PAGCOR vs. Bureau of Internal Revenue

PAGCOR's income derived from gaming operations is subject only to the five percent (5%) franchise tax under Section 13(2)(a) of P.D. 1869, as amended, in lieu of all other taxes, while its income from other related services is subject only to corporate income tax under Section 14(5) of P.D. 1869, as amended by R.A. No. 9337, the BIR having exceeded its authority in issuing administrative rules that conflict with the express provisions of PAGCOR's franchise.

PAGCOR operates gambling casinos, gaming clubs, and other similar recreation or amusement places under Presidential Decree No. 1869, as amended by Republic Act No. 9487. Its Charter classifies income into two distinct categories: (1) income from gaming operations under Section 13(2)(b), and (2) income from other related services under Section 14(5). Section 13(2)(a) imposes a 5% franchise tax on gross revenue from gaming operations "in lieu of all kinds of taxes," while Section 14(5) expressly subjects income from related services to income tax, excluding it from franchise tax application.

In 2005, Congress enacted R.A. No. 9337 amending the National Internal Revenue Code of 1997 (R.A. No. 8424), withdrawing PAGCOR's exemption from corporate income tax under Section 27(c) of the NIRC. Following the Supreme Court's 2011 Decision upholding this withdrawal but nullifying the VAT imposition on PAGCOR, the BIR issued RMC No. 33-2013 interpreting the Decision as subjecting both gaming income and related services income to both franchise tax and corporate income tax.

• The 2011 Decision: In G.R. No. 172087, the Court upheld the constitutionality of Section 1 of R.A. No. 9337 withdrawing PAGCOR's exemption from corporate income tax under Section 27(c) of the NIRC, but nullified BIR Revenue Regulations No. 16-2005 insofar as it subjected PAGCOR to 10% VAT.
• RMC No. 33-2013: On April 17, 2013, the BIR issued the assailed Circular interpreting the 2011 Decision as subjecting PAGCOR's income from gaming operations (casino operations, dollar pit operations, bingo, etc.) and income from "other related operations" (licensed private casinos, internet gaming, junket operations, etc.) to both corporate income tax and 5% franchise tax.
• PAGCOR's Charter Provisions: P.D. No. 1869, as amended, contains distinct tax treatment for two income streams: (1) Section 13(2)(a) imposes a 5% franchise tax on gross revenue from gaming operations "in lieu of all kinds of taxes, levies, fees or assessments of any kind, nature or description"; (2) Section 14(5) provides that income from necessary and 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."
• Franchise Extension: On June 20, 2007, R.A. No. 9487 extended PAGCOR's franchise for another 25 years without revoking or withdrawing the tax exemption provisions under its Charter.

• Erroneous Interpretation of 2011 Decision: PAGCOR maintained that RMC No. 33-2013 erroneously interpreted the March 15, 2011 Decision as subjecting gaming income to both franchise tax and income tax, and related services income to both taxes, thereby creating additional burdens not contemplated in the original decision.
• Independence of Gaming Income Exemption: Petitioner argued that the exemption of gaming income from all taxes except the 5% franchise tax under Section 13(2)(a) of P.D. 1869 exists independently of the NIRC; R.A. No. 9337 only withdrew the income tax exemption under Section 27(c) of the NIRC, which could only apply to income from related services under Section 14(5) of P.D. 1869.
• Special Law Prevails Over General Law: Petitioner contended that P.D. 1869, as amended, being a special law granting PAGCOR's franchise, prevails over R.A. No. 9337, a general law amending the NIRC; repeal by implication is not favored, and the repealing clause of R.A. No. 9337 did not mention P.D. 1869.
• Harmonious Construction: Petitioner asserted that the two laws can be harmonized—gaming income subject to franchise tax only, related services subject to income tax only—without conflict.

• Comprehensive Taxation Authority: Respondent BIR countered that R.A. No. 9337 withdrew all tax exemptions for PAGCOR, including the privilege of paying franchise tax in lieu of income tax for gaming operations, thereby subjecting all PAGCOR income to corporate income tax.
• Implementation of 2011 Decision: Respondent argued that RMC No. 33-2013 merely implemented the 2011 Decision which upheld PAGCOR's liability for corporate income tax, and that the franchise tax under P.D. 1869 was not a barrier to income taxation but an additional tax for the privilege of operating casinos.

• Tax Treatment of Gaming Income: Whether PAGCOR's income from gaming operations is subject to 5% franchise tax only or to both franchise tax and corporate income tax.
• Tax Treatment of Related Services Income: Whether PAGCOR's income from other related services is subject to corporate income tax only or to both taxes.
• Validity of RMC No. 33-2013: Whether the BIR committed grave abuse of discretion in issuing RMC No. 33-2013 subjecting gaming income to income tax and related services income to franchise tax.
• Repeal of Special Law: Whether P.D. 1869's tax provisions were repealed or amended by R.A. No. 9337.

• Gaming Income Subject to Franchise Tax Only: PAGCOR's income from gaming operations is subject only to the 5% franchise tax under Section 13(2)(a) of P.D. 1869, as amended. The franchise tax is expressly imposed "in lieu of all kinds of taxes," necessarily including corporate income tax. R.A. No. 9337 withdrew only the income tax exemption under Section 27(c) of the NIRC, which applied to income from related services, not gaming income which was already exempt under the Charter independently of the NIRC.
• Related Services Subject to Income Tax Only: Income from other related services is subject only to corporate income tax pursuant to Section 14(5) of P.D. 1869, as amended by R.A. No. 9337. The franchise tax finds no application to this income category by express provision of the Charter.
• RMC No. 33-2013 Invalid: The BIR committed grave abuse of discretion amounting to lack of jurisdiction in issuing RMC No. 33-2013, which unduly expanded the 2011 Decision and imposed additional tax burdens not supported by law. Administrative rules cannot go beyond the terms of the basic law.
• Special Law Prevails: P.D. 1869, as amended, is a special law that prevails over R.A. No. 9337, a general law. Repeal by implication is not favored, and R.A. No. 9337's repealing clause specifically mentioned other special laws (R.A. Nos. 6395 and 9136) but not P.D. 1869. The extension of PAGCOR's franchise under R.A. No. 9487 without withdrawing tax exemptions effectively continued the tax exempt status for gaming income.
• Third Parties: The Court declined to rule on whether PAGCOR's tax privilege inures to the benefit of contractees and licensees, as they are not parties to the case and the issue would be premature.

• Special Law vs. General Law: A special law prevails over a general law regardless of their dates of passage; the special is considered an exception to the general. Repeal of special laws by implication is not favored, especially where the general law's repealing clause specifically mentions other statutes but omits the special law in question.
• Tax Exemption as Legislative Grant: A franchise is a legislative grant of special privilege; extension of a franchise under the same terms and conditions constitutes a continuation of rights and privileges, including tax exemptions, unless expressly withdrawn.
• Statutory Construction Against Conflict: Every effort must be exerted to avoid conflict between statutes; if reasonable construction is possible, laws must be reconciled. Where a statute is susceptible of more than one interpretation, courts should adopt the reasonable and beneficial construction rendering provisions operative and harmonious.
• Administrative Regulations Subordinate to Law: Administrative rules and regulations cannot go beyond the terms and provisions of the basic law; in case of discrepancy, the basic law prevails.
• Nature of Tax Exemption: The grant or withdrawal of tax exemption assumes the entity is subject to tax; exemption applies only to taxes which the entity is liable to pay. An entity cannot be exempted from taxes it was not liable to pay in the first place.

• "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."
• "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."
• "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."
• "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."
• "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."

• Lopez v. Civil Service Commission, 273 Phil. 147 (1991) — Applied for the principle that a special law prevails over a general law and that repeal by implication is not favored.
• PLDT v. City of Davao, 447 Phil. 571 (2003) (Separate Opinion of Justice Antonio T. Carpio) — Cited for discussion on the relationship between franchises and general laws.
• Philippine Railway Co. v. Nolting, 34 Phil. 401 — Cited for the principle that the legislature, having specially considered the facts in granting a special charter, is not presumed to amend it by general legislation without mention.

• P.D. No. 1869, Section 13(2)(a) — Imposes 5% franchise tax on gross revenue from gaming operations "in lieu of all kinds of taxes."
• P.D. No. 1869, Section 14(5) — Subjects income from related services to income tax, excluding it from franchise tax.
• R.A. No. 9337, Section 1 — Amended Section 27(c) of NIRC, withdrawing PAGCOR's exemption from corporate income tax.
• R.A. No. 9337, Section 24 — Repealing clause mentioning specific special laws but not P.D. 1869.
• R.A. No. 9487, Section 2 — Repealing clause providing that inconsistent laws are repealed, amended, or modified.

Maria Lourdes P.A. Sereno (Chief Justice), Antonio T. Carpio, Presbitero J. Velasco, Jr., Teresita J. Leonardo-De Castro, Arturo D. Brion (no part), Lucas P. Bersamin (on official leave), Mariano C. Del Castillo, Martin S. Villarama, Jr., Jose Portugal Perez (on official leave), Jose Catral Mendoza, Bienvenido L. Reyes, Estela M. Perlas-Bernabe, Marvic M.V.F. Leonen, Francis H. Jardeleza (no part).