PAGCOR

The income of PAGCOR from gaming operations is subject to the 5% franchise tax under PD No. No. 1869, as amended, while its income from other related services is subject to corporate income tax pursuant to the same law, as well as RA No. 9337.

In our Decision dated March 15, 2011, we have already declared petitioner’s income tax liability in view of the withdrawal of its tax privilege under RA No. 9337.  However, we made no distinction as to which income is subject to corporate income tax, considering that the issue raised therein was only the constitutionality of Section 1 of R.A. No. 9337, which excluded petitioner from the enumeration of GOCCs exempted from corporate income tax.

For clarity, it is worthy to note that under PD No. 1869, as amended, PAGCOR’s income is classified into two: (1) income from its operations conducted under its Franchise, pursuant to Section 13(2) (b) thereof (income from gaming operations); and (2) income from its operation of necessary and related services under Section 14(5) thereof (income from other related services).   In RMC No. 33-2013, respondent further classified the aforesaid income as follows:

1.   PAGCOR’s income from its operations and licensing of gambling casinos, gaming clubs and other similar recreation or amusement places, gaming pools, includes, among others:

a)  Income from its casino operations;

b) Income from dollar pit operations;

c)  Income from regular bingo operations; and

d) Income from mobile bingo operations operated by it, with agents on commission basis.  Provided, however, that the agents’ commission income shall be subject to regular income tax, and consequently, to withholding tax under existing regulations.

2.  Income from “other related operations” includes, but is not limited to:

a)  Income from licensed private casinos covered by authorities to operate issued to private operators;

b)  Income from traditional bingo, electronic bingo and other bingo variations covered by authorities to operate issued to private operators;

c)  Income from private internet casino gaming, internet sports betting and private mobile gaming operations;

d)  Income from private poker operations;

e)  Income from junket operations;

f)  Income from SM demo units; and

g)  Income from other necessary and related services, shows and entertainment.

After a thorough study of the arguments and points raised by the parties, and in accordance with our Decision dated March 15, 2011, we sustain petitioner’s contention that its income from gaming operations is subject only to five percent (5%) franchise tax under PD No. 1869, as amended, while its income from other related services is subject to corporate income tax pursuant to PD No. 1869, as amended, as well as RA No. 9337.  This is demonstrable.

First.  Under PD No. 1869, as amended, petitioner is subject to income tax only with respect to its operation of related services.  Accordingly, the income tax exemption ordained under Section 27(c) of RA No. 8424 clearly pertains only to petitioner’s income from operation of related services.  Such income tax exemption could not have been applicable to petitioner’s income from gaming operations as it is already exempt therefrom under PD No. 1869, as amended, to wit:

SECTION 13.  Exemptions. –

x x x x

(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.

Indeed, the grant of tax exemption or the withdrawal thereof assumes that the person or entity involved is subject to tax.  This is the most sound and logical interpretation because petitioner could not have been exempted from paying taxes which it was not liable to pay in the first place.  This is clear from the wordings of  PD No. 1869, as amended, imposing a franchise tax of five percent (5%) on its gross revenue or earnings derived by petitioner from its operation under the Franchise in lieu of all taxes of any kind or form, as well as fees, charges or levies of whatever nature, which necessarily include corporate income tax.

In other words, there was no need for Congress to grant tax exemption to petitioner with respect to its income from gaming operations as the same is already exempted from all taxes of any kind or form, income or otherwise, whether national or local, under its Charter, save only for the five percent (5%) franchise tax.  The exemption attached to the income from gaming operations exists independently from the enactment of RA No. 8424.  To adopt an assumption otherwise would be downright ridiculous, if not deleterious, since petitioner would be in a worse position if the exemption was granted (then withdrawn) than when it was not granted at all in the first place.

Moreover, as may be gathered from the legislative records of the Bicameral Conference Meeting of the Committee on Ways and Means dated October 27, 1997, the exemption of petitioner from the payment of corporate income tax was due to the acquiescence of the Committee on Ways and Means to the request of petitioner that it be exempt from such tax.  Based on the foregoing, it would be absurd for petitioner to seek exemption from income tax on its gaming operations when under its Charter, it is already exempted from paying the same.

Second.  Every effort must be exerted to avoid a conflict between statutes; so that if reasonable construction is possible, the laws must be reconciled in that manner.

As we see it, there is no conflict between PD No. 1869, as amended, and RA No. 9337.  The former lays down the taxes imposable upon petitioner, as follows: (1) a five percent (5%) franchise tax of the gross revenues or earnings derived from its operations conducted under the Franchise, which shall be due and payable 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;  (2) income tax for income realized from other necessary and related services, shows and entertainment of petitioner.  With the enactment of RA No. 9337, which withdrew the income tax exemption under RA No. 8424, petitioner’s tax liability on income from other related services was merely reinstated.

It cannot be gainsaid, therefore, that the nature of taxes imposable is well defined for each kind of activity or operation.  There is no inconsistency between the statutes; and in fact, they complement each other.

Third.  Even assuming that an inconsistency exists, PD No. 1869, as amended, which expressly provides the tax treatment of petitioner’s income prevails over RA No. 9337, which is a general law.  It is a canon of statutory construction that a special law prevails over a general law — regardless of their dates of passage — and the special is to be considered as remaining an exception to the general.  The rationale is:

Why a special law prevails over a general law has been put by the Court as follows:

x x x x

x x x The Legislature consider and make provision for all the circumstances of the particular case.  The Legislature having specially considered all of the facts and circumstances in the particular case in granting a special charter, it will not be considered that the Legislature, by adopting a general law containing provisions repugnant to the provisions of the charter, and without making any mention of its intention to amend or modify the charter, intended to amend, repeal, or modify the special act. (Lewis vs. Cook County, 74 I11. App., 151; Philippine Railway Co. vs. Nolting 34 Phil., 401.)

Where a general law is enacted to regulate an industry, it is common for individual franchises subsequently granted to restate the rights and privileges already mentioned in the general law, or to amend the later law, as may be needed, to conform to the general law.  However, if no provision or amendment is stated in the franchise to effect the provisions of the general law, it cannot be said that the same is the intent of the lawmakers, for repeal of laws by implication is not favored.

In this regard, we agree with petitioner that if the lawmakers had intended to withdraw petitioner’s tax exemption of its gaming income, then Section 13(2)(a) of PD No. 1869 should have been amended expressly in RA No. 9487, or the same, at the very least, should have been mentioned in the repealing clause of RA No. 9337.  However, the repealing clause never mentioned petitioner’s Charter as one of the laws being repealed.  On the other hand, the repeal of other special laws, namely, Section 13 of RA No. 6395 as well as Section 6, fifth paragraph of R.A. No. 9136, is categorically provided under Section 24(a) (b) of R.A. No. 9337, to wit:

SEC. 24. Repealing Clause. – The following laws or provisions of laws are hereby repealed and the persons and/or transactions affected herein are made subject to the value-added tax subject to the provisions of Title IV of the National Internal Revenue Code of 1997, as amended:

(A)  Section 13 of R.A. No. 6395 on the exemption from value-added tax of the National Power Corporation (NPC);

(B) Section 6, fifth paragraph of R.A. No. 9136 on the zero VAT rate imposed on the sales of generated power by generation companies; and

(C) All other laws, acts, decrees, executive orders, issuances and rules and regulations or parts thereof which are contrary to and inconsistent with any provisions of this Act are hereby repealed, amended or modified accordingly.

When petitioner’s franchise was extended on June 20, 2007 without revoking or withdrawing its tax exemption, it effectively reinstated and reiterated all of petitioner’s rights, privileges and authority granted under its Charter.  Otherwise, Congress would have painstakingly enumerated the rights and privileges that it wants to withdraw, given that a franchise is a legislative grant of a special privilege to a person.  Thus, the extension of petitioner’s franchise under the same terms and conditions means a continuation of its tax exempt status with respect to its income from gaming operations.  Moreover, all laws, rules and regulations, or parts thereof, which are inconsistent with the provisions of PD No. 1869, as amended, a special law, are considered repealed, amended and modified, consistent with Section 2 of RA No. 9487, thus:

SECTION 2. Repealing Clause. – All laws, decrees, executive orders, proclamations, rules and regulations and other issuances, or parts thereof, which are inconsistent with the provisions of this Act, are hereby repealed, amended and modified.

It is settled that where a statute is susceptible of more than one interpretation, the court should adopt such reasonable and beneficial construction which will render the provision thereof operative and effective, as well as harmonious with each other.

Given that petitioner’s Charter is not deemed repealed or amended by RA No. 9337, petitioner’s income derived from gaming operations is subject only to the five percent (5%) franchise tax, in accordance with PD No. 1869, as amended.  With respect to petitioner’s income from operation of other related services, the same is subject to income tax only.  The five percent (5%) franchise tax finds no application with respect to petitioner’s income from other related services, in view of the express provision of Section 14(5) of P.D. 1869, as amended, to wit:

Section 14.  Other Conditions.

x x x x

(5) Operation of related services. — The Corporation is authorized to operate such necessary and related services, shows and entertainment. Any income that may be realized from these related services shall not be included as part of the income of the Corporation for the purpose of applying the franchise tax, but the same shall be considered as a separate income of the Corporation and shall be subject to income tax.

Thus, it would be the height of injustice to impose franchise tax upon petitioner for its income from other related services without basis therefor.

For proper guidance, the first classification of PAGCOR’s income under RMC No. 33-2013 (i.e., income from its operations and licensing of gambling casinos, gaming clubs and other similar recreation or amusement places, gambling pools) should be interpreted in relation to Section 13(2) of PD No. 1869, which pertains to the income derived from issuing and/or granting the license to operate casinos to PAGCOR’s contractees and licensees, as well as earnings derived by PAGCOR from its own operations under the Franchise.  On the other hand, the second classification of PAGCOR’s income under RMC No. 33-2013 (i.e., income from other related operations) should be interpreted in relation to Section 14(5) of PD No. 1869, which pertains to income received by PAGCOR from its contractees and licensees in the latter’s operation of casinos, as well as PAGCOR’s own income from operating necessary and related services, shows and entertainment.

As to whether petitioner’s tax privilege of paying five percent (5%) franchise tax inures to the benefit of third parties with contractual relationship with petitioner in connection with the operation of casinos, we find no reason to rule upon the same.  The resolution of the instant petition is limited to clarifying the tax treatment of petitioner’s income vis-à-vis our Decision dated March 15, 2011.  This Decision is not meant to expand our original Decision by delving into new issues involving petitioner’s contractees and licensees.  For one, the latter are not parties to the instant case, and may not therefore stand to benefit or bear the consequences of this resolution.  For another, to answer the fourth issue raised by petitioner relative to its contractees and licensees would be downright premature and iniquitous as the same would effectively countenance sidesteps to judicial process.

In view of the foregoing disquisition, respondent, therefore, committed grave abuse of discretion amounting to lack of jurisdiction when it issued RMC No. 33-2013 subjecting both income from gaming operations and other related services to corporate income tax and five percent (5%) franchise tax.  This unduly expands our Decision dated March 15, 2011 without due process since the imposition creates additional burden upon petitioner.  Such act constitutes an overreach on the part of the respondent, which should be immediately struck down, lest grave injustice results.  More, it is settled that in case of discrepancy between the basic law and a rule or regulation issued to implement said law, the basic law prevails, because the said rule or regulation cannot go beyond the terms and provisions of the basic law.

In fine, we uphold our earlier ruling that Section 1 of RA No. 9337, amending Section 27(c) of RA No. 8424, by excluding petitioner from the enumeration of GOCCs exempted from corporate income tax, is valid and constitutional.  In addition, we hold that:

1.  Petitioner’s tax privilege of paying five percent (5%) franchise tax in lieu of all other taxes with respect to its income from gaming operations, pursuant to P.D. 1869, as amended, is not repealed or amended by Section 1(c) of R.A. No. 9337;

2.  Petitioner’s income from gaming operations is subject to the five percent (5%) franchise tax only; and

3.  Petitioner’s income from other related services is subject to corporate income tax only.

In view of the above-discussed findings, this Court ORDERS the respondent to cease and desist the implementation of RMC No. 33-2013 insofar as it imposes: (1) corporate income tax on petitioner’s income derived from its gaming operations; and (2) franchise tax on petitioner’s income from other related services.

~~~Philippine Amusement And Gaming Corporation (PAGCOR) vs. The Bureau of Internal Revenue, et al.  (G.R. No. 215427, 10 December 2014, En Banc, J. Peralta)

N.B.: The foregoing case is an offshoot of G.R. No. 172087 (15 March 2011) as a consequence of the filing of petitioner of a Motion for Clarification in the latter case, alleging that RMC No. 33-2013 is an erroneous interpretation and application of the Decision rendered therein.

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