VAT Ruling No. 004-05

April 11, 2005 VAT RULING NO. 004-05 P.D. 1869, R.A.s 7716, 8424, Sec 27 NIRC VAT Rulings 004-96, 138-98, 030-99, 113-99, 041-01 Villanueva, Villanueva & Associates CPAs Tax Consultancy Services Km. 19 J.P. Rizal Avenue, Concepcion I 1807, Marikina City, Philippines Attention: Mr. Felix Perry A. Villanueva Managing Partner Gentlemen : This refers to your undated letter which we received last July 20, 2004 written for and in behalf of your client, Technology Support Services, Inc. (formerly First Advance Multimedia Entertainment, Inc.), TSSI-FAME for short, seeking answers to the following queries: 1. Is TSSI-FAME subject to the payment of franchise tax on gross sales and/or income taxes on its net income? 2. Is the sale of the gaming pre-paid cards or "Electronic Playing Chips" so-called by the PAGCOR-authorized-and-approved Agents in connection with the operation of nationwide Internet-based and mobile-based games subject to the value-added tax? 3. Is the purchase of goods and/or services by TSSI-FAME subject to the value-added tax? and 4. Are 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 subject to the payment of income taxes? It is represented that your client has entered into a memorandum of agreement with the Philippine Amusement and Gaming Corporation (PAGCOR), the object for which is for PAGCOR to establish, operate, centralize and regulate Internet, Mobile and Multimedia gaming; that TSSI-FAME is the proprietary owner and operator of end-to-end solutions that can establish, operate, centralize and regulate value-added services over SMS, EMS, MMS, GPRS, IVR's, J2ME, Internet and other protocols, channels or medium of communications, which solutions being covered by patents, trade secrets and copyrights, prohibit others from using the same, hereinafter referred to as the "SOLUTIONS"; that TSSI-FAME also owns Information and Communication Technology (ICT) equipment capable of and necessary to establish, operate, centralize and regulate Internet, Mobile, and Multimedia gaming, hereinafter referred to as "ICT EQUIPMENT"; that TSSI-FAME has put forward a proposal to provide PAGCOR with a system platform and the use of its SOLUTION and ICT EQUIPMENT herein mentioned in order for PAGCOR to establish, operate, centralize, and regulate Internet, Mobile and Multi-Media gaming; that TSSI-FAME shall make available PAGCOR its business process expertise and management know-how of Internet, Mobile and Multimedia gaining; that in consideration of the above-enumerated valuable contributions, the PAGCOR, TSSI-FAME and PAGCOR-authorize-and-approved Agents agreed on a revenue-sharing scheme for both In-house and External Third Party Gaming/Applications Providers, as set out in Appendix D of the Agreement, covering all PAGCOR's earnings from the use of the Intermediation Platform. STaIHc In reply, please be informed as follows: 1. Section 13(2)(a) of P.D. No. 1869 provides : "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; nor shall any form of tax or charge attach in any way to the earnings of the Corporation, except a Franchise Tax of five (5%) percent of the gross revenue or earnings derived by the Corporation from its operation under this 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 any kind, nature or description, levied, established or collected by any municipal, provincial, or national government authority. " (Emphasis supplied) (a) On the question of franchise tax : In VAT Ruling No. 004-96 dated May 14, 1996, it was held that PAGCOR, being a legislative franchise grantee, became subject to the ten percent (10%) VAT in lieu of the 5% franchise tax prescribed under its Charter, pursuant to the provisions of Section 102(a), old NIRC, as amended by R.A. 7716, otherwise known as the Expanded VAT Law, as follows: "In reply, please be informed that PAGCOR, which falls under `other franchise grantees' under Section 117(c) (now Sec. 119) of the Tax Code, as amended, is now subject to the 10% VAT under Section 102(a) (now Sec. 108(A) of the same Code, as amended by Republic Act No. 7716, otherwise known as the Expanded VAT Law, effective January 1, 1996." iatdc2005 This ruling was reiterated in VAT Ruling No. 030-99 dated 18 March 1999 as follows: ". . . it is clear that all legislative franchise grantees, except only `electric, gas and water utilities' have been expressly subjected to the 10% VAT pursuant to Section 102, old NIRC, as amended by R.A. No. 7716 (now Section 108, Tax Code of 1997) . . . Therefore, upon effectivity of Section 102 (now Section 108) of the NIRC, as amended by R.A. No. 7716, PAGCOR ceased to be embraced by the franchise tax. Instead, it became subject to the 10% VAT, in lieu of all other taxes, pursuant to Sec. 13 of P.D. No. 1869 (i.e. PAGCOR's Charter), as amended by Sections 3 and 12 of R.A. No. 7716." Thus, in lieu of the five percent (5%) franchise tax in the revenue sharing scheme set forth in the Agreement, there shall be levied, assessed and collected on every sale a value-added tax equivalent to ten percent (10%) of the gross selling price, such tax to be paid by the seller, which in this case is PAGCOR. Accordingly, the payment of the VAT shall be in lieu of all other taxes. (b) On the question of income tax : The exemption of PAGCOR from the payment of taxes on its income, in addition to Section 13(2)(a) of P.D. No. 1869, is also provided for in Section 27(C) of the National Internal Revenue Code, as amended by R.A. No. 8424, thus " 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), the Philippine Charity Sweepstakes Office (PCSO) and the Philippine Amusement and Gaming Corporation (PAGCOR), 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 ". (Emphasis supplied) The provisions of Section 13(2)(b) of P.D. No. 1869, as now amended by R.A. No. 7716, remains applicable insofar as contractors of PAGCOR are concerned. Section 13(2)(b) of P.D. No. 1869, thus reads: "b. Others: The exemptions herein granted for earnings derived from the operations conducted under the franchise specifically 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 extend to corporation(s), association(s), agency(ies), or individual(s) with whom the Corporation or operator has any contractual relationship in connection with the operations of the casino(s) authorized to be conducted under this Franchise and to 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 ." (Emphasis supplied) Hence, in BIR Ruling No. 138-98 dated 25 September 1998, it was ruled in the case of AB Leisure Exponent, Inc. (ABLE), as follows: "Since ABLE is under contractual relationship with PAGCOR by virtue of an authority to operate Bingo games, this Office is of the opinion, as it hereby holds, that the exemption from taxes, fees and charges enjoyed by PAGCOR is effectively extended to Bingo Bonanza." IcaHCS Accordingly, considering that PAGCOR is exempt from franchise tax on gross sales and even from income taxes on net income, so are its suppliers of essential facilities and/or technical services, such as TSSI-FAME; 2. Following the grounds laid down in item no. 1 above, the sale of the gaming pre-paid cards or "Electronic Playing Chips" so-called by the PAGCOR-authorized-and-approved Agents in connection with the operation of nationwide Internet-based and mobile-based games is subject to the value-added tax, computed by multiplying the amount indicated in the "Electronic Playing Chips" by one-eleventh (1/11); 3. The purchase of goods, property and services by PAGCOR is subject to VAT on the part of the seller (VAT Ruling No. 041-01), unless of course the transaction is not in the course of trade or business, or it is among those enumerated as exempt under Section 109 of the Tax Code, as amended. Thus, the purchase of goods and services by TSSI-FAME, following Section 13(2)(b) of PD 1869, is likewise subject VAT on the part of the seller, unless the transaction is not in the course of trade or business or it is exempt under Section 109 of the Tax Code; and 4. 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 are exempt from the payment of income taxes, also following the grounds laid down in item no. 1 above. The Agents' share in the revenue-sharing scheme of the Project enjoys the same tax exemption privilege extended to PAGCOR. In BIR Ruling No. 113-99 dated 16 June 1999, it was ruled in the case of Best World Gaming & Entertainment Corp. (BW Gaming) as follows: "It is represented that the Philippine Amusement and Gaming Corporation (PAGCOR) granted BW GAMING the sole authority to operate and conduct a nationwide computerized on-line Bingo Game which operation is subject to the regulatory powers of PAGCOR; that under the Grant of Authority, BW Gaming has the authority to appoint Agents who shall operate Retail Outlets anywhere in the Philippines; that said Agents are authorized to sell Bingo Receipt Cards in their authorized Retail Outlets; that in consideration of their appointments as Agents, the latter receive a commission which is usually equivalent to 5% of gross sales less cancellations; that the Bingo Receipt Cards being sold by the Agents are being sold in behalf of BW Gaming; that all proceeds of the said sale of the Bingo Receipt Cards by the agents are remitted to BW Gaming less commission; that on June 16, 1999, a ruling was issued by this Office in your favor, holding that the exemption from taxes, fees and charges being enjoyed by PAGCOR may also be extended to BW Gaming." This ruling is being issued on the basis of the facts as represented. However, if upon investigation, it shall be disclosed that the facts are different, then this ruling shall be without force and effect. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group