.D. 1157; R.A. 1169; 27 (D); 106; #004-2005 Quiason Makalintal Barot Torres & Ibarra 21st Floor, Robinsons-Equitable Tower 4 ADB Avenue corner Pedro Poveda Street 1605 Ortigas Center, Pasig City, Philippines Attention: Atty. Benedict R. Tugonon Gentlemen : This refers to your letter dated December 8, 2008 requesting on behalf of your client, PGMC Marketing Corporation ("PMC") for confirmation of your opinion that the sales of PMC, as distributor of Instant Scratch Tickets ("Instant Scratch Tickets") for and on behalf of Philippine Charity Sweepstakes Office ("PCSO") and as a lotto outlet operator and franchisee of PCSO are exempt from value-added tax ("VAT"), income tax and all other kinds of taxes, including local taxes, pursuant to the provisions of Presidential Decree (P.D.) No. 1157 , as amended by Republic Act No. 1169 . IaESCH It is represented that PCSO is a government-owned and controlled corporation organized and existing under and by virtue of Presidential Decree No. 1157 , as amended, the agency of the Government of the Republic of the Philippines originally created under P.D. 1157, as amended by R.A. No. 1169 to regulate the conduct and operation of the PCSO On-Line Lottery; that PMC is a corporation duly organized and existing under the laws of the Republic of the Philippines, with office address at E2904A PSE Centre, Exchange Road, Ortigas Center, Pasig City; that on May 19, 2008, the PCSO and PMC entered into a Memorandum of Agreement, wherein PMC undertake to distribute 10 million Instant Scratch Tickets under the New Instant Ticket Game Program approved by the PCSO; that on June 24, 2008, PCSO and PMC entered into an agency agreement, wherein PMC was appointed by PCSO as agent mandated to undertake the operation and maintenance of some Lotto sales outlet, following the rules and regulations governing the conduct and operations of the Philippine on-line Lottery; and that in consideration of the abovementioned services, PMC receives a certain percentage from the sales of lotto and sweepstakes tickets from PCSO. Based on the foregoing representation, you now request for a ruling that PMC, as a franchisee of PCSO, is exempt from all kinds of taxes, including income tax and value-added tax ("VAT"), pursuant to the provisions of Section 4 of P.D. 1157, as amended by R.A. No. 1169. In reply, please be informed that, Section 4 of P.D. 1157, as amended, provides, viz. : "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 i.e. , Lotto, Instant Scratch Tickets, shall be exempt from all taxes. aCHDST 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, to wit: "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. xxx xxx xxx 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)" ADETca In BIR Ruling No. 004-05 dated July 28, 2005, this Office had the occasion to rule on the exemption of PCSO and its agents from all taxes, to wit: "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." Section 106 (A) (2) (c) of the Tax Code, provides, to wit: "SEC. 106. Value-added Tax on Sale of Goods or Properties. xxx xxx xxx (2) The following sales by VAT-registered persons shall be subject to zero percent (0%) rate: xxx xxx xxx (c) Sales to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects such sales to zero rate." Considering that PCSO is exempt from all taxes pursuant to the provisions of R.A. 1169, as amended, the payments by PCSO of commission or any payment for its purchases of goods and services is subject to zero percent (0%) VAT. Since PMC, in the sale of the lotto tickets, Instant Scratch Tickets and in collecting the proceeds thereof for remittance to PCSO, is acting in representation and on behalf of PCSO, i.e. , PCSO being the principal and PMC is the agent, the power and authority granted to PMC 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 the lotto tickets and the Instant Scratch Tickets by PCSO is exempt from all taxes, the sale of the same lotto tickets, Instant Scratch Tickets and other PCSO products by PMC is likewise exempt from all taxes, including VAT, income tax and local taxes. Necessarily, the sale of the lotto tickets, Instant Scratch Tickets and other PCSO products by PMC as the authorized agent of PCSO is not subject to value-added tax imposed under the Tax Code of 1997. TECIaH 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