POGOs not liable for taxes before RA 11590

MANILA - The Supreme Court has struck down 2 subsections of the Bayanihan 2 Law which imposed new taxes on Philippine Offshore Gaming Operators (POGO) licensees.

In a decision dated December 7, 2021 made available to the public only recently, the Supreme Court declared unconstitutional section 11(f) of the Bayanihan 2 Law, which imposed a 5% franchise tax on gaming operations, and section 11(g) which imposed income, VAT and other taxes on non-gaming operations of POGOs.

Also voided are the Bureau of Internal Revenue (BIR) issuances implementing these provisions.

Sec. 11(f) of Bayanihan 2 Law imposed a 5% franchise tax while sec. 11(g) imposed income tax, VAT and other income taxes in POGOs to finance COVID measures.

SC clarifies that before enactment of RA 11590 in Sept. 2021, there was no valid law imposing taxes on POGOs. pic.twitter.com/qmilKyqTG9

— Mike Navallo (@mikenavallo) September 30, 2022

The high court, speaking through Associate Justice Samuel Gaerlan, considered the 2 subsections “riders” or provisions that are “not germane to the purpose of the law.”

Under the Constitution, the title of a bill passed by Congress should only have 1 subject and all parts of the bill must be expressed in 1 title.

The 2 subsections, it said, impose “new taxes” on POGO licensees which cannot be done under a law that seeks to realign funds to provide temporary relief to the pandemic.

“Bayanihan 2 is not a tax measure. Simply stated, the Bayanihan 2 Law was not enacted to impose new taxes in order to address the COVID-19 pandemic…The Bayanihan 2 Law merely realigns these already existing sources of funding and funnels it to be used for COVID-19 relief measures,” the court said.

The high court noted that prior to the enactment of Republic Act 11590 in September 2021, there were no laws imposing franchise taxes, income tax and VAT on offshore-based POGO licensees.

POGO licensees, it said, could not be subject to income tax because no income is derived from sources within the Philippines and neither can VAT be collected because it is only imposed on services and goods consumed in the Philippines.

“To reiterate, the placing of bets occurs outside the Philippines; the players must not be Filipino citizens, or within the Philippines; and the payment of the prize also occurs outside of the Philippines,” read the decision.

RA 11590 imposes a 5% gaming tax on all income derived from gaming operations while 25% income tax is imposed on income from non-gaming operations from sources within the Philippines.

But the Supreme Court stressed RA 11590 could not be applied retroactively.

The December 2021 ruling effectively made permanent a temporary restraining order it issued in January last year halting the collection of increased franchise taxes under the Bayanihan 2 Law.

• SC halts increased taxes on POGOs under Bayanihan 2

The increase in tax base was supposed to raise revenue collection from POGOs from the P7 billion estimated collection in 2019 to around P17.5 billion in 2020, which could have been used to finance COVID response.

Of the 15 magistrates at the time the ruling was promulgated in December last year, only associate justices Marvic Leonen and Amy Lazaro-Javier dissented, while then-Senior Associate Justice Estela Perlas-Bernabe rendered a concurring and dissenting opinion.

Leonen and Lazaro-Javier disagreed with the majority’s view that off-shore POGO licensees are not considered “doing business in the Philippines.”

Lazaro-Javier said POGO activities are deemed consummated in the Philippines and should be the proper subjects of government regulations and taxes.

Leonen said an emergency measure like RA 11494 or the Bayanihan 2 Law should enjoy a “presumption of constitutionality,” arguing that the phrase “Providing Funds Therefor” in the law’s title is wide enough to cover new tax measures.

While Perlas-Bernabe with declaring the provisions unconstitutional, she disagreed that the case has been rendered moot and academic by the passage of RA 11590.

She also pointed out the difficulty of implementing laws based on “dated” notion that requires physical presence within a state in the midst of the proliferation of digital commerce where an activity that produces income could take place over the internet.

The Philippines saw a rapid expansion of POGO activities just before the pandemic struck.

But POGOs have also been linked to growing number cases of murder, kidnapping, and prostitution, among other crimes, prompting authorities to crack down on illegal POGO activities.

Some 175 POGOs have been ordered shut, according to the Department of Justice. An estimated 40,000 mostly Chinese POGO workers are believed to be illegally staying in the country.

The DOJ is set to begin deportation of around 280 Chinese nationals in its custody by the end of September or early October.

• DOJ says shutdown ordered of 175 POGOs linked to crimes