CIR v. PAGCOR

 

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. SECRETARY

OF JUSTICE, and PHILIPPINE AMUSEMENT AND GAMING

CORPORATION, respondents 

G.R. No. 177387, November 9, 2016

 FACTS:  

PAGCOR has operated under a legislative franchise granted by PD No. 1869, in its Charter, 4 whose Section 13 (2) provides that:

(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 percent (5%) of the gross revenue or earnings derived by the Corporation from its operation under this Franchise.

 

Notwithstanding the aforesaid 5% franchise tax imposed, the BIR issued several assessments against PAGCOR of P13,710,145,629.67 for alleged deficiency in value-added tax (VAT), final withholding tax on fringe benefits, and expanded withholding tax of P4,078,476,977.26, P6,678,346,966.49, and P2,953,321,685.92 respectively.

PAGCOR filed a letter-protest with the BIR against Assessment Notice No. 33-1996/1997/1998 and Assessment Notice No. 33-99. 8, and later on filed a letter-protest against Assessment Notice No. 33-2000 reiterated the assertions earlier letter protest.  In reply to both letters-protest, the BIR requested PAGCOR to submit additional documents to enable the conduct of the reinvestigation.  

When CIR did not act on PAGCOR's letter-protest against Assessment Notice No. 33-1996/1997/1998 and Assessment Notice No. 33-99 within the 180-day period from the latter's submission of additional documents. On January 5, 2004, PAGCOR filed an appeal with the Secretary of Justice on relative to Assessment Notice.

Meanwhile, in response to PAGCOR's letter-protest dated March 31, 2003, BIR Regional Director issued a letter reiterating the assessment for deficiency VAT for taxable year 2000, and

reiterate the Final Assessment No. 33-2000 amounting to P2,097,426,943.00. However, the BIR only recomputed the deficiency final withholding tax on fringe benefits and expanded withholding tax, and reduced the assessments to P12,212,199.85 and P6,959,525 respectively

PAGCOR elevated its protest against Assessment Notice No. 33-2000 to the CIR, but the 180-day period prescribed by law also lapsed without any action on the part of the CIR.  Consequently, on August 4, 2004, PAGCOR brought another appeal to the Secretary of Justice covering Assessment Notice No. 33-2000.

The Secretary of Justice consolidated PAGCOR's two appeals. On December 22, 2006 SOJ rendered a resolution declaring PAGCOR exempt from the payment of all taxes except the 5% franchise tax provided in its Charter.

A special civil action for certiorari is filed after Secretary Gonzales denied CIR's motion for reconsideration.

ISSUE:

1.                  W/N the Secretary of Justice has jurisdiction to review the disputed assessments;

2.                  W/N PAGCOR is liable for the payment of VAT; and

3.                  W/N PAGCOR is liable for the payment of withholding taxes.

 

RULING:

1.    No. The Secretary of Justice has no jurisdiction to review the disputed assessments.

PAGCOR filed its appeals in the DOJ on January 5, 2004 and August 4, 2004. Philippine National Oil Company v. Court of Appeals was promulgated on April 26, 2006. The Secretary of Justice resolved the petitions on December 22, 2006. Under the circumstances, the Secretary of Justice had ample opportunity to abide by the prevailing rule and should have referred the case to the CTA because judicial decisions applying or interpreting the law formed part of the legal system of the country, and are for that reason to be held in obedience by all, including the Secretary of Justice and his Department. Upon becoming aware of the new proper construction of P.D. No. 242 in relation to R.A. No. 1125 pronounced in Philippine National Oil Company v. Court of Appeals, therefore, the Secretary of Justice should have desisted from dealing with the petitions, and referred them to the CTA, instead of insisting on exercising jurisdiction thereon. Therein lay the grave abuse of discretion amounting to lack or excess of jurisdiction on the part of the Secretary of Justice, for he thereby acted arbitrarily and capriciously in ignoring the pronouncement in Philippine National Oil Company v. Court of Appeals.

Nonetheless, the Secretary of Justice should not be taken to task for initially entertaining the petitions considering that the prevailing interpretation of the law on jurisdiction at the time of their filing was that he had jurisdiction. Neither should PAGCOR to blame in bringing its appeal to the DOJ on January 5, 2004 and August 4, 2004 because the prevailing rule then was the interpretation in Development Bank of the Philippines v. Court of Appeals. The emergence of the later ruling was beyond PAGCOR's control. Accordingly, the lapse of the period within which to appeal the disputed assessments to the CTA could not be taken against PAGCOR. While a judicial interpretation becomes a part of the law as of the date that the law was originally passed, the reversal of the interpretation cannot be given retroactive effect to the prejudice of parties who may have relied on the first interpretation.

 

2.    No. PAGCOR is exempt from payment of VAT.

CIR Arguments:

The CIR argues that PAGCOR's gambling operations are embraced under the phrase sale or exchange of services, including the use or lease of properties; that such operations are not among those expressly exempted from the 10% VAT under Section 3 of R.A. No. 7716; and that the legislative purpose to withdraw PAGCOR's 5% franchise tax was manifested by the language used in Section 20 of R.A. No. 7716.

PAGCOR is exempt from the payment of VAT, because PAGCORs charter, P.D. No. 1869, is a special law that grants petitioner exemption from taxes.

Firstly, a basic rule in statutory construction is that a special law cannot be repealed or modified by a subsequently enacted general law in the absence of any express provision in the latter law to that effect. A special law must be interpreted to constitute an exception to the general law in the absence of special circumstances warranting a contrary conclusion. R.A. No. 7716, a general law, did not provide for the express repeal of PAGCOR's Charter, which is a special law; hence, the general repealing clause under Section 20 of R.A. No. 7716 must pertain only to franchises of electric, gas, and water utilities, while the term other franchises in Section 102 of the NIRC should refer only to transport, communications and utilities, exclusive of PAGCOR's casino operations.

 Secondly, R.A. No. 7716 indicates that Congress has not intended to repeal PAGCOR's privilege to enjoy the 5% franchise tax in lieu of all other taxes.

 Although Section 3 of R.A. No. 7716 imposes 10% VAT on the sale or exchange of services, including the use or lease of properties, the provision also considers transactions that are subject to 0% VAT. On the other hand, Section 4 of R.A. No. 7716 enumerates the transactions exempt from VAT.

 "SEC. 103. Exempt transactions. — The following shall be exempt from the value-added tax:

xxx xxx xxx

"(q) Transactions which are exempt under special laws, except those granted under Presidential Decree Nos. 66, 529, 972, 1491, and 1590, and nonelectric cooperatives under republic Act No. 6938, or international agreements to which the Philippines is a signatory;

 As a result of its amendment by Republic Act No. 7716, §103 of the NIRC now provides:

§103. Exempt transactions. — The following shall be exempt from the value-added tax:

xxx xxx xxx

(q) Transactions which are exempt under special laws, except those granted under Presidential Decree Nos. 66, 529, 972,

1491, 1590 …..

 

R.A. No. 7716 does not specifically exclude PAGCOR's exemption under P.D. No. 1869 from the grant of exemptions from VAT; hence, the petitioner's contention that R.A. No. 7716 expressly amended PAGCOR's franchise has no leg to stand on.

 Moreover, the exemption of PAGCOR from VAT is supported by Section 6 of R.A. No. 9337, which retained Section 108 (B) (3) of R.A. No. 8424, thus

 SEC. 108. Value-Added Tax on Sale of Services and Use or Lease of Properties.

(B) Transactions Subject to Zero Percent (0%) Rate. The following services performed in the Philippines by VAT registered persons shall be subject to zero percent (0%) rate:

xxx xxx xxx

(3) 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 percent (0%) rate;

 Although R.A. No. 9337 introduced amendments to Section 108 of R.A. No. 8424 by imposing VAT on other services not previously covered, it did not amend the portion of Section 108 (B) (3) that subjects to zero percent rate services performed by VAT-registered persons 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 0% rate.

 PAGCOR is exempt from payment of indirect taxes

It is undisputed that P.D. 1869, the charter creating PAGCOR, grants the latter an exemption from the payment of taxes. Section 13 of P.D. 1869 pertinently provides 

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. We are one with the CA ruling that PAGCOR is also exempt from indirect taxes, like VAT, as follows: Under the above provision [Section 13 (2) (b) of P.D. 1869], the term "Corporation" or operator refers to PAGCOR.

Although the law does not specifically mention PAGCOR's exemption from indirect taxes, PAGCOR is undoubtedly exempt from such taxes because the law exempts from taxes persons or entities contracting with PAGCOR in casino operations. Although, differently worded, the provision clearly exempts PAGCOR from indirect taxes. In fact, it goes one step further by granting tax exempt status to persons dealing with PAGCOR in casino operations.

Indeed, 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. Thus, by extending the tax exemption to entities or individuals dealing with PAGCOR in casino operations, it is exempting PAGCOR from being liable to indirect taxes.

Clearly, the assessments for deficiency VAT issued against PAGCOR should be cancelled for lack of legal basis. The Court also deems it warranted to cancel the assessments for deficiency withholding VAT pertaining to the payments made by PAGCOR to its catering service  contractor. The payments made by PAGCOR to its catering service contractor are subject to zero-rated (0%) VAT in accordance with Section 13 (2) of P.D. No. 1869 in relation to Section 3 of R.A. No. 7716,

 3.    Yes. PAGCOR is liable for the payment of withholding taxes.

 a. Final Withholding Tax on Fringe Benefits

CAR PLAN (liable)

The recomputed assessment for deficiency final withholding taxes related to the car plan granted to PAGCOR's employees and for its payment of membership dues and fees.

Under Section 33 of the NIRC, FBT is imposed as:

A final tax of thirty-four percent (34%) effective January 1, 1998; thirty three percent (33%) effective January 1, 1999; and thirty-two percent (32%) effective January 1, 2000 and thereafter, is hereby imposed on the grossed-up monetary value of fringe benefit furnished or granted to the employee (except rank and file employees as defined herein) by the employer, whether an individual or a corporation (unless the fringe benefit is required by the nature of, or necessary to the trade, business or profession of the employer, or when the fringe benefit is for the convenience or advantage of the employer). The tax herein imposed is payable by the employer which tax shall be paid in the same manner as provided for under Section 57 (A) of this Code.

 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. 45 As such, PAGCOR is a mere withholding agent inasmuch as the FBT is imposed on PAGCOR's employees who receive the fringe benefit. PAGCOR's liability as a withholding agent is not covered by the tax exemptions under its Charter.

The car plan extended by PAGCOR to its qualified officers is evidently considered a fringe benefit as defined under Section 33 of the NIRC. To avoid the imposition of the FBT on the benefit received by the employee, and, consequently, to avoid the withholding of the payment thereof by the employer, PAGCOR must sufficiently establish that the fringe benefit is required by the nature of, or is necessary to the trade, business or profession of the employer, or when the fringe benefit is for the convenience or advantage of the employer.  

PAGCOR asserted that the car plan was granted "not only because it was necessary to the nature of the trade of PAGCOR but it was also granted for its convenience." The records are lacking in proof as to whether such benefit granted to PAGCOR's officers were, in fact, necessary for PAGCOR's business or for its convenience and advantage. Accordingly, PAGCOR should have withheld the FBT from the officers who have availed themselves of the benefits of the car plan and remitted the same to the BIR.

 Membership dues and fees (not liable)

As for the payment of the membership dues and fees, the Court finds that this is not considered a fringe bene􀁄t that is subject to FBT and which holds PAGCOR liable for final withholding tax. According to PAGCOR, the membership dues and fees are

58. Respondent's nature of business is casino operations and it derives business from its customers who play at the casinos. In furtherance of its business, PAGCOR usually attends its VIP customers, amenities such as playing rights to golf clubs. The membership of PAGCOR to these golf clubs and other organizations are intended to benefit respondent's customers and not its employees. Aside from this, the membership is under the name of PAGCOR, and as such, cannot be considered as fringe benefits because it is the customers and not the employees of PAGCOR who benefit from such memberships.

Considering that the payments of membership dues and fees are not borne by PAGCOR for its employees, they cannot be considered as fringe benefits which are subject to FBT under Section 33 of the NIRC. Hence, PAGCOR is not liable to withhold FBT from its employees.

b. Expanded Withholding Tax

The Court finds that PAGCOR is not liable for deficiency expanded withholding tax on its payment for: (1) audit services rendered by the Commission on Audit (COA), amounting to P4,243,977.96, 52 and (2) prizes and other promo items amounting to P16,185,936.61.

 Commission on Audit (COA) – not liable

PAGCOR's payment to the COA for its audit services is exempted from withholding tax pursuant to Sec. 2.57.5 (A) of Revenue Regulations (RR) 2-98, which states:

SEC. 2.57.5. Exemption from Withholding Tax — The withholding of creditable withholding tax prescribed in these Regulations shall not apply to income payments made to the following:

(A) National government and its instrumentalities, including provincial, city or municipal governments;

 Prizes and other promo items – not liable

The prizes and other promo items amounting to P16,185,936.61 were already subjected to the 20% final withholding tax pursuant to Section 24 (B) (1) of the NIRC.  To impose another tax on these items would amount to obnoxious or prohibited double taxation because the taxpayer would be taxed twice by the same jurisdiction for the same purpose.

Other: - liable

Hence, except for the foregoing, the Court upholds the validity of the assessment against PAGCOR for deficiency expanded withholding tax.

Other than the P4,243,977.96 payments made to COA, the remainder of the P71,611,563.60 compensation income that PAGCOR paid for the services of its contractual, casual, clerical and messengerial employees are clearly subject to expanded withholding tax by virtue of Section 79

(A) of the NIRC which reads: Sec. 79 Income Tax Collected at Source. —

(A) Requirement of Withholding. — Every employer making payment of wages shall deduct and withhold upon such wages a tax determined in accordance with the rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner: Provided, however, That no withholding of a tax shall be required where the total compensation income of an individual does not exceed the statutory minimum wage, or Five thousand pesos (P5,000) per month, whichever is higher.

 In addition, Section 2.57.3 (C) of RR 2-98 states that:

SEC. 2.57.3 Persons Required to Deduct and Withhold. — The following persons are hereby constituted as withholding agents for purposes of the creditable tax required to be withheld on income payments enumerated in Section 2.57.2:

xxx xxx xxx

(c) All government offices including government-owned or controlled corporations, as well as provincial, city and municipal governments. As for the rest of the assessment for deficiency expanded withholding tax arising from PAGCOR's (1) reimbursement for over-the-counter purchases by its agents amounting to P18,246,090.34; (2) tax payments of P6,679,807.53; (3) security deposit totalling P3,450,000.00; and (4) importations worth P194,999,366.00, the Court

observes that PAGCOR did not present sufficient and convincing proof to establish its non-liability.

With regard to the reimbursement for over-the-counter purchases by its agents, PAGCOR merely relied on BIR Ruling Nos. 129-92 and 345-88 to support its claim that it should not be liable to withhold taxes on these payments without submitting any proof to show that there were really actual payments made. There is also nothing in the records to show that the amount of P6,679,807.53 really represented PAGCOR's tax payments, or that the amount of P194,999,366.00 were, in fact, paid for PAGCOR's importations of various items in furtherance of its business.

Even the P3,450,000.00 security deposit that it claims to have been written-off based on the compromise agreement in Civil Case No. 097-31299 was not sufficiently proved to be tax exempt. The only document presented by PAGCOR to support its contention was a copy of the trial court's decision in the civil case. However, nowhere in the decision mentioned the security deposit. It is settled that all presumptions are in favor of the correctness of tax assessments. The good faith of the tax assessors and the validity of their actions are thus presumed. They will be presumed to have taken into consideration all the facts to which their attention was called.  Hence, it is incumbent upon the taxpayer to credibly show that the assessment was erroneous in order to relieve himself from the liability it imposes. PAGCOR failed in this regard. Hence, except for the assessment for deficiency expanded withholding taxes pertaining to the payments made to the COA for its audit services and for the prizes and other promo items, the Court upholds the BIR's assessment for deficiency expanded withholding taxes.

WHEREFORE, the Court PARTIALLY GRANTS the petition for certiorari; ANNULS and SETS ASIDE the Resolutions dated December 22, 2006 and March 12, 2007 of the Secretary of Justice in OSJ Case No. 2004-1 FOR LACK OF JURISDICTION; DECLARES that Republic Act No. 7716 did not repeal Section 13 (2) of Presidential Decree 1869, and, ACCORDINGLY, the PHILIPPINE AMUSEMENT AND GAMING CORPORATION is EXEMPT from value-added tax.

The Court FURTHER RESOLVES to:

(1) CANCEL Assessment No. 33-1996/1997/1998 dated November 14, 2002, which assessed PHILIPPINE AMUSEMENT AND GAMING CORPORATION for deficiency value-added tax;

(2) CANCEL Assessment No. 33-99 dated November 25, 2002, insofar as it assessed PHILIPPINE AMUSEMENT AND GAMING CORPORATION for deficiency

(a) value-added tax;

(b) expanded withholding value-added tax on payments made by PHILIPPINE AMUSEMENT AND GAMING CORPORATION to its catering service contractor;

(c) final withholding tax on fringe benefits relating to the membership fees and dues paid by PHILIPPINE AMUSEMENT AND GAMING CORPORATION for the benefit of its clients and customers; and

(d) expanded withholding tax on compensation income paid by PHILIPPINE AMUSEMENT AND GAMING CORPORATION to the Commission on Audit for its audit services, and expanded withholding tax on the prizes and other promo items, which were already subjected to the 20% final withholding tax;

(3) CANCEL Assessment No. 33-2000 dated March 18, 2003, insofar as it assessed PHILIPPINE AMUSEMENT AND GAMING CORPORATION for deficiency

(a) value-added tax;

(b) expanded withholding value-added tax on payments made by PHILIPPINE AMUSEMENT AND GAMING CORPORATION to its catering service contractor; and

(c) final withholding tax on fringe benefits relating to the membership fees and dues paid by PHILIPPINE AMUSEMENT AND GAMING CORPORATION for the benefit of its clients and customers;Respondent PHILIPPINE AMUSEMENT AND GAMING CORPORATION is DIRECTED TO PAY to the Bureau of Internal Revenue:

(1) its deficiency final withholding tax on fringe benefits arising from the car plan it granted to its qualified officers and employees under Assessment No. 33-99 and Assessment No. 33-2000; and

(2) its deficiency expanded withholding tax under Assessment No. 33-99, except on compensation income paid to the Commission on Audit for its audit services and on prizes and other promo items.

Upon receipt of respondent PHILIPPINE AMUSEMENT AND GAMING CORPORATION's payment for the foregoing tax deficiencies, the Bureau of Internal Revenue is DIRECTED TO WITHHOLD 5% thereof and TO REMIT the same to the Office of the Solicitor General pursuant to Section 11 (1) 60 of Republic Act No. 9417

 (An Act to Strengthen the Office of the Solicitor General, by Expanding and Streamlining its Bureaucracy, Upgrading Employee Skills and Augmenting Benefits, and Appropriating Funds Therefor and for Other Purposes).