Sale of Cash and Car Promo Tickets by PCSO Agent Not Subject to Value-added Tax

July 28, 2005 BIR RULING NO. 004-05 R.A. 1157; 105 000-00 Perlas, De Guzman, Antonio & Herbosa Law Firm Unit 2603, 26/F Antel Global Corporate Center Doa Julia Vargas Avenue near corner Meralco Avenue Ortigas Centre, Pasig City Attention: Atty. Rodolfo P. de Guzman, Jr. Counsel Gentlemen : This refers to your letter dated July 15, 2003 requesting on behalf of your client, AB Gaming and Leisure Specialists, Inc. ("AB Gaming"), for a confirmation of your opinion that the selling of the CASH and CAR promotion tickets made by your client as an authorized agent of Philippine Charity Sweepstakes Office ("PCSO") by virtue of a Contract of Exclusive Distributorship entered into by AB Gaming and PCSO is exempt from Value-Added Tax (VAT) imposed under the 1997 Tax Code. It is represented that AB Gaming and Leisure Specialists, Inc. is a corporation duly organized and existing under the laws of the Republic of the Philippines; that it entered into a Contract of Exclusive Distributorship with the PCSO on January 7, 2003, whereby it was appointed as the exclusive authorized agent to sell/distribute the CASH and CAR PROMO tickets, subject to the following conditions: (1) That the planning, marketing and sale of the said CASH and CAR PROMO tickets are under the control, supervision and coordination of the PCSO; (2) That all CASH and CAR PROMO tickets delivered to AB Gaming shall be considered sold and that the sale and distribution thereof shall not be more and/or less than the price stated in the ticket; (3) That the tickets shall remain the sole property of PCSO and the proceeds thereof are deemed government funds and AB Gaming's possession of said funds is only for remittance to the PCSO; (4) That AB Gaming is required to post a surety bond from a reputable surety duly licensed by the Insurance Commission in the amount of P60,000,000.00; and ISaTCD that on the other hand, PCSO is created under Republic Act No. (R.A.) 1157, as amended, to raise and provide funds through holding and conducting charity sweepstakes races, lotteries and other similar activities, i.e ., CASH and CAR PROMO 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 R.A. 1157, as amended; that the agreement manifests the consent of PCSO that AB Gaming shall act for and on its behalf subject to its control and authority in the implementation of the agreed distributorship and that AB Gaming consented and assumed to do the distribution with limitation and to render an accounting thereof; that in fine, PCSO granted AB Gaming the full power and authority to sell CASH and CAR PROMO tickets and to collect the proceeds thereof and to perform such other acts necessary to achieve the best results in the selling of the said tickets to all intents and purposes as the PCSO might or could lawfully do; that the power and authority granted to AB Gaming carries with it the privileges and obligations inherent in the personality of the PCSO particularly pertaining to tax exemption in the conduct of selling the CASH and CAR PROMO tickets and collecting the proceeds thereof; that since PCSO is exempt from all taxes, the action of AB Gaming in selling the CASH and CAR PROMO tickets for and in behalf of PCSO is likewise exempt from taxes; and thus, the sale of CASH and CAR PROMO tickets by AB Gaming is not subject to Value-Added Tax under the Tax Code of 1997. In reply, please be informed that Section 4 of R.A. 1157, as amended, provides, viz. : "SEC. 4. Holding of Sweepstakes. . . . 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 (5%) per centum 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 exempted from income tax. . . ." (Emphasis supplied) 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. , CASH and CAR PROMO, 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) DCScaT 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 )." 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 R.A. 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. 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 or void. Very truly yours, (SGD.) JOSE MARIO C. BUAG OIC-Commissioner of Internal Revenue