PAGCOR Has No Authority to Collect Franchise Taxes from Centennial Gaming Corp.

July 6, 1998 BIR RULING NO. 109-98 P.D. 1869-E.O. 312-000-00-109-98 Arcaya & Associates 3rd Flr., Union-Ajinomoto Building 331 Gil J. Puyat Avenue Makati City Attention: Atty . Nestor P . Ricolcol Gentlemen: This refers to your letter dated November 11, 1997 requesting on behalf of your client, Centennial Gaming Corporation (CGC), for a ruling on whether or not the Philippine Amusement and Gaming Corporation (PAGCOR) has the authority to collect franchise taxes from CGC. LexLib It is represented that under Executive Order No. 128, series of 1993. NCC has been tasked to take charge of the nationwide preparations for the National Celebration of the Philippine Centennial of the Declaration of Philippine Independence and the Inauguration of the Malolos Convention; that under Section 2-A of Executive Order No. 312, NCC has been authorized to undertake fund raising activities, to wit: "SEC. 2-A. The Commission is hereby empowered and authorized to call upon any government agency or instrumentality, including government-owned and/or controlled corporations and their subsidiaries and non-government or private organizations or institutions and individuals, for financial and other forms of assistance, such as, but not limited to donations, contributions and the like, and to engage in other fund-raising activities that will generate the resources needed in the implementation of its various programs and projects." that in February 1997, Chairman Salvador Laurel of the National Centennial Commission (NCC) had proposed to a private individual to help NCC raise funds for the centennial celebration by staging a nationwide bingo games; that on April 11, 1997, a transmittal letter from then Executive Secretary Ruben Torres was received by Mr. Luis J. Morales, Commissioner and Executive Director of the NCC approving its request to augment its budget; that on August 6, 1997, PAGCOR, through its Chairman and Chief Executive Officer, Ms. Alice Reyes, granted the request of NCC to conduct bingo games and its variants; that said bingo games were scheduled on three dates, December 1997, June 1998 and January 1999; that prior to the grant by PAGCOR on the request of NCC, CGC was incorporated as a corporate vehicle to conduct the fund raising project for and in behalf of the Commission; that on August 25, 1997, NCC accepted the proposals of the CGC to raise funds for the Commission by staging bingo games in its behalf; that NCC designated First Clark Centennial Corporation (FCCC) as its main beneficiary; that FCCC handles the construction of the international exposition at Clark Field; that upon agreement, FCCC will receive 20% of the gross proceeds of the sales of the bingo cards; that on October 24, 1997, PAGCOR required CGC to pay the franchise tax of 5% of its gross proceeds in lieu of PAGCOR's share of 20% of the gross proceeds in the gaming corporations operating for profit; and that it is however, alleged that the 5% franchise tax is included in the 20% share in the gross earnings which PAGCOR requires from the bingo operators conducted for profit. In reply, please be informed that Section 13(2)(a) and (b) of P.D. 1869 provides. viz; "SEC. 13. Exemptions. xxx xxx xxx "(2) Income and other taxes. "(a) Franchise Holder: No tax of any kind or form, income or otherwise, as well as fees, charges or levies of whatever nature, whether national or local, shall be assessed and collected under this Franchise from the Corporation, except a Franchise Tax of five (5%) percent of the gross revenue or earnings derived by the Corporation from its operation under the Franchise. Such tax shall be due and payable quarterly to the National Government and shall be in lieu of all kinds of taxes, levies, fees or assessments of kind, nature or description, levied, established or collected by any municipal, provincial, or national government authority. "(b) Others: The exemption herein granted for earnings derived from the operations conducted under the franchise specially from the payment of any tax, income or otherwise, as well as any form of charges, fees or levies, shall inure to the benefit of and extent to corporations, associations, agencies, or individuals with whom the Corporation or operator has any contractual relationship in connection with the operation of the casino(s) authorized to be conducted under this franchise and those receiving compensation or other remuneration from the corporation or operator as a result of essential facilities furnished and/or technical services rendered to the corporation or operator. (Emphases supplied.) xxx xxx xxx." Based on the foregoing, the exemption from payment of all taxes in lieu of the 5% franchise tax for earnings derived from operations conducted under the franchise shall inure to the benefit of and extend to corporations, associations, agencies or individuals with whom the Corporation or operator has any contractual relationship in connection with the operation of casinos. In the instant case, it is NCC that has contractual relationship with PAGCOR the latter having approved NCC's request to conduct bingo games and its variants. In accordance with its authority to regulate the conduct of casino(s) games, PAGCOR required NCC to remit 20% of the gross proceeds from the sale of bingo cards but which it also waived in favor of FCCC as the main beneficiary of the Centennial Celebration. However, because of its lack of expertise to conduct bingo games, NCC, by virtue of its authority to undertake fund raising activities as provided for under the above-quoted Section 2-A of E.O. No. 312, instead approached and designated CGC to handle the operation and management of the bingo games and its variances, the consideration of which NCC shall collect 20% of the gross proceeds from the sales of bingo cards. The said 20% share in the gross earnings of NCC is the same share which PAGCOR had waived in its favor. In other words, for the services and facilities furnished, CGC shall receive 80% of the gross proceeds from the sales of bingo cards. Upon the other hand, NCC allocated its share of 20% to FCCC as its main beneficiary. llcd The 20% share which PAGCOR required from CGC through NCC is the usual share which PAGCOR requires from operators of the bingo games conducted for profit. This has been expressly stated by Ms. Alice Reyes, Chairman and Chief Executive Officer of PAGCOR in her letter to Mr. Alfredo B. Benitez of CGC dated October 24, 1997, portion of which reads ". . . The authority of private group to operate bingo games are those that refer to commercial undertakings with the profit motive as their primary purpose, from which PAGCOR derives twenty (20%) percent of the gross bingo sales receipt. "Since the 'Expo Pilipino Bingo' identifies the National Centennial Commission as the sole beneficiary whereby it will derive twenty (20%) percent of the gross sales, PAGCOR will no longer collect its own 20% requirement, but instead it will require your group to pay PAGCOR the franchise tax of 5% of the gross proceeds." (Emphasis supplied.) It can be deducted from the above that when PAGCOR granted NCC's request to conduct bingo games for fund-raising purposes of the Centennial Celebration, the requisite authority necessary to operate bingo games has been effectively approved. Such being the case, the exemption from taxes, fees and charges in lieu of paying the 5% franchise tax of the gross receipt being enjoyed by PAGCOR was effectively extended to CGC it being an agent/operator of NCC. On one hand, since CGC is the corporate agent of NCC which actually manages the operation, it is the one which shall remit the equivalent amount of the 20% of the gross earnings to the PAGCOR through FCCC. In the light of the foregoing, this Office is of the opinion that CGC as an agent of NCC, shall likewise enjoy exemption from payment of taxes granted to PAGCOR or its operator in lieu of the 5% franchise tax. However, since the 5% franchise tax was already included in the 20% share of PAGCOR the equivalent amount of which having been waived by PAGCOR in favor of FCCC, CGC shall no longer be liable for the 5% franchise tax which PAGCOR tries to collect in addition to the 20% of the gross earnings being allocated to FCCC. Accordingly, this Office is of the opinion that while PAGCOR is authorized to regulate the casino(s) operations for which it collects a 20% share in the gross earnings with the 5% franchise tax included thereon, it cannot further collect another 5% franchise tax from CGC merely on the basis that the 20% share in the gross receipts was waived in favor of the NCC through the FCC for the Centennial Celebration. PAGCOR had belatedly realized that the 5% franchise tax was included in the 20% share which it waived in favor of FCCC. Moreover, it will be confiscatory and unjust if over and above the 20% share in the gross earnings of PAGCOR there shall be collected another 5% franchise tax from CGC considering that PAGCOR collects only 20% which already include the 5% franchise tax of the gross earnings from the private operators of bingo games conducted for profit, it being known that the purpose for which CGC shall conduct bingo games is for the fund-raising for the National Celebration of the Philippine Centennial Celebration of the Declaration of Philippine Independence and the Inauguration of the Malolos Convention. Logically, since PAGCOR had already waived its share of 20% in the gross earnings of CGC in favor of FCCC with the corresponding franchise tax equivalent to the 5% of the gross earnings also included thereon, it cannot collect another 5% franchise tax. cdlex This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it shall be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue