August 9, 2017
BIR RULING NO. 359-17
P.D. 1869; 109; 27
Atty. Leonard L. Escueta
3605 One Rockwell East Tower
Rockwell Center, Makati City
Sir :
This refers to your letter dated February 6, 2017, requesting on behalf of your
client, Coast Redwood Management Solutions, Inc. ("CRMSI" for brevity), for
confirmation of your opinion that:
1. The income derived by CRMSI arising from the services rendered
to AG Interpacific Resources, Limited ("AGIRL"), an Offshore
Gaming Licensee of the Philippine Amusement and Gaming
Corporation (PAGCOR), pursuant to a Service Agreement (the
"Agreement") is subject to 5% franchise tax, in lieu of all taxes, in
accordance with Section 13 (2) (b) of Presidential Decree (PD) No.
1869, as amended;
2. All domestic purchases of goods and services by CRMSI directly
related to its gaming operation as described in the first paragraph,
shall not be subject to 12% VAT on the ground of its exemption
from all taxes pursuant to Section 13 (2) (b) of PD No. 1869, as
amended. Stated otherwise, no VAT shall be passed on to CRMSI
with respect to its domestic purchase of goods and services that is
directly related to its gaming operation as described in the first
paragraph.
Background:
CRMSI is a corporation duly organized under the laws of the Philippines and is
primarily engaged in providing technical and customer support services such as
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customer relationship, management services, data management and information
processing services, software development, customer care and information technology
services exclusively to 100% foreign-based and offshore clients including but not
limited to those engaged in interactive gaming and sports book activities. CRMSI is a
holder of multiple Certificate of Accreditation and Authority to Operate as an Online
Gaming Agent and as Business Process Outsourcing pursuant to PD No. 1869, as
amended by Republic Act (RA) No. 9487.
On the other hand, AGIRL is a corporation organized under the laws of British
Virgin Islands and is a grantee of an Offshore Gaming License by PAGCOR effective
from October 26, 2016 and is engaged in interactive online gaming, which may
include, but not limited to e-casino, sports-betting, random number generation (RNG)
and other activities or games of chance from internet users located outside the
territory of the Republic of the Philippines.
On January 31, 2017, AGIRL and CRMSI entered into a service agreement
whereby CRMSI will act as service provider to AGIRL. Specifically, the scope of
service shall include performance of interactive gaming services for and on behalf of
AGIRL, which includes operations and technical support services. In addition,
CRMSI shall also provide additional services as may be mutually agreed in writing to
be approved and registered with PAGCOR. CAIHTE
In consideration of the services provided by CRMSI, AGIRL agrees to pay a
monthly service fee to CRMSI in US dollars.
In reply, please be informed that Section 13 (2) (b) of PD No. 1869, as
amended by RA 9487, provides, viz.:
"SEC. 13. Exemptions. —
(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
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national government authority.
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(b) Others: The exemption 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 and underscoring
supplied)
Furthermore, in the case of Bloomberry Resorts and Hotels, Inc. vs. Bureau of
Internal Revenue, (G.R. No. 212530 dated August 10, 2016), the Supreme Court
unequivocally affirmed the applicability of the tax exemption provisions of PD No.
1869, as amended, to PAGCOR's licensees and the contractees. Thus, the Supreme
Court ruled that:
"As the PAGCOR Charter states in unequivocal terms that exemptions
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
PAGCOR or operator has any contractual relationship in connection with the
operations of the casino(s) authorized to be conducted under this Franchise, so
it must be that all contractees and licensees of PAGCOR, upon payment of the
5% franchise tax, shall likewise be exempted from all other taxes, including
corporate income tax realized from the operation of casinos.
For the same reasons that made us conclude in the December 10, 2014
Decision of the Court sitting En Banc in G.R. No. 215427 that PAGCOR is
subject to corporate income tax for "other related services," we find it logical
that its contractees and licensees shall likewise pay corporate income tax for
income derived from such "related services."
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Plainly, too, upon payment of the 5% franchise tax, petitioner's income
from its gaming operations of gambling casinos, gaming clubs and other
similar recreation or amusement places, and gaming pools, defined within the
purview of the aforesaid section, is not subject to corporate income tax."
(Emphasis Supplied)
With regard to the VAT exemption of CRMSI, Section 109 (1) (K) of the
National Internal Revenue Code of 1997, as amended, provides:
"SEC. 109. Exempt Transactions. — (1) Subject to the provisions of
Subsection (2) hereof, the following transactions shall be exempt from the
value-added tax:
xxx xxx xxx
(K) Transactions which are exempt under international agreements to
which the Philippines is a signatory or under special laws, except those under
Presidential Decree No. 529;" (Emphasis supplied)
Thus, PAGCOR and its licensees and contractees are exempt from the payment
of VAT because PAGCOR's charter, PD 1869, is a special law that grants the latter
exemption from taxes and such exemptions extend or inure to the benefit of its
licensees and contractees. (Philippine Amusement and Gaming Corporation v. Bureau
of Internal Revenue, G.R. No. 172087 dated March 15, 2011)
Premises being considered, this Office hereby confirms your opinion, as
follows:
1. Since AGIRL is a licensee of an offshore gaming, while CRMSI is
an accredited operator as an online gaming agent and business
process outsourcing, both issued by PAGCOR, the exemption from
taxes, fees and charges enjoyed by PAGCOR is extended to
CRMSI pursuant to Section 13 (2) (b) of PD 1869, as amended.
Therefore, the income derived by CRMSI from the Service
Agreement with AGIRL, particularly the performance of
interactive gaming services, which includes operations and
technical support services, is subject only to the 5% franchise tax,
and shall be exempted from the 30% corporate income tax under
Section 27 of the Tax Code of 1997, as amended, and consequently
to the withholding tax. However, for the purpose of applying the
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5% franchise tax, any income that may be realized from related
services or such services not falling under gaming operations, shall
be subject to the 30% corporate income tax. (Section 14 (5) of
Presidential Decree No. 1869, as amended.)
2. All domestic purchases of goods and services and importations
made by CRMSI directly related to its gaming operation as
described in the first paragraph, shall not be subject to 12% VAT
on the ground of its exemption from all taxes pursuant to Section
13 (2) (b) of PD No. 1869, as amended. Hence, no VAT shall be
passed on to CRMSI with respect to its domestic purchase of
goods and services that is directly related to its gaming operation
as described in the first paragraph. (Section 109 (1) (K) of the Tax
Code of 1997, as amended and (Philippine Amusement and
Gaming Corporation v. Bureau of Internal Revenue, G.R. No.
172087 dated March 15, 2011)
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. DETACa
Very truly yours,
(SGD.) CAESAR R. DULAY
Commissioner of Internal Revenue
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