PAGCOR vs. Commissioner of Internal Revenue

PAGCOR's income from gaming operations is subject only to the 5% franchise tax under PD 1869, as amended, and is exempt from corporate income tax and VAT; PAGCOR's income from other related services is subject to corporate income tax only, not franchise tax; and PAGCOR is liable for deficiency fringe benefit tax as a withholding agent for failing to withhold and remit taxes on car plan benefits granted to its officers.

PAGCOR is a government instrumentality created under PD 1869 (issued July 11, 1983), granted the franchise to operate and maintain gambling casinos, gaming pools, and other recreation or amusement places within Philippine territory. Section 13(2) of PD 1869 exempts PAGCOR from all taxes of any kind except a 5% franchise tax on gross revenues from its franchise operations, payable quarterly to the National Government in lieu of all kinds of taxes, levies, fees, or assessments. Section 14(5) of the same decree provides that income from related services, shows, and entertainment is treated as separate income subject to income tax. RA 8424 (effective January 1, 1998) included PAGCOR among GOCCs exempt from corporate income tax, but RA 9337 (effective July 1, 2005) removed PAGCOR from that exempt list. RA 9487 (enacted June 20, 2007) extended PAGCOR's franchise for another 25 years on the same terms and conditions.

PAGCOR is a government instrumentality created under PD 1869, issued on July 11, 1983, with the franchise to operate and maintain gambling casinos, gaming pools, and other recreation or amusement places within the Philippines. Under Section 13(2) of its charter, PAGCOR is exempt from all taxes of any kind except a 5% franchise tax on its gross revenues from franchise operations, payable quarterly to the National Government in lieu of all kinds of taxes, levies, fees, or assessments. Section 14(5) of the same decree provides that income from related services, shows, and entertainment is treated as separate income subject to income tax. On January 1, 1998, RA 8424 or the 1997 NIRC took effect, listing PAGCOR among GOCCs exempt from corporate income tax under Section 27(C). On July 1, 2005, RA 9337 amended Section 27(C) by removing PAGCOR from the exempt list. On June 20, 2007, RA 9487 extended PAGCOR's franchise for another 25 years, renewable for another 25 years.

On July 14, 2008, PAGCOR received a letter from the Head of Revenue Executive Assistant (HREA) of the Large Taxpayers Service, BIR, requesting an informal conference on the results of an investigation regarding all its internal revenue tax liabilities for taxable years 2005 and 2006. On August 11, 2008, PAGCOR received a Preliminary Assessment Notice from the CIR covering alleged deficiency income tax, VAT, Fringe Benefit Tax (FBT), and documentary stamp tax for taxable years 2005 and 2006. On February 3, 2009, PAGCOR received a Formal Letter of Demand with attached Assessment Notices dated December 9, 2008, for deficiency income tax, VAT, and FBT, inclusive of surcharges, interest, and compromise penalties, in the aggregate amount of ₱5,927,542,547.76. The breakdown showed total deficiency income tax, VAT, and FBT for 2005 amounting to ₱1,775,207,692.42, and for 2006 amounting to ₱4,152,334,855.34.

On March 3, 2009, PAGCOR filed a letter-protest with the CIR. On September 29, 2009, PAGCOR filed a petition for review with the CTA, alleging inaction on the part of the CIR. During the pre-trial conference on April 30, 2010, the parties submitted the case for decision without presentation of evidence, agreeing that no factual issues were involved and only legal issues remained. The CTA First Division rendered a Decision on September 5, 2011, cancelling the deficiency VAT assessments but affirming the deficiency income tax and FBT assessments with modifications. Both parties appealed to the CTA En Banc, which dismissed both appeals on July 23, 2013, and denied their motions for partial reconsideration on December 18, 2013.

• Franchise Tax in Lieu of All Taxes (PAGCOR): PAGCOR argued that under its charter, it is liable only for the 5% franchise tax, which is in lieu of all kinds of national and local taxes, levies, fees, or assessments, and that this tax privilege was not amended or repealed by RA 9337.
• Restoration of Tax Privileges by RA 9487 (PAGCOR): PAGCOR maintained that assuming its tax exemption was amended or repealed by RA 8424 and RA 9337, RA 9487, which extended its franchise for another 25 years, restored all rights, privileges, and authority granted and enjoyed under PD 1869.
• FBT Liability as Withholding Agent (PAGCOR): PAGCOR asserted that it is not liable for FBT as a withholding agent, contending that the imposition of liability violates its right to due process since the FBT was assessed against it as a final direct tax as employer and not as a withholding tax agent.
• Car Plan as Business Necessity (PAGCOR): PAGCOR argued that the car plan benefit extended to its officers was necessary in the conduct of its business and actually inured to its benefit, and therefore is not covered by FBT.
• Good Faith on Surcharges and Interests (PAGCOR): PAGCOR claimed that even assuming liability for deficiency income tax and FBT, it should only be liable for the basic tax excluding surcharges, deficiency interest, delinquency interest, and other charges, on the ground of good faith and honest belief that it was exempt.
• VAT Liability (CIR): The CIR insisted that under the 1997 NIRC, as amended, all franchise holders are liable for VAT except those listed under Section 119, and since PAGCOR is not among those exempt, it is liable for VAT as an ordinary corporate taxpayer.

• Withdrawal of Income Tax Exemption (CIR): The CIR, through the OSG, countered that PAGCOR is no longer exempt from income taxes because its exemption was effectively withdrawn by the amendments to the 1997 NIRC introduced by RA 9337.
• VAT Exemption Under Charter (PAGCOR): PAGCOR reiterated that it is only liable for the 5% franchise tax, which is in lieu of all kinds of national or local taxes, levies, or impositions, including VAT, based on the provisions of PD 1869, which were not amended, modified, or repealed by RA 9337.

• Franchise Tax vs. Income Tax on Gaming Operations: Whether PAGCOR under PD 1869, as amended by RA 9487, is liable only for the 5% franchise tax in lieu of all kinds of taxes, levies, fees, or assessments.
• Repeal of Tax Exemption: Whether PAGCOR's exemption from income tax and FBT under its charter was amended or repealed by RA 8424 and RA 9337.
• Restoration by RA 9487: Whether RA 9487, PAGCOR's amended charter, restored the rights, privileges, and authority granted under PD 1869 before the enactment of RA 8424 and RA 9337.
• FBT as Withholding Agent: Whether the CTA En Banc erred in declaring PAGCOR liable for FBT as a withholding agent, considering that such imposition allegedly violates PAGCOR's right to due process.
• Car Plan Necessity: Whether the car plan benefit extended to PAGCOR's officers was necessary in the conduct of its business and inured to its benefit, thus not covered by FBT.
• Surcharges and Interests: Whether PAGCOR is liable only for the basic tax excluding surcharges, deficiency interest, delinquency interest, and other charges.
• VAT Exemption: Whether PAGCOR is exempt from the payment of VAT.

• Franchise Tax vs. Income Tax on Gaming Operations: No. PAGCOR's income from gaming operations is subject only to the 5% franchise tax under PD 1869, as amended; RA 9337 did not repeal this tax privilege.
• Repeal of Tax Exemption: Partially. RA 9337 withdrew PAGCOR's exemption from corporate income tax only on income from other related services, not on income from gaming operations.
• Restoration by RA 9487: Yes, in part. RA 9487's extension of PAGCOR's franchise on the same terms and conditions effectively reinstated and reiterated all of PAGCOR's rights, privileges, and authority under its charter, including the 5% franchise tax privilege for gaming operations.
• FBT as Withholding Agent: Yes. PAGCOR is liable for deficiency FBT as a withholding agent; FBT is not covered by the tax exemptions under PD 1869.
• Car Plan Necessity: No. PAGCOR failed to adduce proof beyond bare allegations that the car plan was necessary to its business or for its convenience or advantage.
• Surcharges and Interests: No. PAGCOR is liable for surcharges and interests because it failed to point to any specific BIR issuance or ruling declaring it exempt; reliance on opinions of the OGCC, OSG, and DOJ is insufficient.
• VAT Exemption: Yes. PAGCOR is exempt from VAT under its charter and Section 108(B)(3) of the 1997 NIRC, as amended by RA 9337, which subjects to zero percent rate services rendered to entities whose exemption under special laws effectively subjects the supply of such services to zero rate.

• Franchise Tax vs. Income Tax on Gaming Operations: The Court relied on its earlier En Banc ruling in Philippine Amusement and Gaming Corporation vs. Bureau of Internal Revenue (749 Phil. 1010 [2014]), which clarified that RA 9337 did not repeal the tax privilege granted to PAGCOR under PD 1869 with respect to its income from gaming operations. The 5% franchise tax under Section 13(2)(a) of PD 1869 is imposed in lieu of all taxes of any kind or form, which necessarily includes corporate income tax. The income tax exemption under Section 27(C) of RA 8424 pertained only to PAGCOR's income from operation of related services, since PAGCOR was already exempt from income tax on gaming operations under its charter. What RA 9337 withdrew was PAGCOR's exemption from corporate income tax on income from other related services, previously granted under Section 27(C) of RA 8424. There is no conflict between PD 1869 and RA 9337; they complement each other, with the nature of taxes well defined for each kind of activity.

• Repeal of Tax Exemption: Even assuming an inconsistency exists, PD 1869, as a special law expressly providing the tax treatment of PAGCOR's income, prevails over RA 9337, which is a general law. The repealing clause of RA 9337 never mentioned PAGCOR's charter as one of the laws being repealed, while it categorically repealed other special laws (Section 13 of RA 6395 and Section 6 of RA 9136). Repeal of laws by implication is not favored. The grant of tax exemption or withdrawal thereof assumes that the person or entity involved is subject to tax; PAGCOR could not have been exempted from taxes it was not liable to pay in the first place.

• Restoration by RA 9487: When PAGCOR's franchise was extended on June 20, 2007 without revoking or withdrawing its tax exemption, it effectively reinstated and reiterated all of PAGCOR's rights, privileges, and authority granted under its charter. Congress would have painstakingly enumerated the rights and privileges it wanted to withdraw, given that a franchise is a legislative grant of a special privilege. The extension under the same terms and conditions means a continuation of PAGCOR's tax-exempt status with respect to its income from gaming operations. Section 2 of RA 9487 provides that all laws inconsistent with PD 1869, as amended, are repealed, amended, and modified.

• FBT as Withholding Agent: The Court relied on Commissioner of Internal Revenue vs. Secretary of Justice (G.R. No. 177387, November 9, 2016), which ruled that FBT is not covered by the exemptions under PD 1869. FBT is treated as a final income tax on the employee that shall be withheld and paid by the employer on a calendar quarterly basis. PAGCOR is a mere withholding agent, and its liability as such is not covered by the tax exemptions under its charter. Under Section 33 of the 1997 NIRC, FBT is imposed on the grossed-up monetary value of fringe benefits furnished to employees, payable by the employer, unless the fringe benefit is required by the nature of or necessary to the trade, business, or profession of the employer, or for the convenience or advantage of the employer.

• Car Plan Necessity: PAGCOR did not adduce any proof, other than bare allegations, that the car plan granted to its officers was ultimately for the benefit of its business or for its convenience or advantage. Mere allegations are not evidence and are not equivalent to proof. PAGCOR admitted it provided car plan benefits to its executives during taxable years 2005 and 2006 but did not present any evidence to prove that said benefits were required by the nature of or necessary to its business.

• Surcharges and Interests: While the Court has deleted surcharges and interests in cases where taxpayers relied in good faith on specific BIR rulings declaring them exempt, PAGCOR failed to point to any particular BIR issuance or ruling categorically declaring that it is not subject to income tax and/or FBT. PAGCOR relied on opinions of the Office of the Government Corporate Counsel, the OSG, and DOJ resolutions — government offices bereft of authority to implement or interpret tax laws. The interests and surcharges, which are mandated by law, were therefore upheld.

• VAT Exemption: The Court affirmed its ruling in Philippine Amusement and Gaming Corporation vs. Bureau of Internal Revenue (660 Phil. 636 [2011]), which cited Commissioner of Internal Revenue vs. Acesite (Phils.) Hotel Corporation (545 Phil. 1 [2007]). PD 1869 grants PAGCOR a blanket exemption from taxes with no distinction on whether the taxes are direct or indirect. Section 13(2)(b) of PD 1869 extends the exemption to entities or individuals dealing with PAGCOR in casino operations, thereby proscribing any indirect tax, like VAT, that may be shifted to PAGCOR. Section 108(B)(3) of the 1997 NIRC, as amended by RA 9337, subjects to zero percent rate services rendered to persons or entities whose exemption under special laws effectively subjects the supply of such services to zero rate. RA 9337 did not amend this provision, so the legislative intent is for PAGCOR to remain exempt from VAT.

• Special law prevails over general law — A special law prevails over a general law regardless of their dates of passage, and the special is considered as remaining an exception to the general. The Legislature, having specially considered all facts and circumstances in the particular case in granting a special charter, will not be considered to have intended to amend, repeal, or modify the special act by adopting a general law containing repugnant provisions without making any mention of such intention. Applied here: PD 1869, as a special law expressly providing the tax treatment of PAGCOR's income, prevails over RA 9337, a general law.

• Repeal by implication is not favored — Where a general law is enacted to regulate an industry, if no provision or amendment is stated in a franchise to effect the provisions of the general law, it cannot be said that the lawmakers intended to repeal the special act. Applied here: The repealing clause of RA 9337 never mentioned PAGCOR's charter, while it categorically repealed other special laws, indicating no intent to repeal PAGCOR's tax privileges.

• Statutes must be harmonized — Every effort must be exerted to avoid a conflict between statutes; if reasonable construction is possible, the laws must be reconciled. Where a statute is susceptible of more than one interpretation, the court should adopt a reasonable and beneficial construction rendering the provisions operative, effective, and harmonious. Applied here: PD 1869 and RA 9337 were found to complement each other, with the nature of taxes well defined for each kind of activity or operation.

• Tax exemption for GOCCs assumes taxability — The grant of tax exemption or the withdrawal thereof assumes that the person or entity involved is subject to tax, because one cannot be exempted from taxes one is not liable to pay in the first place. Applied here: PAGCOR's income from gaming operations was already exempt from all taxes under its charter, so the income tax exemption under Section 27(C) of RA 8424 could only have pertained to income from other related services.

• Fringe Benefit Tax not covered by charter exemptions — FBT is a final income tax on the employee, withheld and paid by the employer as a withholding agent. The employer's liability as a withholding agent is not covered by the tax exemptions under its charter. To avoid FBT imposition, the employer must establish that the fringe benefit is required by the nature of, or necessary to, the trade, business, or profession of the employer, or for the convenience or advantage of the employer.

• Good faith reliance on BIR rulings for deletion of surcharges — Surcharges and interests may be deleted when a taxpayer's good faith and honest belief on previous interpretations of the BIR constitute sufficient justification. However, reliance must be on a specific BIR ruling or issuance, not on opinions of government offices bereft of authority to implement or interpret tax laws.

• "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 [PAGCOR] could not have been exempted from paying taxes which it was not liable to pay in the first place." — This passage articulates the logical premise underlying the Court's reconciliation of PD 1869 and RA 9337, explaining why the income tax exemption under RA 8424 could only have pertained to income from related services, not gaming operations.

• "A close scrutiny of the above provisos clearly gives PAGCOR a blanket exemption to taxes with no distinction on whether the taxes are direct or indirect." — This passage, quoted from Commissioner of Internal Revenue vs. Acesite (Phils.) Hotel Corporation, defines the scope of PAGCOR's tax exemption under its charter as encompassing both direct and indirect taxes, including VAT.

• "By extending the exemption to entities or individuals dealing with PAGCOR, the legislature clearly granted exemption also from indirect taxes. It must be noted that the indirect tax of VAT, as in the instant case, can be shifted or passed to the buyer, transferee, or lessee of the goods, properties, or services subject to VAT." — This passage explains the rationale for PAGCOR's VAT exemption: Section 13(2)(b) of PD 1869 extends the exemption to PAGCOR's contractees, thereby proscribing any indirect tax that may be shifted to PAGCOR.

• "PAGCOR's liability as a withholding agent is not covered by the tax exemptions under its Charter." — This passage, quoted from Commissioner of Internal Revenue vs. Secretary of Justice, establishes that PAGCOR's charter exemptions do not extend to its obligations as a withholding agent for fringe benefit tax.

• Philippine Amusement and Gaming Corporation vs. Bureau of Internal Revenue, 660 Phil. 636 (2011) — Controlling precedent. The Court En Banc declared valid and constitutional Section 1 of RA 9337, which excluded PAGCOR from the list of GOCCs exempt from corporate income tax, finding legislative intent to require PAGCOR to pay corporate income tax. Also affirmed PAGCOR's VAT exemption.

• Philippine Amusement and Gaming Corporation vs. Bureau of Internal Revenue, 749 Phil. 1010 (2014) — Controlling precedent. In a clarification treated as a new petition, the Court En Banc upheld that PAGCOR's income from gaming operations is subject only to 5% franchise tax, while income from other related services is subject to corporate income tax. The Court ordered the CIR to cease and desist from implementing RMC No. 33-2013 insofar as it imposed corporate income tax on gaming operations income and franchise tax on related services income.

• Commissioner of Internal Revenue vs. Acesite (Phils.) Hotel Corporation, 545 Phil. 1 (2007) — Followed. Held that PAGCOR's charter grants a blanket exemption from taxes, including indirect taxes like VAT, and that Section 108(B)(3) of the 1997 NIRC subjects to zero percent rate services rendered to entities whose exemption under special laws effectively subjects the supply of such services to zero rate.

• Commissioner of Internal Revenue vs. Secretary of Justice, G.R. No. 177387, November 9, 2016 — Followed. Ruled that FBT is not covered by the exemptions under PD 1869, and that PAGCOR's liability as a withholding agent is not covered by its charter exemptions. Upheld deficiency FBT assessments on PAGCOR's car benefit plan for failure to prove the benefits were necessary to its business.

• Commissioner of Internal Revenue vs. John Gotamco & Sons, Inc. (1987) — Cited as supporting rationale. Upheld the absolute tax exemption of the WHO under an international agreement, holding that the manifest intention was to exempt the contractor so that no contractor's tax may be shifted to the contractee. Used to explain the rationale for extending PAGCOR's exemption to entities dealing with it in casino operations.

• Lewis vs. Cook County, 74 Ill. App. 151; Philippine Railway Co. vs. Nolting, 34 Phil. 401 — Cited for the doctrine that a special law prevails over a general law, as the Legislature having specially considered the circumstances of a particular case will not be presumed to have intended to repeal the special act by a subsequent general law.

• Commissioner of Internal Revenue vs. St. Luke's Medical Center, Inc., 695 Phil. 867 (2012); Michel J. Lhuillier Pawnshop, Inc. vs. Commissioner of Internal Revenue, 533 Phil. 101 (2006); Tuason, Jr. vs. Lingad, 157 Phil. 159 (1974) — Cited for the doctrine that surcharges and interests may be deleted when a taxpayer relies in good faith on specific BIR rulings declaring them exempt. Distinguished in this case because PAGCOR failed to point to any specific BIR issuance.

• Section 13(2), PD 1869 (PAGCOR Charter) — Grants PAGCOR exemption from all taxes of any kind, form, income or otherwise, as well as fees, charges, or levies, except a 5% franchise tax on gross revenues from franchise operations, payable quarterly in lieu of all kinds of taxes, levies, fees, or assessments. Applied to uphold PAGCOR's exemption from income tax and VAT on its gaming operations.

• Section 13(2)(b), PD 1869 — Extends PAGCOR's tax exemption to corporations, associations, agencies, or individuals with whom PAGCOR has any contractual relationship in connection with casino operations. Applied to establish that PAGCOR is exempt from indirect taxes like VAT, since the exemption extends to entities dealing with PAGCOR, proscribing any indirect tax that may be shifted to PAGCOR.

• Section 14(5), PD 1869 — Authorizes PAGCOR to operate necessary and related services, shows, and entertainment; provides that income from these related services shall not be included as part of PAGCOR's income for franchise tax purposes but shall be considered separate income subject to income tax. Applied to uphold PAGCOR's liability for corporate income tax on income from other related services.

• Section 27(C), RA 8424 (1997 NIRC) — Listed PAGCOR among GOCCs exempt from corporate income tax. The Court clarified that this exemption pertained only to PAGCOR's income from operation of related services, not gaming operations, which was already exempt under PD 1869.

• Section 1, RA 9337 — Amended Section 27(C) of RA 8424 by removing PAGCOR from the list of GOCCs exempt from corporate income tax. Held valid and constitutional; withdrew PAGCOR's exemption from corporate income tax only on income from other related services, not on gaming operations.

• Section 108(B)(3), 1997 NIRC, as amended by RA 9337 — Subjects to zero percent rate services rendered to persons or entities whose exemption under special laws or international agreements effectively subjects the supply of such services to zero rate. Applied to uphold PAGCOR's VAT exemption, as RA 9337 did not amend this provision.

• Section 33, 1997 NIRC — Imposes a final tax on the grossed-up monetary value of fringe benefits furnished to employees by the employer, unless the fringe benefit is required by the nature of or necessary to the trade, business, or profession of the employer, or for the convenience or advantage of the employer. Applied to uphold PAGCOR's deficiency FBT liability as withholding agent for car plan benefits.

• Section 248(A)(3), 1997 NIRC — Imposes a 25% surcharge for failure to pay the deficiency tax. Applied in the CTA Division's assessment against PAGCOR.

• Sections 249(B) and 249(C), 1997 NIRC — Impose deficiency interest at 20% per annum and delinquency interest at 20% per annum on deficiency taxes. Applied to uphold the imposition of interest on PAGCOR's deficiency income tax and FBT.

• Section 119, 1997 NIRC — Lists franchise holders exempt from VAT (radio/television broadcasting companies and gas and water utilities). The CIR argued PAGCOR is not among those exempt; the Court rejected this argument, finding PAGCOR's VAT exemption under its charter and Section 108(B)(3).

• Section 2, RA 9487 — Repealing clause providing that all laws inconsistent with PD 1869, as amended, are repealed, amended, and modified. Applied to support the conclusion that RA 9487's extension of PAGCOR's franchise on the same terms and conditions reinstated its tax privileges for gaming operations.

Carpio (Chairperson), Peralta, and Perlas-Bernabe, JJ., concurred. Reyes, Jr., J., was on leave.