VAT Ruling No. 067-01

October 8, 2001 VAT RULING NO. 067-01 108 (A) VAT Ruling No. 04-96 Philippine Amusement & Gaming Corporation (PAGCOR) PAGCOR House, 1330 Roxas Blvd., Ermita Metro Manila ZIP Code 1000 Attention: Mr. Carlos R. Bautista, Jr., Managing Head Corporate and Legal Services Dept. Gentlemen : This refers to your letter dated 11 December 2000 concerning your request for the reconsideration of our letter to you dated 19 November 2000, requesting PAGCOR to amend its percentage tax returns filed for the period from 01 January 1996 until the present, and to pay its 10% value added tax (VAT) liabilities covering the said period for the following reasons: 1. PAGCOR's legislative franchise under P.D. No. 1869 had been amended by R.A. No. 7716, otherwise known as the Expanded Vat Law (the EVAT law); 2. That, pursuant to R.A. No. 7716, PAGCOR became subject to the 10% VAT, effective 01 January 1996, in lieu of the 5% franchise tax prescribed under its Charter. That, PAGCOR's liability for the 10% VAT, in lieu of the 5% franchise tax prescribed under its Charter, had already been resolved in VAT RULING No. 004-96 dated 14 May 1996, and reiterated in VAT RULING No. 030-99 dated 18 March 1999; 3. That, however, despite the foregoing, records of the BIR disclosed that PAGCOR paid only the said 5% franchise tax, instead of the required 10% VAT, for the period from 01 January 1996 until the present, contrary to the provisions of the National Internal Revenue Code (Tax Code), as amended by R.A. No. 7716, and as last amended by R.A. No. 8424. It is represented in your aforesaid letter dated 11 December 2000 that you have requested for the reconsideration of VAT RULING No. 030-99 dated 18 March 1999 in your letter dated 07 December 2000, and that you are reiterating the arguments submitted thereunder. In reply, please be informed that, after a close scrutiny of the issues raised in your aforesaid request for reconsideration, this Office finds your contentions without basis in law, as follows: I That, Executive Order Nos. 72 and 93 did not amend P.D. No. 1869, the PAGCOR'S Charter. It is your contention that E.O. Nos. 72 and 93 did not effectively amend PAGCOR'S Charter, citing in support thereof, the following: 1. Former Executive Secretary Ruben D. Torres' opinion dated 29 August 1995; 2. Confirmation of that opinion by Justice Secretary Teofisto T. Guingona, Jr. in his letter dated 14 May 1996; 3. Confirmation by Finance Secretary Roberto de Ocampo in his letter dated 02 July 1997; 4. Opinion No. 058, series of 1995, dated 03 March 1995, Office of the Government Corporate Counsel; 5. Opinion of the Office of the Solicitor General dated 10 April 1995; 6. Court of Tax Appeals Decision in CTA Case No. 5449 entitled Acesite (Philippines) Hotel Corporation vs. the Commissioner of Internal Revenue. Items 1 to 5 above all pertained to the general repealing law under E.O. No. 72, promulgated 25 November 1986, which prescribed that all legislative franchise grantees shall be subject to corporate income tax, in addition to the franchise tax 1 ; and E.O. 93, promulgated 17 December 1986, withdrawing all tax exemptions heretofore granted, except the tax exemptions retained thereunder. 2 Please be informed that our aforementioned VAT RULING No. 004-96 dated 14 May 1996, which was reiterated and amplified in VAT RULING No. 030-99 dated 18 March 1999, pertains to the provisions of the Tax Code, as amended by R.A. No. 7716, otherwise known as the Expanded Vat Law, which was implemented beginning 01 January 1996. The provisions of E.O. Nos. 72 and 93 are not at issue in the aforesaid rulings, hence, immaterial and irrelevant in resolving the question of whether or not the Charter of PAGCOR had been effectively amended or modified by the Tax Code, as amended by R.A. No. 7716. Item No. 6 above pertains to the CTA decision in the case of ACESITE (PHILIPPINES) HOTEL CORPORATION (CTA CASE NO. 5449), dated 28 January 1999. ACESITE, a VAT-registered person, billed PAGCOR for rentals and various hotel services and charges. The main issue in this case is "Whether or not EVAT may be shifted or passed on to a tax-exempt entity such as PAGCOR " Section 13 of P.D. 1869 (PAGCOR's Charter) provides: "SEC. 13. Exemptions . . . . "(1) Customs duties, taxes and other imposts on importations . 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; 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. "(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 . "The fee or remuneration of foreign entertainers contracted by the Corporation or operator in pursuance of this provision shall be free of any tax. ISAaTH "(3) Dividend Incomes . . . . . . ." On the other hand, Section 102 (b) (3) 3 , of the Tax Code, as amended, provides that " Services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero rate; " shall be subject to the zero percent (0%) VAT, hence, no 10% VAT shall be passed-on in the invoice billing of such supplier of service. In view of the provisions under Section 13 of P.D. 1869 that PAGCOR's tax exemption privilege shall be extended to its aforementioned contractors, the CTA held that ACESITE's supply of services to PAGCOR is subject to 0% VAT, hence, ACESITE is entitled to a refund of the VAT which it paid vis-a-vis sales of services to the PAGCOR. "Petitioner has presented convincing evidence showing PAGCOR as an entity with a special charter, namely, Presidential Decree No. 1869, which categorically makes it exempt from the payment of all taxes, after paying a 5% franchise tax on its gross revenue or earnings (Exhibits I, J, K and L). Hence,. . . the services rendered by the Petitioner to PAGCOR are effectively subject to zero rate." It may be stated that the above resolution of the CTA did not touch on the issue of whether or not PAGCOR's liability for the 5% franchise tax, in lieu of all taxes, national and local, has been amended by R.A. No. 7716. The only issue resolved thereunder is whether or not PAGCOR's contractors may be imposed with the 10% VAT. However, as discussed in ISSUES NOS. II and III hereof, there is no doubt that PAGCOR's Charter has been amended by R.A. 7716; that, by virtue of the said amendment, PAGCOR's liability to the 5% franchise tax has been replaced by the 10% VAT ; and that this 10% VAT shall be in lieu of all taxes, national and local. Hence, granting arguendo, that the said CTA resolution is well placed and not inconsistent with the VAT law, it may not, however, be invoked by PAGCOR, considering the express amendments made by R.A. 7716, making PAGCOR liable to the 10% VAT, in lieu of other taxes, national and local. II That, R.A. Nos. 7716 and 8241 did not amend P.D. No. 1869, the PAGCOR's Charter because it is not engaged in the sale of service. The Tax Code, as amended by R.A. No. 7716, provides: "Any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties , renders services, and any person who imports goods shall be subject to the value-added tax . . ." 4 xxx xxx xxx "There shall be levied, assessed and collected on every sale, barter or exchange of goods or properties , a value-added tax equivalent to ten percent (10%) of the gross selling price or gross value in money of the goods or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor." 5 "xxx xxx xxx "There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use or lease of propertie s. "The phrase 'sale or exchange of services' means the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration, including . . . services of franchise grantees of telephone and telegraph, radio and television broadcasting and all other franchise grantees except those under Section 119 of this Code . . . ." 6 It is your contention, however, that PAGCOR is neither engaged in the sale of service nor in the use or lease of its properties, hence, it is not subject to the VAT. Please be informed that your above contention is also not well taken. One of PAGCOR's franchised activities is the operation of gambling casinos . TITLE I, SECTION 1 of its Charter (P.D. 1869) provides, in part, as follows: "SEC. 1. Declaration of Policy . It is hereby declared to be the policy of the State to centralize and integrate all games of chance not heretofore authorized by existing franchises or permitted by law in order to attain the following objectives: "(a) To centralize and integrate the right and authority to operate and conduct games of chance into one corporate entity to be controlled, administered and supervised by the Government; "(b) To establish and operate clubs and casinos, for amusement and recreation, including sports gaming pools (basketball, football, lotteries, etc.) and such other forms of amusement and recreation including games of chance, . . . A Gambling House (i.e., a gambling casino) means " A building, place, or room kept for use as a place to gamble, or to keep or exhibit for the purpose of gaming, any bank table, alley, machine, wheel, or device. " 7 It is very clear that PAGCOR's gambling operations is embraced under the term "sale or exchange of services, including the use or lease of properties" (supra) because this term includes the word "use" of its properties by the gamblers, e.g., its casino building and the gaming tables, slot machines, and other gambling devices or paraphernalia provided therein for use by the said gamblers. Therefore, it is equally very clear that PAGCOR is subject to the 10% VAT, pursuant to Section 102 of the Tax Code, as amended by R.A. 7716, and as renumbered by R.A. 8424 (supra). III That R.A. Nos. 7716, and 8241, being general laws, do not repeal a special law. Generalia specialibus non derogant. It is your contention that the aforesaid laws, being "general laws," cannot repeal a "special law, and that, PAGCOR's Charter under P.D. 1869, which is a "special law," cannot be amended by the said amendatory laws. In support of your argument, you cited the Court's decision in the case of "Villegas vs. Subido, 41 SCRA 190; De Jesus vs. People, 120 SCRA 760; and U.S. vs. Palacio, 33 Phil. 208." In all these cases, the Court is consistent in holding that "Repeals by implication are not favored and will not be decreed unless it is manifest that the legislature so intended . . . ." Please be informed that your above contention is likewise not well taken because it is neither relevant nor material to the legal issue at bar. This Office wholly agrees with you that the prevailing doctrine is that a special law may not be deemed amended by a general law by mere implication; that, implied repeal is not favored; and that, before a special law may be deemed amended by a general law, such amendment must be " expressly" so provided in the said general law. Please be informed, however, that this is not at issue in the aforementioned VAT ruling. On the contrary, the premise in the said ruling is that R.A. 7716 had expressly amended the tax proviso of PAGCOR's Charter. Section 3 of R.A. 7716 amended Section 102, 8 Tax Code, as follows: "There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties . "The phrase 'sale or exchange of services' means the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration, including . . . services of franchise grantees of telephone and telegraph, radio and television broadcasting and all other franchise grantees except those under Section 117 (now Sec. 119) of this Code . . . " Section 12 of R.A. 7716, further amended, Section 117 (now Sec. 119) of the Tax Code, as follows: "Sec. 117. Tax on franchises Any provision of general or special law to the contrary notwithstanding there shall be levied, assessed and collected in respect to all franchises on electric, gas and water utilities a tax of two percent (2%) on the gross receipts derived from the business covered by the law granting the franchise." Section 20 of R.A. 7716 further provided in its Repealing Clauses, as follows: "Sec. 20. Repealing Clauses . The provisions of any special law relative to the rate of franchise taxes are hereby expressly repealed . . . . " It is very clear from the foregoing express provisions of R.A. 7716, as later amended by R.A. 8241 and R.A. 8424, that " all " legislative franchise grantees became subject to the 10% VAT, except only the following which remained under the franchise tax, in lieu of the 10% VAT: 1. Franchise grantees of radio and television broadcasting whose annual gross receipts of the preceding year does not exceed Ten Million pesos (P10,000,000) and which did not opt for VAT registration; and 2. Electric, gas and water utilities. The services of a casino operator, like that of the PAGCOR, by the express provisions of R.A. 7716, is not included among the said exceptions. Very clearly, PAGCOR is expressly included in the catch all proviso " all other franchise grantees ." Therefore, PAGCOR is subject to the 10% VAT effective January 1, 1996 (supra). Moreover, the meaning of "express amendment" of a legislative franchise, by a general law, had already been resolved by the Court in the case of CAGAYAN ELECTRIC POWER & LIGHT CO., INC., petitioner, vs. COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS, respondents. 9 The issue in this case was the amendment of the old Section 24 of the Code, imposing a higher income tax on all corporations, unless otherwise specifically exempt therefrom under Sections 24 and 27 of the said Code. Section 24, old Tax Code, was amended by Section 1 of R.A. 5431, as follows: "(d) The provisions of existing special or general laws to the contrary notwithstanding, all corporate taxpayers not specifically exempt under Sections twenty-four (c) (1) and twenty-seven of this Code shall pay the rates provided in this section . All corporations, agencies, or instrumentalities owned or controlled by the Government, including the Government Service Insurance System and the Social Security System but excluding educational institutions, shall pay such rate of tax upon their taxable net income as are imposed by this section upon associations or corporations engaged in a similar business or industry." Section 9 of R.A. 5431 further provided, as follows: "SEC. 9. All special laws, acts and parts thereof, which are inconsistent with the provisions of this Act are hereby amended or repealed ." The above petitioner contended that its legislative franchise, as electric utility company, was not expressly amended by R.A. 5431. The Court denied its contention, as follows: "Republic ActNo.5431, in amending Section 24 of the TaxCode by subjecting to income tax all corporate taxpayers not expressly exempted therein and in Section 27 of the TaxCode, had the effect of withdrawing petitioner's exemption from income tax." It will be observed from the foregoing that the amendments made under R.A. 5431 were exactly similar in character to the amendments made under R.A. 7716, i.e., all taxpayers not specifically included in the exceptions, are included. In the same vein, since PAGCOR is not included among the exceptions provided by R.A. 7716, it accordingly became subject to the 10% VAT, in lieu of the franchise tax heretofore prescribed under its Charter. The Court also held, in various cases, that there is an effective repeal in any of the following cases: Where the later general act provides that all laws or parts thereof which are inconsistent therewith are repealed or modified accordingly. 10 Where the later statute is so broad in its terms and so clear and explicit in its words as to show that it was intended to cover the whole subject and therefore to displace the prior statute." 11 As between two laws on the same subject matter, which are irreconcilably inconsistent, that which is passed later prevails since it is the latest expression of the legislative will. 12 IV. That, PAGCOR's franchise is a contract between PAGCOR and the Government, hence, may not be impaired by subsequent legislation. It is your contention that, PAGCOR's franchise is in the nature of a contract between PAGCOR and the Government; that, therefore, it may not be repealed, modified or amended as to do so is a violation of the Constitutional prohibition on impairment of contracts. We regret to inform you that your above contention is also not well taken. In fact, it is inconsistent with ARTICLE XII, Section 11, of the 1987 Constitution, which provides: SEC. 11. No franchise, certificate, or any other form of authorization for the operation of a public utility shall be granted except to citizens of the Philippines or to corporations or associations organized under the laws of the Philippines at least sixty per centum of whose capital is owned by such citizens, nor shall such franchise, certificate, or authorization be exclusive in character or for a longer period than fifty years. Neither shall any such franchise or right be granted except under the condition that it shall be subject to amendment, alteration, or repeal by the Congress when the common good so requires. The State shall encourage equity participation in public utilities by the general public. The participation of foreign investors in the governing body of any public utility enterprise shall be limited to their proportionate share in its capital, and all the executive and managing officers of such corporation or association must be citizens of the Philippines." The above quoted Constitutional limitation on the power of Congress to grant franchises is a carry-over from the 1935 and the 1973 Constitution, as follows: 1935 Constitution, ART.XIV, Sec. 8 "SEC. 8. No franchise, certificate, or any other form of authorization for the operation of a public utility shall be granted except to citizens of the Philippines or to corporations or other entities organized under the laws of the Philippines sixty per centum of the capital of which is owned by citizens of the Philippines, nor shall such franchise, certificate, or authorization be exclusive in character or for a longer period than fifty years. No franchise or right shall be granted to any individual, firm or corporation, except under the condition that it shall be subject to amendment, alteration, or repeal by the Congress when the public interest so requires ." 1973 Constitution, ART. XIV, Sec. 5 "SEC. 5. No franchise, certificate, or any other form of authorization for the operation of a public utility shall be granted except to citizens of the Philippines at least sixty per centum of the capital of which is owned by such citizens, nor shall such franchise, certificate, or authorization be exclusive in character or for a longer period then fifty years. Neither shall any such franchise or right be granted except under the condition that it shall be subject to amendment, alteration, or repeal by the Batasang Pambansa when the public interest so requires . The State shall encourage equity participation in public utilities by the general public. The participation of foreign investors in the governing body of any public utility enterprise shall be limited to their proportionate share in the capital thereof." Most importantly, it has been a settled doctrine, since the inception of the 1935 Constitution until the present 1987 Constitution, that Congress has the power and Constitutional authority to amend, alter or repeal any legislative franchise. For instance, the Court held in the case of Cagayan Electric Power & Light Co., Inc . 13 that Congress could amend, alter or repeal any legislative franchise, as follows: DCcHIS "We hold that Congress could impair petitioner's legislative franchise by making it liable for income tax from which heretofore it was exempted by virtue of the exemption provided for in section 3 of its franchise. "The Co nstit ution provides that a franchise is subject to amendment, alteration or repeal by the Congress when the public interest so requires (Sec. 8, Art. XIV, 1935 Constitution; sec. 5, Art. XIV, 1973 Constitution)." "Republic ActNo.5431, in amending section 24 of the TaxCode by subjecting to income tax all corporate taxpayers not expressly exempted therein and in section 27 of the TaxCode, had the effect of withdrawing petitioner's exemption from income tax." DECISION In view of the foregoing, we regret to inform that your request for the reconsideration of our VAT RULING No. 04-96 dated 14 May 1996, as reiterated in our VAT RULING No. 030-99 dated 18 March 1999, holding that the PAGCOR is subject to the 10% VAT, in lieu of the 5% franchise tax heretofore found under its Charter (P.D. No. 1869), pursuant to the Tax Code, as amended by R.A. No. 7716, effective January 1, 1996, is hereby denied for lack of legal basis. In accordance with our letter to you dated 19 November 2000, it will be very much appreciated that PAGCOR should amend its percentage (franchise) tax returns filed for the period from 01 January 1996 until the present by filing the prescribed VAT returns and paying its corresponding value added tax liabilities, net of the percentage (franchise) tax actually paid but subject to the applicable penalties incident to late payment, pursuant to the provisions of Sections 108 (A), 248 and 249 of the Tax Code, as amended by R.A. No. 7716, and as further amended and renumbered by R.A. No. 8424. Otherwise, this Office will be constrained to institute the necessary remedies for the assessment and collection thereof, inclusive of the applicable penalties, as prescribed by law. Very truly yours, Commissioner of Internal Revenue By: (SGD.) EDMUNDO P. GUEVARA Deputy Commissioner Legal & Inspection Group Footnotes 1. Sec. 2, E.O. 72. 2. Sec. 1, E.O. 93. 3. Now Sec. 108 (B) (3), Tax Code, as renumbered by R.A. 8424. 4. Sec. 99, Tax Code, as amended by R.A. 7716 (now, Sec. 105, Tax Code, as amended and renumbered by R.A. 8424. 5. Sec. 100, Tax Code, as amended by R.A. 7716 (now, Sec. 106, Tax Code, as amended and renumbered by R.A. 8424 6. Sec. 102, Tax code, as amended by R.A. 7716 (now, Sec. 108, Tax Code, as amended and renumbered by R.A. 8424. 7. BLACK'S LAW DICTIONARY, CITING Davis v. State, Tex.Civ. App., 165 S.W. 2d 757, 758. 8. Now, Sec. 102, Tax Code, as amended, and as renumbered by R.A. 8424. 9. G.R. No. L-60126. September 25, 1985. 10. Lichoco vs. Civil Aeronautics Board G.R. No. 32979, Feb. 29, 1972, 43 SCRA 670. 11. Lichauco & Co. vs. Apostol, 44 Phil. 302. 12. Pacis vs. Avena, G.R. No. 22526, Nov. 29, 1966, 18 SCRA 907; Lopez vs. Commissioner of Customs, G.R. No. 28235, Jan. 30, 1971. 13. CAGAYAN ELECTRIC POWER & LIGHT CO., INC., vs. COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS, respondents, SECOND DIVISION [G.R. No. L-60126, September 25, 1985.]