EN BANC
G.R. No. 252965. December 07, 2021
SAINT WEALTH LTD., AS REPRESENTED BY DAVID BUENAVENTURA & ANG LAW OFFICES, Petitioner, v. BUREAU OF INTERNAL REVENUE, HEREIN REPRESENTED BY HON. CAESAR R. DULAY, IN HIS CAPACITY AS COMMISSIONER OF THE BUREAU OF INTERNAL REVENUE, AND JOHN DOES AND JANE DOES, AS PERSONS ACTING FOR, IN BEHALF, OR UNDER THE AUTHORITY OF RESPONDENTS, Respondents.
[G.R. No. 254102]
MARCO POLO ENTERPRISES LIMITED, MG UNIVERSAL LINK LIMITED, OG GLOBAL ACCESS LIMITED, PRIDE FORTUNE LIMITED, VIP GLOBAL SOLUTIONS LIMITED, AG INTERPACIFIC RESOURCES LIMITED, WANFANG TECHNOLOGY MANAGEMENT LTD., IMPERIAL CHOICE LIMITED, BESTBETINNET LIMITED, RIESLING CAPITAL LIMITED, GOLDEN DRAGON EMPIRE LTD., ORIENTAL GAME LIMITED, MOST SUCCESS INTERNATIONAL GROUP LIMITED, AND HIGH ZONE CAPITAL INVESTMENT GROUP LIMITED, Petitioners, v. THE SECRETARY OF FINANCE, IN THE PERSON OF CARLOS G. DOMINGUEZ III AND THE COMMISSIONER OF INTERNAL REVENUE IN THE PERSON OF CAESAR R. DULAY, Respondents.
D E C I S I O N
GAERLAN, J.:
These are consolidated petitions for certiorari and prohibition with urgent prayer for the issuance of a temporary restraining order (TRO) and/or preliminary injunction (Consolidated Petitions),1 seeking to annul and set aside: (1) Section 11(f) and (g) of Republic Act (R.A.) No. 11494 (Bayanihan 2 Law); (2) Revenue Regulation (RR) No. 30-2020 (RR No. 30-2020) of the Department of Finance (DOF) and the Bureau of Internal Revenue (BIR); (3) Revenue Memorandum Circular (RMC) No. 64-2020 (RMC No. 64-2020) of the BIR; (4) RMC No. 102-2017 of the BIR; and (5) RMC No. 78-2018 of the BIR (the Assailed Tax Issuances).
The Antecedents
In 1983, Presidential Decree No. 1869 (PAGCOR Charter) was enacted, consolidating all laws relative to the franchise and powers of the Philippine Amusement and Gaming Corporation (PAGCOR).2 Under Section 10 of the PAGCOR Charter, PAGCOR is granted rights, privileges, and authority to operate and license gambling casinos, gaming clubs, and other similar recreation or amusement places within the territorial jurisdiction of the Philippines.3chanRoblesvirtualLawlibrary
From 2016, the Philippines began regulating online gaming hubs, specifically the Philippine Offshore Gaming Operators (POGOs). Thus, on September 1, 2016, the PAGCOR issued the Rules and Regulations for Philippine Offshore Gaming Operations (POGO Rules and Regulations).4chanRoblesvirtualLawlibrary
The POGO Rules and Regulations defines offshore gaming as "the offering by a licensee of PAGCOR authorized online games of chance via the internet using a network and software or program, exclusively to offshore authorized players excluding Filipinos abroad, who have registered and established an online gaming account with the licensee."5 Moreover, the POGO Rules and Regulations explains that offshore gaming has three components:
chanroblesvirtuallawlibrary
The POGO Rules and Regulations further provides that POGOs must register with PAGCOR. Upon registration, the POGO is given an Offshore Gaming License (OGL). Entities who may be given an OGL are either: (1) Philippine-based operators; or (2) offshore-based operators. Philippine-based operators are corporations organized in the Philippines which will either conduct offshore gaming operations themselves or engage the services of PAGCOR-accredited service providers. Meanwhile, offshore-based operators are corporations organized in any foreign country which will engage the services of PAGCOR-accredited local gaming agents and/or service providers for its offshore gaming operations.7chanRoblesvirtualLawlibrary
b.l. prize consisting of money or something else of value which can be won under the rules of the game. b.2. a player who: b.2.a being located outside of the Philippines and not a Filipino citizen, enters the game remotely or takes any step in the game by means of a communication device capable of accessing an electronic communication network such as the internet. b.2.b gives or undertakes to give, a monetary payment or other valuable consideration to enter in the course of, or for, the game; and b.3. the winning of a prize is decided by chance.6
Thus, under RMC No. 102-2017, Licensees must pay a five percent (5%) franchise tax, in lieu of all other taxes, for their income arising from their gaming operations. Such franchise tax is based on their entire gross gaming revenues. Meanwhile, for income arising from non-gaming operations, Licensees must pay normal income tax, value-added tax (VAT), and other applicable taxes.8chanRoblesvirtualLawlibrary
a) The entire gross gaming receipts/earnings or the agreed or pre-determined minimum monthly revenues/income from Gaming Operations under existing rules, whichever is higher, shall be subject to a franchise tax of five percent (5%), in lieu of all kinds of taxes, levies, fees or assessments of any kind, nature or description. This income is therefore exempt from any kind of tax, income or otherwise, as well as fees, charges or levies of whatever nature, whether national or local. b) Income from Other Related Services income from non-gaming operations) shall be subject to normal income tax, value-added tax and other applicable taxes, as may be deemed appropriate. The 5% franchise tax in lieu of all taxes shall not apply. c) A Licensee deriving income from both gaming operations and from other related services shall be subject to 5% franchise tax on its gaming revenues and normal income tax, value-added tax and other applicable taxes on its non-gaming revenues. d) An Other Entity, specifically including the gaming agent, Service Provider and Gaming Support Provider, who is also a POGO Licensee shall be taxed 5% Franchise tax on its gaming activities and subject to the normal tax rate and other appropriate taxes on its non-gaming operations. An Other Entity, who is not a POGO Licensee, deriving or earning only Income from Other Related Services or from non-gaming operations shall be subject to normal income tax, value-added tax and other applicable taxes on its entire revenues. e) Income payments made by POGO Licensees or any other business entity licensed or authorized by PAGCOR for all their purchases of goods and services shall [be] subject to withholding taxes as may be appropriate and applicable. f) Compensation, fees, commissions or any other form of renumeration as a result of services rendered to POGO licensees or any other business entity licensed by PAGCOR shall be subject to applicable withholding taxes under existing revenue laws and regulations. g) Purchases (local or imported) and sale (local or international) of goods (tangible or intangible) or services shall be subject to existing tax laws and revenue issuances, as may be applicable.
On June 24, 2020, the BIR issued RMC No. 64-2020, revising RMC 46-2020, as follows:
- Conditions
1. Registered with the concerned Revenue District Office (RDO) having jurisdiction over the place of business;cralawlawlibrary
2. Submit copies of 2019 & First Quarter of 2020 Franchise Tax Quarterly returns and proof of payments;cralawlawlibrary
3. Remitted and paid the withholding taxes due from the months of January to April, 2020;cralawlawlibrary
4. Submission of a notarized undertaking to pay all tax arrears for prior years;cralawlawlibrary
5. Failure to comply with any of the above will result in the denial of the issuance of a BIR Clearance for resumption of operations.- Documentary Requirements
1. Copy of Application for Registration of Corporations, et al. duly received by the concerned RDO (BIR Form No. 1903) or BIR Certificate of Registration (COR), if already registered;cralawlawlibrary
2. Copies of Franchise Tax Returns (BIR Form No. 2553) for the taxable quarters of 2019 and 1st quarter of 2020 together with proof of payments;cralawlawlibrary
3. Copies of Monthly Remittance Form for Income Taxes Withheld (BIR Form Nos. 1601-C and 0619-E and F), Quarterly Remittance Return of Income Taxes Withheld (BIR Form 1601-EQ and FQ) or Payment Form (BIR Form No. 0605) for January to April, 2020; and
4. Notarized Undertaking to pay all tax arrears for prior years.
On September 11, 2020, the Bayanihan 2 Law, entitled "An Act Providing for COVID-19 Response and Recovery Interventions and Providing Mechanisms to Accelerate the Recovery and Bolster the Resiliency of the Philippine Economy, Providing Funds Therefor, and For Other Purposes," was enacted as an emergency response law to address the COVID-19 pandemic. Section 11 of the Bayanihan 2 Law outlines the sources of funding for the COVID-19 measures to be undertaken by the government.11 Among others, Section 11 mentions a five percent (5%) franchise tax based on the gross bets or turnovers earned by POGOs:
- Conditions
1. Registered with the concerned Revenue District Office (RDO) having jurisdiction over the place of business;cralawlawlibrary
2. Payment of Franchise Tax and submit proof of payments;cralawlawlibrary
3. Remitted and paid the withholding taxes, if applicable;cralawlawlibrary
4. Submission of a notarized undertaking to pay tax arrears; and
5. Failure to comply with any of the above will result in the denial of the issuance of a BIR Clearance for resumption of operations.- Documentary Requirements
1. Copy of Application for Registration of Corporations, et al. duly received by the concerned RDO (BIR Form No. 1903) or BIR Certificate of Registration (COR), if already registered;cralawlawlibrary
2. Copies of Franchise Tax Returns (BIR Form No. 2553) together with proof of payments;cralawlawlibrary
3. Copies of Monthly Remittance Form for Income Taxes Withheld (BIR Form Nos. 1601-C and 0619-E and F), Quarterly Remittance Return of Income Taxes Withheld (BIR Form 1601-EQ and FQ) or Payment Form (BIR Form No. 0605) for January to April, 2020; and
4. Notarized Undertaking to pay tax arrears.
To implement Section 11(f) and (g) of the Bayanihan 2 Law, the BIR and the DOF issued RR No. 30-2020 dated September 30, 2020, which provides:The tax shall be computed on the peso equivalent of the foreign currency used, based on the prevailing official exchange rate at the time of payment, otherwise the same shall be considered as a fraudulent act constituting under declaration of taxable receipts or income, and shall be subject to interests, fines and penalties under Sections 248(B), 249(B), 253, and 255 of the National Internal Revenue Code of the Philippines.
- SECTION 11. Sources of Funding. — The enumerated subsidy and stimulus measures, as well as all other measures to address the COVID-19 pandemic shall be funded from the following:
- x x x x
(f) Amounts derived from the five percent (5%) franchise tax on the gross bets or turnovers or the agreed pre-determined minimum monthly revenues from gaming operations, whichever is higher, earned by offshore gaming licensees, including gaming operators, gaming agents, services-providers and gaming support providers;cralawlawlibrary
(g) Income tax, VAT, and other applicable taxes on income from non-gaming operations earned by offshore gaming licensees, operators, agents, service providers and support providers.
After two (2) years or upon a determination that the threat of COVID-19 has been successfully contained or abated, whichever comes first, the revenues derived from franchise taxes on gross bets or turnovers under paragraph (f) and income from non-gaming operations under paragraph (g) shall continue to be collected and shall accrue to the General Fund of the Government. The BIR shall implement closure orders against offshore gaming licensees, operators, agents, service providers and support providers who fail to pay the taxes due, and such entities shall cease to operate.12 (Emphasis supplied)
The Saint Wealth Petition
- Section 3. Sources of Funding for the Subsidy, Stimulus Measures, and Other Measures to address the COVID-19 Pandemic. –
- a. Franchise Tax at the rate of five percent (5%) imposed on the gross bets or turnovers, or the agreed pre-determined minimum monthly revenues from gaming operations, whichever is higher, earned by offshore gaming licensees, including gaming operators, gaming agent, service providers and gaming support providers.
b. Income Tax, Value-Added Tax, and other applicable taxes imposed on income from Non-Gaming Operations earned by offshore gaming licensees, including gaming operators, gaming agent, service providers and gaming support providers.
Considering that a reasonable classification exists between Saint Wealth, an offshore-based POGO licensee, and Philippine-based operators, the BIR should treat them differently and should not impose similar tax liabilities on these different classes of entities.17chanRoblesvirtualLawlibrary
- There is a substantial distinction between Philippine-based entities and offshore-based POGO licensees because the former performs services within the Philippines, while the latter performs services outside of the Philippines. Hence, the former is subject to tax for income from services rendered within the Philippines, while the latter is not subject to tax for its income derived from services performed abroad.
- The classification is germane to the purpose of RMC 64-2020, because its purpose is to regulate POGO licensees and operators which are within the taxing authority of the BIR. Thus, only those entities which are within the taxing authority of the BIR may be subjected to the BIR's regulations.
- The distinction is not limited to existing conditions only because the distinction is based on established principles in taxation with regard to classifying taxable entities.
- The distinction applies equally to all members of the same class. The distinction between Philippine-based entities and offshore-based POGO licensees is equally applicable to the members of each class.16
The subject matter of the Bayanihan 2 Law is the implementation of COVID-19 relief measures. It is not a tax measure. However, Section 11(f) and (g) of the said law impose new taxes upon POGOs, which cannot be found in any other legislation. Moreover, the Bayanihan 2 Law is a temporary relief measure. However, under the said law, the collections under Section 11(f) and (g) shall subsist beyond the effectivity of the Bayanihan 2 Law, and even after the COVID-19 pandemic is successfully contained. Clearly, therefore, Section 11(f) and (g) of the Bayanihan 2 Law go beyond the subject matter of the law.22chanRoblesvirtualLawlibrarySecond, Section 11(f) of the Bayanihan 2 Law violates substantive due process, and is arbitrary and confiscatory:24chanRoblesvirtualLawlibrary
Furthermore, Section 11(f) and (g) of the Bayanihan 2 Law are not germane to the purpose of the law. Again, the Bayanihan 2 Law is a temporary pandemic relief measure. Thus, there is no logical connection between the perpetual tax imposition under Section 11(f) and (g) to the purpose of the law which is to provide a temporary pandemic relief measure.23cralawredlibrary
The concept of a tax based on gross bets or turnover of POGO licensees was introduced for the first time in the Bayanihan 2 Law, pursuant to a last minute change during the Bicameral Conference Committee meeting. As a result of such change, POGO licensees are now being subjected to tax, not only on their earnings, receipts, or income, but even on the winnings that they pay out to patrons.25chanRoblesvirtualLawlibraryThird, Section 11(f) of the Bayanihan 2 Law is repugnant to substantive due process because it whimsically disregards the principle of territoriality in taxation:27chanRoblesvirtualLawlibrary
Clearly, it is arbitrary and confiscatory to tax POGO licensees on the basis of gross bets or turnover because these do not equate to earnings, income, or wealth flowing to the POGO licensees. Such rule likewise violates the Constitutional mandate that the rule of taxation shall be uniform, and equitable, and that Congress shall evolve a progressive system of taxation.26cralawredlibrary
Section 11(f) of the Bayanihan 2 Law is unconstitutional because it taxes an activity that does not take place in the Philippines. Under the POGO Rules and Regulations, the activity which generates gaming revenue or income for offshore-based POGO licensees is the game of chance or offshore gaming. This is because income is generated only when patrons access the gaming website, place bets, and then lose their bets. Therefore, the situs of income derived from offshore gaming is the place where such game is played. Notably, the PAGCOR expressly prohibits POGO licensees from the following activities: (1) allowing their gaming websites to be accessed within Philippine territory; (2) allowing the placing of bets within Philippine territory; (3) allowing the paying of winnings within the Philippine territory; and (4) allowing Filipino citizens, wherever located, and foreign nationals while in the Philippines, from accessing their games through their websites. From the foregoing, it is clear that the income from offshore gaming operations are from sources outside the Philippine jurisdiction because the activity that produces the income occurs abroad – the online gaming websites are operated and accessed abroad, the bets are placed abroad, and the winnings are paid abroad.28cralawredlibraryFourth, Section 11(f) of the Bayanihan 2 Law violates the equal protection clause:29chanRoblesvirtualLawlibrary
The Bayanihan 2 Law violates the equal protection clause for the following reasons: (1) it is the only statute that taxes a business entity even for its losses (taxing turnover); and (2) it is the only statute that taxes foreign corporations for income earned abroad. Thus, only offshore-based POGO licensees are subjected to the type of tax treatment imposed under Section 11 (f) of the Bayanihan 2 Law.30chanRoblesvirtualLawlibraryFifth, Section 11(g) of the Bayanihan 2 Law is also unconstitutional because it whimsically disregards the principle of territoriality in taxation. Similar to Section 11(f) of the Bayanihan 2 Law, Section 11(g) also violates the principle of territoriality in taxation because it taxes "non-gaming" income of offshore-based POGO licensees derived from sources abroad. Section 11(g) likewise disregards the destination principle because it imposes VAT on goods and services which are consumed outside the territory of the Philippines.32chanRoblesvirtualLawlibrary
Moreover, the requirements for a valid classification under the equal protection clause are not met. There is no substantial distinction between offshore-based POGO licensees and other gaming businesses to justify taxing POGO licensees based on gross bets or turnover when other similar gaming business (such as casinos operating in the Philippines and licensed by PAGCOR) are only subjected to a five percent (5%) franchise tax based on gross gaming revenues. Gross gaming revenue is the total sum received less the total of all sums paid out as winnings to casino players. There is likewise no substantial distinction between offshore-based POGO licensees and other foreign corporations to justify the tax treatment of taxing POGO licensees even for income derived abroad. Finally, the discrimination against POGO licensees is not germane to the purpose of the law because such discrimination has no logical connection to the purpose of the Bayanihan 2 Law, which, again, is only a temporary pandemic relief measure.31cralawredlibrary
RMC No. 102-2017 was issued purportedly to clarify the taxability of POGOs. It then imposed a franchise tax of five percent (5%) on the gross gaming revenues of POGOs, including offshore-based POGO licensees. However, prior to the Bayanihan 2 Law, there was no statute which imposed taxes on the gaming revenue of offshore-based POGOs.36chanRoblesvirtualLawlibraryNinth, RMC No. 102-2017 is confiscatory and violates the equal protection clause. Similar to the provisions of the Bayanihan 2 Law, RMC No. 102-2017 discriminates against offshore-based POGO licensees, making them the only foreign corporations subject to taxes for income abroad, therefore, violating the principle of territoriality. There is also no substantial distinction or justification to treat offshore-based POGO licensees differently and tax them on income from sources abroad when other foreign corporations are not subjected to the same.38chanRoblesvirtualLawlibrary
Apparently, in issuing RMC No. 102-2017, the BIR based the imposition of the five percent (5%) franchise tax on gross gaming revenues on the PAGCOR Charter. However, the PAGCOR Charter grants PAGCOR and its contractees (licensees) operating within the territorial jurisdiction of the Philippines an exemption from all national and local fees and taxes in exchange for the payment of the five percent (5%) franchise tax. The PAGCOR Charter does not authorize the collection of any new tax whatsoever. It cannot be a source of a new tax on offshore gaming done online, and outside the jurisdiction of the Philippines. Considering that there is no law which allows for the taxation of foreign-sourced income of foreign corporations, including offshore-based POGO licensees, RMC No. 102-2017 has no legal basis, and therefore, must be struck down and declared void.37cralawredlibrary
Issuance of the TRO
- The Marco Polo petitioners have a clear and unmistakable right against deprivation of property without due process of law.41chanRoblesvirtualLawlibrary
- Section 11(f) and (g) of the Bayanihan 2 Law and the Assailed Tax Issuances directly and specifically target offshore-based POGO licensees such as the Marco Polo petitioners. The imposition of the taxes in question would amount to a deprivation of their property without due process of law, and is a material and substantial invasion of their constitutional rights.42chanRoblesvirtualLawlibrary
- There is an extreme urgency for the issuance of injunctive relief because if the same is not issued, the Marco Polo petitioners would bleed financially because of illegal and oppressive taxes.43chanRoblesvirtualLawlibrary
- The Marco Polo petitioners will suffer irreparable injury if injunctive relief is not granted. If they are forced to cease operations, either because of closure orders or because they cannot afford to pay the illegal and oppressive taxes, their business reputations will be tarnished, and they will lose their clientele who may decide to patronize other operators permanently.44
Section 26(1), Article VI of the Constitution requires that "[e]very bill passed by the Congress shall embrace only one subject which shall be expressed in the title thereof." Such requirement is satisfied if all the parts of the statute are related, and are germane to the subject matter expressed in the title, or as long as they are not inconsistent with the general subject and title of the law.48chanRoblesvirtualLawlibrarySecond, Section 11(f) and (g) of the Bayanihan 2 Law, as well as the Assailed Tax Issuances, do not violate the petitioners' right to due process:51chanRoblesvirtualLawlibrary
The full title of the Bayanihan 2 Law provides: "An Act Providing for COVID-19 Response and Recovery Interventions and Providing Mechanisms to Accelerate the Recovery and Bolster the Resiliency of the Philippine Economy, Providing Funds Therefor, And For Other Purposes." The phrase "Providing Funds Therefor" shows that Section 11 of the said law, which enumerates the existing sources of funding for COVID-19 relief measures, is germane to the purpose of the law. Furthermore, Section 11(f) and (g) of the Bayanihan 2 Law do not impose new taxes because as early as 2017 and pursuant to RMC 102-2017, revenues derived by POGO operators have been subject to a five percent (5%) franchise tax.49chanRoblesvirtualLawlibrary
Clearly, Section 11(f) and (g) of the Bayanihan 2 Law are not riders but are valid sources of funds, the identification of which is germane to the subject and purpose of the law. As such, the Bayanihan 2 Law did not impose any new tax, but merely allowed the realignment of collections from already existing taxes.50cralawredlibrary
Section 11(f) and (g) of the Bayanihan 2 Law are valid and constitutional. The collection of franchise tax under the said law does not violate the principle of territoriality in taxation because what is being collected is a tax not based on income, but rather, on the exercise of a privilege. Since such franchise tax partakes of the nature of an excise tax, the situs of taxation is the place where the privilege is exercised, regardless of the place where the services are performed, or where the products are delivered.52chanRoblesvirtualLawlibraryThird, Section 11(f) and (g) of the Bayanihan 2 Law, as well as the Assailed Tax Issuances, do not violate the equal protection clause.56 There exists a reasonable classification between offshore-based POGO licensees and other foreign corporations that justifies the difference in treatment under the Bayanihan 2 Law:
RR No. 30-2020, which implements Section 11(f) and (g) of the Bayanihan 2 Law, is valid, and enjoys the presumption that the legislature intended to enact a valid, sensible, and just law. Furthermore, it bears emphasis that the NIRC empowers the DOF Secretary to promulgate revenue regulations to ensure effective enforcement of tax laws. Considering that RR No. 3-02020 was issued by the proper authority (the DOF Secretary and the BIR), and in accordance with a valid statute enacted by Congress, the same enjoys the presumption of validity.53chanRoblesvirtualLawlibrary
RMC No. 102-2017 has statutory basis. It was issued by the BIR in accordance with the PAGCOR Charter, which imposes a five percent (5%) franchise tax on the gross gaming revenues of businesses engaged in gambling operations under the mantle of PAGCOR. Clearly, the tax mentioned in RMC No. 102-2017 is not a new tax.54chanRoblesvirtualLawlibrary
RMC No. 78-2018 and RMC No. 64-2020, which impose requirements for POGO registration and BIR clearance, are valid. Again, these issuances did not impose new taxes on POGO licensees. They merely provide for guidelines for registration and application for a BIR Clearance in connection with their resumption of operations. Notably, the act of providing guidelines is within the powers of the BIR as the administrative body tasked to enforce tax laws, and administrative issuances. Hence, RMC No. 78-2018 and RMC No. 64-2020 have in their favor the presumption of legality.55cralawredlibrary
For the same reasons, RMC No. 102-2017, RMC No. 782018 and RMC No. 64-2020 do not violate the equal protection clause because there are valid classifications and distinctions to justify the difference in treatment between POGO licensees and other corporations.
- Not all foreign corporations are engaged in offshore gaming, and not all foreign corporations are required to obtain a license from PAGCOR before they could operate. Moreover, with the recognition that online activity is sufficient to constitute doing business in the Philippines, foreign corporations engaged in offshore gaming are regarded as resident foreign corporations engaged in business in the Philippines. Clearly, substantial distinctions exist between foreign corporations engaged in offshore gaming, and foreign corporations.57chanRoblesvirtualLawlibrary
- The classification is germane to the purpose of the law since Section 11(f) and (g) of the Bayanihan 2 Law are mechanisms to accelerate the recovery of the Philippine economy.58chanRoblesvirtualLawlibrary
- The classification applies equally to all members of the same class – all foreign corporations granted with an OGL.59chanRoblesvirtualLawlibrary
- The classification is not limited to existing conditions since the Bayanihan 2 Law itself provides for the collection of taxes under Section 11(f) and (g) even after the COVID-19 pandemic is successfully contained.60
The principle of situs of taxation only applies to income taxation. Clearly, such principle does not apply in the imposition of franchise tax – the tax imposed upon POGO licensees. Hence, in imposing franchise tax on POGO licensees, the location or the situs of their income is immaterial, because what is being taxed is the exercise of their rights and privileges granted to them by the government.62chanRoblesvirtualLawlibraryIn the Consolidated Comment, the respondents likewise moved for the reconsideration of the issuance of the TRO. The respondents argued that the requisites for the issuance of a TRO were not met because:
Nevertheless, assuming arguendo that the principle of situs of taxation applies, the revenues of POGOs are still subject to tax as they are considered income within the Philippines. The income-producing activity of POGOs is its entire gaming operations, which consist of operating the software, taking bets, provision of gaming, provision of services, and streaming of the games. Such gaming operations, or parts of it, are done in the Philippines. Thus, the revenues derived from these activities are taxable in the Philippine jurisdiction.63chanRoblesvirtualLawlibrary
Moreover, offshore-based POGO licensees are considered resident foreign corporations, and as such, they are taxable in the Philippines. Based on the Opinion of the Office of the General Counsel of the Securities and Exchange Commission (SEC), the setting up of game servers in the Philippines by a foreign corporation is considered as "doing business" in the Philippines. According to the SEC, since these game servers will be in continued operations while being physically present in the Philippines, the foreign corporation which set up these servers are considered to be engaged in activities which imply a continuity of commercial dealings in the Philippines.64chanRoblesvirtualLawlibrary
Meanwhile, as regards the income tax and VAT imposed upon revenues from non-gaming operations, these non-gaming operations are services performed in the Philippines. Thus, these are subject to normal income tax, VAT, and other applicable taxes under the NIRC.65chanRoblesvirtualLawlibrary
With respect to the principle of uniformity of taxation, the taxes imposed upon POGO licensees are uniform because they are imposed on all POGOs wherever they operate. Uniformity of taxation simply requires that all subjects or objects of taxation, similarly situated, are to be treated alike.66cralawredlibrary
Legislative Developments During the
- The petitioners failed to show that they have a clear legal right as there is no violation of the "one subject, one title," due process, and equal protection clauses of the Constitution.67chanRoblesvirtualLawlibrary
- The petitioners failed to prove the element of grave and irreparable injury. The injury or damage sought to be prevented is not irreparable and is actually capable of pecuniary estimation. Moreover, the petitioners have other remedies such as tax refund or tax credit under the NIRC.68chanRoblesvirtualLawlibrary
- The petitioners failed to show extreme necessity for the issuance of injunctive relief.69
Section 125-A. Gaming Tax on Services Rendered by Offshore Gaming Licensees. – Any provision of existing laws, rules or regulations to the contrary notwithstanding, the entire gross gaming revenue or receipts or the agreed predetermined minimum monthly revenue or receipts from gaming, whichever is higher, shall be levied, assessed, and collected a gaming tax equivalent to five percent (5%), in lieu of all other direct and indirect internal revenue taxes and local taxes, with respect to gaming income x x x. (Emphasis supplied)As regards income derived from non-gaming operations, R.A. No. 11590 imposes a 25% income tax on Philippine-based POGOs for their income derived from sources within and without the Philippines.72 On the other hand, for offshore-based POGO licensees, they are subject to 25% income tax for their income only from sources within the Philippines:73chanRoblesvirtualLawlibrary
Sec. 28. Rates of Income Tax on Foreign Corporations. –Finally, with respect to the imposition of VAT, R.A. No. 11590 provides that sales of goods and properties to POGOs, as well as services rendered to POGOs by service providers, shall be subject to zero percent (0%) rate.74chanRoblesvirtualLawlibrary
x x x x
(7) Offshore Gaming Licensees. – The provisions of existing special or general laws to the contrary notwithstanding, the non-gaming revenues derived within the Philippines of foreign-based offshore gaming licensees as defined and duly licensed by the Philippine Amusement and Gaming Corporation or any special economic zone authority or tourism zone authority or freeport authority shall be subject to an income tax equivalent to twenty-five percent (25%) of the taxable income derived during each taxable year. (Emphasis supplied)
R.A. No. 11590 similarly states that all laws, rules and regulations, including the Bayanihan 2 Law, which are contrary to or inconsistent with any provision of the same are repealed and modified accordingly.75chanRoblesvirtualLawlibrary
- Five percent (5%) gaming tax on all income derived from gaming operations; and
- Twenty-Five percent (25%) income tax on income derived from non-gaming operations from sources within the Philippines.
A moot and academic case is one that ceases to present a justiciable controversy by virtue of supervening events, so that an adjudication of the case or a declaration on the issue would be of no practical value or use. Courts generally decline jurisdiction over such case or dismiss it on the ground of mootness.77 (Citations omitted)With the enactment of R.A. No. 11590, a supervening event has transpired which directly addressed the pivotal issues raised in the Consolidated Petitions because a valid law has been passed clarifying the taxability of POGOs, including offshore-based POGO licensees, and imposing the applicable taxes thereon.
The "moot and academic" principle is not a magical formula that can automatically dissuade the courts in resolving a case. Courts will decide cases, otherwise moot and academic, if: first, there is a grave violation of the Constitution; second, the exceptional character of the situation and the paramount public interest is involved; third, when constitutional issue raised requires formulation of controlling principles to guide the bench, the bar, and the public; and fourth, the case is capable of repetition yet evading review.79 (Emphasis supplied; citations omitted)Here, the petitioners raise, among others, genuine issues on the constitutionality of Section 11(f) and (g) of the Bayanihan 2 Law. Thus, this Court is impelled to consider and resolve the Consolidated Petitions to provide guidance as to the tax liabilities of offshore-based POGO licensees, including the petitioners, prior to the passage of R.A. No. 11590.
SECTION 13. Exemptions. –Such exemption extends to PAGCOR's licensees pursuant to Section 13(2)(b) of the PAGCOR Charter, which provides:
x x x x
(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 national government authority. (Emphasis and underscoring supplied)
(b) Others: The exemptions 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)Considering the above-cited provisions, this Court clarified in Bloomberry Resorts and Hotels, Inc. v. Bureau of Internal Revenue (Bloomberry),80 that PAGCOR's tax privilege of paying only a five percent (5%) franchise tax for income generated from its gaming operations, in lieu of all other taxes, inures to the benefit of PAGCOR's licensees:
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.Clearly, both law and jurisprudence mandate that PAGCOR's licensees are only liable to pay a five percent (5%) franchise tax for income derived from its gaming operations. However, a plain reading of the PAGCOR Charter and the ruling in Bloomberry shows that the liability of paying the five percent (5%) franchise tax only applies to PAGCOR's licensees which are connected to the operations of casinos and other related amusement places.
x x x x
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.81 (Emphasis and underscoring supplied)
RR 2-2012 is unconstitutional.Indeed, the ruling in Purisima applies squarely in this case. The BIR encroached upon the authority reserved exclusively for Congress when it issued RMC No. 102-2017 and imposed a five percent (5%) franchise tax upon POGOs when the PAGCOR Charter itself does not tax POGOs. RMC No. 102-2017 likewise failed to indicate which provisions of the PAGCOR Charter it was implementing when it imposed the franchise tax. Accordingly, RMC No. 102-2017, and consequently, RMC No. 78-2018, insofar as they imposed franchise taxes on POGOS, are invalid and unconstitutional for being issued without any statutory basis and for encroaching upon legislative power to enact tax laws.
According to the respondents, the power to enact, amend, or repeal laws belong exclusively to Congress. In passing RR 2-2012, petitioners illegally amended the law - a power solely vested on the Legislature.
We agree with the respondents.
The power of the petitioners to interpret tax laws is not absolute. The rule is that regulations may not enlarge, alter, restrict, or otherwise go beyond the provisions of the law they administer; administrators and implementors cannot engraft additional requirements not contemplated by the legislature.
It is worthy to note that RR 2-2012 does not even refer to a specific Tax Code provision it wishes to implement. While it purportedly establishes mere administration measures for the collection of VAT and excise tax on the importation of petroleum and petroleum products, not once did it mention the pertinent chapters of the Tax Code on VAT and excise tax. (Emphasis supplied; citations omitted)
All these three components do not involve and are not performed within the Philippine territory. None of these components likewise deals with Filipino citizens. 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.
b.l.) prize consisting of money or something else of value which can be won under the rules of the game; b.2.) a player who: b.2.a.) being located outside of the Philippines and not a Filipino citizen, enters the game remotely or takes any step in the game by means of a communication device capable of accessing an electronic communication network such as the internet. b.2.b.) gives or undertakes to give, a monetary payment or other valuable consideration to enter in the course of, or for, the game; and b.3.) the winning of a prize is decided by chance.92
SEC. 23. General Principles of Income Taxation in the Philippines. - Except when otherwise provided in this Code:In fact, R.A. No. 11590 likewise categorically provides that offshore-based POGO licensees are only liable to pay income tax for income derived within the Philippines.
x x x x
(f) A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines. (Emphasis supplied)
The source of an income is the property, activity or service that produced the income. For the source of income to be considered as coming from the Philippines, it is sufficient that the income is derived from activity within the Philippines. In BOAC's case, the sale of tickets in the Philippines is the activity that produces the income. The tickets exchanged hands here and payments for fares were also made here in Philippine currency. The situs of the source of payments is the Philippines. The flow of wealth proceeded from, and occurred within, Philippine territory, enjoying the protection accorded by the Philippine government. In consideration of such protection, the flow of wealth should share the burden of supporting the government.Thus, as observed by Justice Perlas-Bernabe, in BOAC, the Court held that, while the actual transportation would occur outside the Philippines, the sale of tickets in the Philippines already constituted a taxable activity.100 In this regard, in Commissioner of Internal Revenue v. Baier-Nickel (Baier-Nickel),101 this Court expounded on its ruling in BOAC, and clarified that the "source" of income is not determined by where income is disbursed or physically received, but rather, where the business activity that produced such income is actually conducted:
x x x x
BOAC, however, would impress upon this Court that income derived from transportation is income for services, with the result that the place where the services are rendered determines the source; and since BOAC's service of transportation is performed outside the Philippines, the income derived is from sources without the Philippines and, therefore, not taxable under our income tax laws. The Tax Court upholds that stand in the joint Decision under review.
The absence of flight operations to and from the Philippines is not determinative of the source of income or the situs of income taxation. Admittedly, BOAC was an off-line international airline at the time pertinent to this case. The test of taxability is the "source"; and the source of an income is that activity x x x which produced the income. Unquestionably, the passage documentations in these cases were sold in the Philippines and the revenue therefrom was derived from a business activity regularly pursued within the Philippines. And even if the BOAC tickets sold covered the "transport of passengers and cargo to and from foreign cities," it cannot alter the fact that income from the sale of tickets was derived from the Philippines. The word "source" conveys one essential idea, that of origin, and the origin of the income herein is the Philippines.99 (Emphasis supplied; citations omitted)
Both the petitioner and respondent cited the case of Commissioner of Internal Revenue v. British Overseas Airways Corporation in support of their arguments, but the correct interpretation of the said case favors the theory of respondent that it is the situs of the activity that determines whether such income is taxable in the Philippines. The conflict between the majority and the dissenting opinion in the said case has nothing to do with the underlying principle of the law on sourcing of income. In fact, both applied the case of Alexander Howden & Co., Ltd. v. Collector of Internal Revenue. The divergence in opinion centered on whether the sale of tickets in the Philippines is to be construed as the "activity" that produced the income, as viewed by the majority, or merely the physical source of the income, as ratiocinated by Justice Florentino P. Feliciano in his dissent. The majority, through Justice Ameurfina Melencio-Herrera, as ponente, interpreted the sale of tickets as a business activity that gave rise to the income of BOAC. Petitioner cannot therefore invoke said case to support its view that source of income is the physical source of the money earned. If such was the interpretation of the majority, the Court would have simply stated that source of income is not the business activity of BOAC but the place where the person or entity disbursing the income is located or where BOAC physically received the same. But such was not the import of the ruling of the Court. It even explained in detail the business activity undertaken by BOAC in the Philippines to pinpoint the taxable activity and to justify its conclusion that BOAC is subject to Philippine income taxation, x x x.Applying the rulings of BOAC and Baier-Nickel to the instant case, it appears that offshore-based POGO licensees derive no income from the sources within the Philippines because the "activity" which produces income occurs and is located outside the territory of the Philippines. Indeed, the flow of wealth or the income-generating activity – the placing of bets less the amount of payout – transpires outside the Philippines.
x x x x
The Court reiterates the rule that "source of income" relates to the property, activity or service that produced the income. With respect to rendition of labor or personal service, as in the instant case, it is the place where the labor or service was performed that determines the source of the income. There is therefore no merit in petitioner's interpretation which equates source of income in labor or personal service with the residence of the payor or the place of payment of the income.102 (Emphasis supplied)
5.2.1.1 Avoiding a taxable presenceTo combat this, the OECD offers several proposals, such as revising treaty terms on Permanent Establishments, and implementing better domestic foreign corporation rules among countries.120chanRoblesvirtualLawlibrary
In many digital economy business models, a non-resident company may interact with customers in a country remotely through a website or other digital means (e.g. an application on a mobile device) without maintaining a physical presence in the country. Increasing reliance on automated processes may further decrease reliance on local physical presence. The domestic laws of most countries require some degree of physical presence before business profits are subject to taxation. In addition, under Articles 5 and 7 of the OECD Model Tax Convention, a company is subject to tax on its business profits in a country of which it is a non-resident only if it has a permanent establishment (PE) in that country. Accordingly, such non-resident company may not be subject to tax in the country in which it has customers.
Companies in many industries have customers in a country without a PE in that country, communicating with those customers via phone, mail, and fax and through independent agents. That ability to maintain some level of business connection within a country without being subject to tax on business profits earned from sources within that country is the result of particular policy choices reflected in domestic laws and relevant double tax treaties, and is not in and of itself a BEPS issue. However, while the ability of a company to earn revenue from customers in a country without having a PE in that country is not unique to digital businesses, it is available at a greater scale in the digital economy than was previously the case. Where this ability, coupled with strategies that eliminate taxation in the State of residence, results in such revenue not being taxed anywhere, BEPS concerns are raised. In addition, under some circumstances, tax in a market jurisdiction can be artificially avoided by fragmenting operations among multiple group entities in order to qualify for the exceptions to PE status for preparatory and auxiliary activities, or by otherwise ensuring that each location through which business is conducted falls below the PE threshold. Structures of this type raise BEPS concerns.119cralawredlibrary
SECTION 11. Sources of Funding. — The enumerated subsidy and stimulus measures, as well as all other measures to address the COVID-19 pandemic shall be funded from the following:To determine whether certain provisions are riders, it is vital to understand the rationale behind its prohibition. Such proscription against riders was explained by this Court in Fariñas v. Executive Secretary,122 thus:The tax shall be computed on the peso equivalent of the foreign currency used, based on the prevailing official exchange rate at the time of payment, otherwise the same shall be considered as a fraudulent act constituting underdeclaration of taxable receipts or income, and shall be subject to interests, fines and penalties under Sections 248(B), 249(B), 253, and 255 of the National Internal Revenue Code of the Philippines.
- x x x x
- (f) Amounts derived from the five percent (5%) franchise tax on the gross bets or turnovers or the agreed pre-determined minimum monthly revenues from gaming operations, whichever is higher, earned by offshore gaming licensees, including gaming operators, gaming agents, services-providers and gaming support providers;cralawlawlibrary
(g) Income tax, VAT, and other applicable taxes on income from non-gaming operations earned by offshore gaming licensees, operators, agents, service providers and support providers.
After two (2) years or upon a determination that the threat of COVID-19 has been successfully contained or abated, whichever comes first, the revenues derived from franchise taxes on gross bets or turnovers under paragraph (f) and income from non-gaming operations under paragraph (g) shall continue to be collected and shall accrue to the General Fund of the Government. The BIR shall implement closure orders against offshore gaming licensees, operators, agents, service providers and support providers who fail to pay the taxes due, and such entities shall cease to operate.121 (Emphasis supplied)
Section 26(1), Article VI of the Constitution provides:Similarly, and as observed by Justice Perlas-Bernabe,124 in Atitiw v. Zamora,125 this Court elucidated that the rationale for the prohibition against riders is to prevent hodge-podge or log-rolling legislation, and to ensure that all provisions of a statute have some reasonable relation to the subject matter as expressed in the title thereof:
SEC. 26(1). Every bill passed by the Congress shall embrace only one subject which shall be expressed in the title thereof.
The proscription is aimed against the evils of the so-called omnibus bills and log-rolling legislation as well as surreptitious and/or unconsidered encroaches. The provision merely calls for all parts of an act relating to its subject finding expression in its title.
To determine whether there has been compliance with the constitutional requirement that the subject of an act shall be expressed in its title, the Court laid down the rule that —
Constitutional provisions relating to the subject matter and titles of statutes should not be so narrowly construed as to cripple or impede the power of legislation. The requirement that the subject of an act shall be expressed in its title should receive a reasonable and not a technical construction. It is sufficient if the title be comprehensive enough reasonably to include the general object which a statute seeks to effect, without expressing each and every end and means necessary or convenient for the accomplishing of that object. Mere details need not be set forth. The title need not be an abstract or index of the Act.123 (Emphasis supplied; citations omitted)
The rationale against inserting a rider in an appropriations bill under the specific appropriation clause embodied in Section 25(2), Article VI of the Constitution is similar to that of the "one subject in the title clause provided in Section 26(1) also of Article VI, which directs that every provision in a bill must be germane or has some reasonable relation to the subject matter as expressed in the title thereof. The unity of the subject matter of a bill is mandatory in order to prevent hodge-podge or log-rolling legislation, to avoid surprise or fraud upon the legislature, and to fairly appraise the people of the subjects of legislation that are being considered.126 (Emphasis supplied; citation omitted)Following such jurisprudential guides, it is evident that all provisions of a law must be germane to the purpose of the law, and contemplated by the title thereof.
After two (2) years or upon a determination that the threat of COVID-19 has been successfully contained or abated, whichever comes first, the revenues derived from franchise taxes on gross bets or turnovers under paragraph (f) and income from non-gaming operations under paragraph (g) shall continue to be collected and shall accrue to the General Fund of the Government. The BIR shall implement closure orders against offshore gaming licensees, operators, agents, service providers and support providers who fail to pay the taxes due, and such entities shall cease to operate. (Emphasis supplied)Indeed, and as emphasized by Justice Perlas-Bernabe,131 if all sources of funding under Section 11 of the Bayanihan 2 Law are already existing taxes, there would be no need to specify that the collections thereof after the COVID-19 pandemic has been thwarted would accrue to the General Fund of the Government. The logical implication of this statement, therefore, is that prior to the Bayanihan 2 Law, there was no statute which imposed the same taxes as found in Section 11(f) and (g) of the Bayanihan 2 Law; and consequently, the foregoing provisions are new tax measures.
Endnotes:
* On official leave.
chanRoblesvirtualLawlibrary
1 Rollo (G.R. No. 252965), pp. 3-54; Rollo (G.R. No. 254102), pp 3-119.
2 Rollo (G.R. No. 252965), p. 16.
3 Rollo (G.R. No. 254102), p. 22.
4 Id.
5 POGO RULES AND REGULATIONS, Section 4(b).
6 Id.
7 Id., Section 6; Rollo (G.R. No. 254102), p. 23.
8 REVENUE MEMORANDUM CIRCULAR NO. 102-2017, paragraph IV(2).
9 Id.
10 REVENUE MEMORANDUM CIRCULAR NO. 78-2018, paragraph B.
11 Rollo (G.R. No. 254102), p. 28.
12 BAYANIHAN 2 LAW, Section 11.
13 Rollo (G.R. No. 252965), pp. 26-27.
14 Id. at 32.
15 Id. at 33-36.
16 Id. at 35.
17 Id. at 36.
18 Id. at 36-38.
19 Id. at 38-40.
20 Id. at 45.
21 Rollo (G.R. No. 254102), pp. 31-39.
22 Id. at 32-33.
23 Id. at 33.
24 Id. at 39-41.
25 Id. at 39-40.
26 Id. at 40-41.
27 Id. at 41-46.
28 Id. at 41-44.
29 Id. at 46-50.
30 Id. at 46.
31 Id. at 46-49.
32 Id. at 50-51.
33 Id. at 51.
34 Id. at 51-52.
35 Id. at 52-55.
36 Id. at 54.
37 Id. at 54-55.
38 Id. at 55.
39 Id. at 56.
40 Id. at 60.
41 Id. at 57-58.
42 Id. at 58.
43 Id.
44 Id. at 57-58.
45 Id. at 211-215.
46 Rollo (G.R. No. 252965), pp. 101-176.
47 Id. at 117-129.
48 Id. at 130.
49 Id. at 132-134.
50 Id. at 129-134.
51 Id. at 135-143.
52 Id. at 136-137.
53 Id. at 138-139.
54 Id. at 140.
55 Id. at 142-143.
56 Id. at 143-155.
57 Id. at 146-147.
58 Id. at 147.
59 Id. at 147-148.
60 Id. at 148.
61 Id. at 155-165.
62 Id. at 155-159.
63 Id. at 159.
64 Id. at 159-160.
65 Id. at 160.
66 Id. at 163.
67 Id. at 168.
68 Id. at 170.
69 Id.
70 See REPUBLIC ACT NO. 11590, Section 2.
71 Id., Section 8.
72 Id., Section 4.
73 Id., Section 5.
74 Id., Sections 6 and 7.
75 Id., Section 13.
76 807 Phil. 133 (2017).
77 Id. at 140-141.
78 522 Phil. 705 (2006).
79 Id. at 754.
80 792 Phil. 751 (2016).
81 Id. at 767-768.
82 Concurring and Dissenting Opinion, Senior Associate Justice Perlas-Bernabe, p. 18.
83 Justice Caguioa's Comments, p. 2.
84 Film Development Council of the Philippines v. Colon Heritage Realty Corporation, 760 Phil. 519, 535 (2015); Purisima v. Lazatin, 801 Phil. 395, 426 (2016).
85 Light Rail Transit Authority v. Quezon City, G.R. No. 221626, October 9, 2019.
86 Supra note 84 at 425-426.
87 RMC No. 102-2017, paragraph IV(1)(b).
88 Concurring and Dissenting Opinion, Senior Associate Justice Perlas-Bernabe, p. 9. Phil. Guaranty Co., Inc. v. Commissioner of Internal Revenue, 121 Phil. 755, 760 (1965).
89 Id.; Commissioner of Internal Reveue v. Algue, Inc., 241 Phil. 829, 836 (1988).
90 Justice Dimaampao's Reflections, p. 1; Smith, Adam, "The Wealth of Nations," Bantam Classic (2003).
91 POGO RULES AND REGULATIONS, Section 4(b).
92 Id.
93 See PAGCOR Manual, p. 2.
94 Section 42(A) of the NIRC provides:
Section 42. Income from Sources Within the Philippines. –
(A) Gross Income From From Sources Within the Philippines. – The following items of gross income shall be treated as gross income from sources within the Philippines:
x x x x
(3) Services. – Compensation for labor or personal services performed in the Philippines[.] (Emphasis supplied)
95 Section 42(C) of the NIRC provides:
Section 42. Income from Sources Within the Philippines. –
x x x x
(C) Gross Income From Sources Without the Philippines. – The following items of gross income shall be treated as income from sources without the Philippines:
x x x x
(3) Compensation for labor or personal services performed without the Philippines[.] (Emphasis supplied)
96 62 Phil. 895, 901 (1936).
97 Concurring and Dissenting Opinion, Senior Associate Justice Perlas-Bernabe, p. 10.
98 233 Phil. 406 (1987).
99 Id. at 422-424.
100 Concurring and Dissenting Opinion, Senior Associate Justice Perlas-Bernabe, pp. 10-11.
101 531 Phil. 480 (2006).
102 Id. at 491-493.
103 Justice Dimaampao's Reflections, p. 3.
104 Id.; The Mentholatum Co., Inc. v. Mangaliman, 72 Phil. 524, 528 (1941).
105 Id.; Pacific Vegetable Oil Corporation v. Singzon, 96 Phil. 986 (1955).
106 Id; Eriks Pte. Ltd., v. Court of Appeals, 335 Phil. 229, 239 (1997).
107 Id.; B. Van Zuiden Bros., Ltd. v. GTVL Manufacturing Industries, Inc., 551 Phil. 231, 237 (2007).
108 The Mentholatum Co., Inc. v. Mangaliman, supra note 104 at 528.
109 Justice Dimaampao's Reflections, pp. 3-4.
110 Id. at 4.
111 Section 3(d) of the FIA provides:
Section 3. Definitions.- As used in this Act:
x x x x
d) The phrase "doing business" shall include soliciting orders, service contracts, opening offices, whether called "liaison" offices or branches; appointing representatives or distributors domiciled in the Philippines or who in any calendar year stay in the country for a period or periods totalling one hundred eighty (180) days or more; participating in the management, supervision or control of any domestic business, firm, entity or corporation in the Philippines; and any other act or acts that imply a continuity of commercial dealings or arrangements, and contemplate to that extent the performance of acts or works, or the exercise of some of the functions normally incident to, and in progressive prosecution of, commercial gain or of the purpose and object of the business organization: Provided, however, That the phrase "doing business" shall not be deemed to include mere investment as a shareholder by a foreign entity in domestic corporations duly registered to do business, and/or the exercise of rights as such investor; nor having a nominee director or officer to represent its interests in such corporation; nor appointing a representative or distributor domiciled in the Philippines which transacts business in its own name and for its own account[.] (Emphasis supplied)
112 Justice Dimaampao's Reflections, p. 5.
113 Concurring and Dissenting Opinion, Senior Associate Justice Perlas-Bernabe, p. 12; Justice Dimaampao's Reflections, p. 5.
114 Id. at 13.
115 See OECD (2014), Addressing the Tax Challenges of the Digital Economy, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris, p. 73; available at
https://doi.org/10.1787/9789264218789-en.
116 See OECD (2014), Addressing the Tax Challenges of the Digital Economy, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris, p. 84; available at https://doi.org/10.1787/9789264218789-en.
118 Id.
119 See OECD (2014), Addressing the Tax Challenges of the Digital Economy, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris, p. 102; available at https://doi.org/10.1787/9789264218789-en.
120 See OECD (2014), Addressing the Tax Challenges of the Digital Economy, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris, pp. 112-121; available at
https://doi.org/10.1787/9789264218789-en.
121 BAYANIHAN 2 LAW, Section 11.
122 463 Phil. 179 (2003).
123 Id. at 198.
124 Concurring and Dissenting Opinion, Senior Associate Justice Perlas-Bernabe pp 2-3.
125 508 Phil. 321 (2005).
126 Id. at 335.
127 Concurring and Dissenting Opinion, Senior Associate Justice Perlas-Bernabe, p. 3.
128 See Sponsorship Remarks of Deputy Speaker Villafuerte, House of Representatives Journal No. 59, June 1-5, 2020, p. 101.
129 See Interpellation of Representative Abante, House of Representatives Records, August 5, 2020, p. 45.
130 Id. at 46; see also Interpellations of Senator Recto, Senate Journal No. 67, June 1, 2020, p. 614.
131 Concurring and Dissenting Opinion, Senior Associate Justice Perlas-Bernabe, p. 5.
132 CIVIL CODE, Article 4.
The rationale for the prohibition against riders is to "to prevent hodge-podge or log-rolling legislation, to avoid surprise or fraud upon the legislature, and to fairly appraise the people of the subjects of legislation that are being considered."12 Jurisprudence has laid down a "germaneness" standard to test whether a provision is a rider, i.e., that the provision must have some reasonable relation to the subject matter as expressed in the title thereof.13chanRoblesvirtualLawlibraryARTICLE VI
The Legislative Department
x x x x
Sec. 25. x x x
(2) No provision or enactment shall be embraced in the general appropriations bill unless it relates specifically to some particular appropriation therein. Any such provision or enactment shall be limited in its operation to the appropriation to which it relates.
x x x x
Sec. 26. (1) Every bill passed by the Congress shall embrace only one subject which shall be expressed in the title thereof.
SECTION 11. Sources of Funding. – The enumerated subsidy and stimulus measures, as well as all other measures to address the COVID-19 pandemic shall be funded from the following:Neither provision identifies any pre-existing tax laws from which such tax liabilities would arise. Undeniably, it appears to be a new revenue measure altogether. Moreover, unlike the other provisions of this temporary relief statute, Sections 11 (f) and (g) were intended to outlive the December 19, 2020 expiration date of RA 11494, viz.:
x x x x
(f) Amounts derived from the five percent (5%) franchise tax on the gross bets or turnovers or the agreed pre-determined minimum monthly revenues from gaming operations, whichever is higher, earned by offshore gaming licensees, including gaming operators, gaming agents, service providers and gaming support providers;cralawlawlibrary
(g) Income tax, VAT, and other applicable taxes on income from non-gaming operations earned by offshore gaming licensees, operators, agents, service providers and support providers.
x x x x
After two (2) years or upon a determination that the threat of COVID-19 has been successfully contained or abated, whichever comes first, the revenues derived from franchise taxes on gross bets or turnovers under paragraph (f) and income from non-gaming operations under paragraph (g) shall continue to be collected and shall accrue to the General Fund of the Government. The BIR shall implement closure orders against offshore gaming licensees, operators, agents, service providers and support providers who fail to pay the taxes due, and such entities shall cease to operate, (emphasis supplied)Had Sections 11 (f) and (g) merely directed the collection of funds from existing tax exactions to the COVID-19 intervention measures of the Bayanihan 2 Law, there would be no need to specify that the collections thereof after the pandemic has abated would accrue to the General Fund. The logical implication of including this paragraph is that prior to the Bayanihan 2 Law, there was no statute which imposed the same taxes as found in Sections 11 (f) and (g); necessarily, the foregoing provisions should be considered as new tax measures.
The Bureau of Internal Revenue (BIR), not a newcomer to the workings and tax issues presented by online business transactions through the internet, feels that the challenge in gaming operations is how to implement a fair and equitable taxation of online gaming businesses, how to monitor the revenues and revenue-generating activities of POGO and how to adapt existing taxes to POGO so as to lessen the so-called "lost potential tax revenues". This is the perspective from which the current issue of taxing taxpayers engaged in POGO should be viewed.23cralawredlibraryThe BIR further states that "online activity is sufficient to constitute doing business in the Philippines x x x." Hence, it imposed regulatory and administrative requirements to POGOs, which was further outlined in RMC 78-2018.24 It likewise clarified that the following taxes apply to POGOs:
The source of an income is the property, activity or service that produced the income. For the source of income to be considered as coming from the Philippines, it is sufficient that the income is derived from activity within the Philippines. In BOAC's case, the sale of tickets in the Philippines is the activity that produces the income. The tickets exchanged hands here and payments for fares were also made here in Philippine currency. The situs of the source of payments is the Philippines. The flow of wealth proceeded from, and occurred within, Philippine territory, enjoying the protection accorded by the Philippine government. In consideration of such protection, the flow of wealth should share the burden of supporting the government.In BOAC, the transaction involved the sale of air transport to passengers. Even though the actual transportation would occur outside of the Philippines, the Court held that the sale of tickets here already constituted a taxable activity. However, the Court had occasion to expound on this doctrine in Commissioner of Internal Revenue v. Baier-Nickel (Baier-Nickel).49 In Baier-Nickel, the Court clarified that the "source" was not determined by where the income is disbursed or physically received, but rather where the business activity that produced the income was actually conducted, viz.:
x x x x
The absence of flight operations to and from the Philippines is not determinative of the source of income or the situs of income taxation. Admittedly, BOAC was an off-line international airline at the time pertinent to this case. The test of taxability is the "source"; and the source of an income is that activity . . . which produced the income. Unquestionably, the passage documentations in these cases were sold in the Philippines and the revenue therefrom was derived from a business activity regularly pursued within the Philippines. And even if the BOAC tickets sold covered the "transport of passengers and cargo to and from foreign cities", it cannot alter the fact that income from the sale of tickets was derived from the Philippines. The word "source" conveys one essential idea, that of origin, and the origin of the income herein is the Philippines.
x x x x48 (emphases supplied; citations omitted)
Both the petitioner and respondent cited the case of Commissioner of Internal Revenue v. British Overseas Airways Corporation in support of their arguments, but the correct interpretation of the said case favors the theory of respondent that it is the situs of the activity that determines whether such income is taxable in the Philippines. The conflict between the majority and the dissenting opinion in the said case has nothing to do with the underlying principle of the law on sourcing of income. In fact, both applied the case of Alexander Howden & Co., Ltd. v. Collector of Internal Revenue. The divergence in opinion centered on whether the sale of tickets in the Philippines is to be construed as the "activity" that produced the income, as viewed by the majority, or merely the physical source of the income, as ratiocinated by Justice Florentino P. Feliciano in his dissent. The majority, through Justice Ameurfina Melencio-Herrera, as ponente, interpreted the sale of tickets as a business activity that gave rise to the income of BOAC. Petitioner cannot therefore invoke said case to support its view that source of income is the physical source of the money earned. If such was the interpretation of the majority, the Court would have simply stated that source of income is not the business activity of BOAC but the place where the person or entity disbursing the income is located or where BOAC physically received the same. But such was not the import of the ruling of the Court. It even explained in detail the business activity undertaken by BOAC in the Philippines to pinpoint the taxable activity and to justify its conclusion that BOAC is subject to Philippine income taxation. x x x.However, this reading of the law flows from the dated notion that a business requires physical presence within the State to provide its services, or a more analog form of conducting business. With the proliferation of digital commerce, there is now the added complication of specifically pinpointing where the "activity that produced the income" occurs when the transaction is conducted over the internet, as in the case of offshore gaming.
x x x x
The Court reiterates the rule that "source of income" relates to the property, activity or service that produced the income. With respect to rendition of labor or personal service, as in the instant case, it is the place where the labor or service was performed that determines the source of the income. There is therefore no merit in petitioner's interpretation which equates source of income in labor or personal service with the residence of the payor or the place of payment of the income.
x x x x50 (Emphases and underscoring supplied; citations omitted)
5.2.1.1 Avoiding a taxable presenceThe OECD itself proposes several ways to combat the potential "double non-taxation" of the digital economy, including the revision of treaty terms on Permanent Establishments, and implementing better domestic foreign corporation rules among countries.61 Nevertheless, until such time as the existing tax treaties are revisited, or the rules on situs under Section 42 of the Tax Code are amended to account for the digital economy, of which offshore gaming conducted by POGOs are naturally part of, the Court must apply the laws as they currently are and not go beyond their auspices.
In many digital economy business models, a non-resident company may interact with customers in a country remotely through a website or other digital means (e.g. an application on a mobile device) without maintaining a physical presence in the country. Increasing reliance on automated processes may further decrease reliance on local physical presence. The domestic laws of most countries require some degree of physical presence before business profits are subject to taxation. In addition, under Articles 5 and 7 of the OECD Model Tax Convention, a company is subject to tax on its business profits in a country of which it is a non-resident only if it has a permanent establishment (PE) in that country. Accordingly, such non-resident company may not be subject to tax in the country in which it has customers.
Companies in many industries have customers in a country without a PE in that country, communicating with those customers via phone, mail, and fax and through independent agents. That ability to maintain some level of business connection within a country without being subject to tax on business profits earned from sources within that country is the result of particular policy choices reflected in domestic laws and relevant double tax treaties, and is not in and of itself a [base erosion and profit shifting (BEPS)] issue. However, while the ability of a company to earn revenue from customers in a country without having a PE in that country is not unique to digital businesses, it is available at a greater scale in the digital economy than was previously the case. Where this ability, coupled with strategies that eliminate taxation in the State of residence, results in such revenue not being taxed anywhere, BEPS concerns are raised. In addition, under some circumstances, tax in a market jurisdiction can be artificially avoided by fragmenting operations among multiple group entities in order to qualify for the exceptions to PE status for preparatory and auxiliary activities, or by otherwise ensuring that each location through which business is conducted falls below the PE threshold. Structures of this type raise BEPS concerns.60cralawredlibrary
It is a basic principle that laws shall not be construed as imposing a tax unless they do so clearly and expressly, and any doubt must be strictly construed against the government.65 Consequently, RMC 102-2017 could not have drawn validity from the provisions of the Tax Code, or any other tax law, to cover offshore revenues of foreign-based POGO Licensees during the period prior to the effectivity of RA 11590.Interpellation of Representative Zarate on House Bill No. 577763chanRoblesvirtualLawlibrary
REP. ZARATE. Yes, thank you for that. But there was one hearing that I attended which in fact said that out of the 60, only 10 were actually paying, and in fact, President Duterte...
REP. SALCEDA. Dalawa iyan, sa BIR oo, pero sa PAGCOR, oo, lahat.
REP. ZARATE. So, ang...
REP. SALCEDA. So, pasensya ka na kasi ang tanong mo ay sino ang nagbabayad. Kung ang nagbabayad sa BIR, sampu, oo; ang nagbabayad sa PAGCOR, lahat.
REP. ZARATE. Lahat sila, nagbabayad ng 2 percent.
REP. SALCEDA. Sa PAGCOR.
REP. ZARATE, Yes. Now that was...
REP. SALCEDA. And kaya naman, kaya naman ganoon po ay dahil wala naming tax regime e.
REP. ZARATE. Yes, yes, oo. So, that ...
REP. SALCEDA. Kaya nga inilalagay natin ito.
REP. ZARATE. So, iyon iyong POGO BC or before COVID?
REP. SALCEDA. Yes. (emphases supplied)Sponsorship Speech of Senator Cayetano on Senate Bill No. 223264chanRoblesvirtualLawlibrary
The reason for this is because, at present, nowhere under the National Internal Revenue Code, otherwise known as the NIRC, as amended, can we find explicit tax provisions pertaining to the offshore gaming licensees including gaming operators, gaming agents, and service providers.
x x x x
Hence, the long-standing question about the tax obligations of POGOs conducting business in our country remain unanswered and unaddressed, which means billions worth of revenue losses for our government.
Having said these, it is high time that we clarify and establish the taxation regime of offshore gaming licensees, including gaming operators, gaming agents, service providers, and gaming support providers, and incorporate these entities in the Philippine taxation system.
As your Chair of the Senate Ways and Means Committee, we have reviewed the various bills, listened to government agencies, industry and other stakeholders. I believe that legislating the tax regime of the POGOs and incorporating the same in the NIRC is a step towards the right direction.
It will not only plug the loopholes in our country's tax code that led to issues of confusion surrounding the operation of POGOs, but it will also prevent similar issues in the future, which could gravely undermine our government's power to impose and collect the right taxes.
By addressing these gaps in our tax system, we can maximize the POGO industry's potential as a revenue source. In turn, we will have more resources in our country's coffers to fund programs that will improve people's lives and help us build back better following this global health and economic crisis. (emphases supplied)
SECTION 13. Exemptions. –As a form of tax exemption, it necessarily implies that the PAGCOR Licensees are subject to tax in the first place, Moreover, any form of tax exemption must be strictly construed to benefit only those clearly covered thereby.67 The ponencia aptly observed that Section 13 (2)(b) which forms the basis for the extension of the tax exemption to Licensees clearly apply only to those engaged in "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."68chanRoblesvirtualLawlibrary
x x x x
(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 national government authority.
(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.
x x x x (emphases supplied)
Endnotes:
1 Entitled "AN ACT PROVIDING FOR COVID-19 RESPONSE AND RECOVERY INTERVENTIONS AND PROVIDING MECHANISMS TO ACCELERATE THE RECOVERY AND BOLSTER THE RESILIENCY OF THE PHILIPPINE ECONOMY, PROVIDING FUNDS THEREFOR, AND FOR OTHER PURPOSES," approved on September 11, 2020.
2 See ponencia, p. 40.
3 See id. at 22-23.
4 See Letter of Justice Caguioa to J. Gaerlan dated October 4, 2021.
5 See Article 4 of the CIVIL CODE OF THE PHILIPPINES.
6 See Co v. Court of Appeals, 298 Phil. 221, 226 (1993).
7 See Film Development Council of the Philippines v. Colon Heritage Realty Corp., G.R. Nos. 203754 & 204418 (Resolution), October 15, 2019.
8 See ponencia, p. 40.
9 See Commissioner of Internal Revenue v. San Roque Power Corp., 719 Phil. 137, 157 (2013).
10 See ponencia, pp. 36-40.
11 Atitiw v. Zamora, 508 Phil. 321, 334 (2005).
12 Id. at 335.
13 Id.
14 See Sponsorship Remarks of Deputy Speaker Villafuerte, House of Representatives Journal No. 59, June 1 to 5, 2020, p. 101.
15 See Interpellation of Representative Abante, House of Representatives Records, August 5, 2020, p. 45.
16 See Interpellation of Representative Abante, House of Representatives Records, August 5, 2020, p. 46; and Interpellation of Senator Recto, Senate Journal No. 67, June 1, 2020, p. 614.
17 The effectivity of the law is only until the next adjournment of the Eighteenth Congress on December 19, 2020, viz:.SECTION 18. Effectivity. – Except as otherwise specifically provided herein, this Act shall be in full force and effect until the next adjournment of the Eighteenth Congress on December 19, 2020. This Act shall take effect immediately upon its publication in a newspaper of general circulation or in the Official Gazette: Provided, That Section 4 (cc) of this Act shall be deemed to be in effect since Republic Act No. 11469 expired.18 Section 4 of RA 11494 reads:
chanroblesvirtuallawlibrarySECTION 4. COVID-19 Response and Recovery Interventions. – Pursuant to Article VI, Section 23 (2) of the Constitution, the President is hereby authorized to exercise powers that are necessary and proper to undertake and implement the following COVID-19 response and recovery interventions:19 Section 10 of RA 11494 reads:
x x x x
chanroblesvirtuallawlibrarySECTION 10. Appropriations and Standby Fund. – The amounts that will be raised under Section 4 paragraphs (pp), (qq), (rr), (ss), (sss) and (ttt) of this Act shall be used for the response and recovery interventions for the COVID-19 pandemic authorized in this Act x x x x20 Section 11, paragraphs (a) to (e) of RA 11494 reads:
chanroblesvirtuallawlibrarySECTION 11. Sources of Funding. – The enumerated subsidy and stimulus measures, as well as all other measures to address the COVID-19 pandemic shall be funded from the following:21 See ponencia, p. 40.
(a) 2020 GAA: Provided, That funds for the herein authorized programs and projects shall be sourced primarily from the unprogrammed funds and savings realized from modified, realigned, or reprogrammed allocations for operational expense of any government agency or instrumentality under the Executive Department, including, but not limited to, travelling expenses, supplies and materials expenses, professional services, general services, advertising expenses, printing and publication expenses, and other maintenance and operating expenses in the 2020 GAA;
(b) Savings pooled pursuant to Republic Act No. 11469 and Section 4 paragraphs (pp), (qq), (rr), (ss), (sss) and (ttt) of this Act;
(c) Excess revenue collections in any one of the identified tax or non-tax revenue sources from its corresponding revenue collection target, as provided in the FY 2020 Budget of Expenditures and Sources of Financing (BESF);
(d) New revenue collections gr those arising from new tax or non-tax sources which are not part of nor included in the original sources included in the FY 2020 BESF;
(e) All amounts derived from the cash, funds, and investments held by any GOCC or any national government agency;
22 See Republic v. Bajao, 601 Phil. 53, 59 (2009).
23 See RMC 102-2017.
24 The subject of RMC 78-2018 reads "Registration Requirements of Philippine Offshore Gaming Operators and its Accredited Service Providers."
25 Rollo (G.R. No. 254102), p. 54.
26 Id. at 54-55.
27 Id. at 55.
28 Id. at 55-56.
29 Rollo (G.R. No. 252965), pp. 140-142.
30 Id. at 142-143.
31 SECTION 13. Exemptions.
x x x x
(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 national government authority.
(b) Others: The exemptions 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.
32 Section 57 of the Tax Code, as amended by RA Nos. 10963 and 11534 reads:
chanroblesvirtuallawlibrarySec. 57. Withholding of Tea at Source. -(Note: Section 57 [B] was amended by RA 10963, which took effect on January 1, 2018. A new paragraph was also introduced by RA 11534, which took effect in April 2021. However, RMC 1022017 was promulgated prior to these amendments, hence, the original wording is footnoted.)
(A) Withholding of Final Tax on Certain Incomes. – Subject to rules and regulations the Secretary of Finance may promulgate, upon the recommendation of the Commissioner, requiring the filing of income tax return by certain income payees, the tax imposed or prescribed by Sections 24(B)(1), 24(B)(2), 24(C), 24(D)(1); 25(A)(2), 25(A)(3), 25(B), 25(C), 25(D), 25(E), 27(D)(!), 27(D)(2), 27(D)(3), 27(D)(5), 28 (A)(4), 28(A)(5), 28(A)(7)(a), 28(A)(7)(b), 28(A)(7)(c), 28(B)(1), 28(B)(2), 28(B)(3), 28(B)(4), 28(B)(5)(a), 28(B)(5)(b), 28(B)(5)(c); 33; and 282 of this Code on specified items of income shall be withheld by payor-corporation and/or person and paid in the same manner and subject to the same conditions as provided in Section 58 of this Code.
(B) Withholding of Creditable Tax at Source. – The Secretary of Finance may, upon the recommendation of the Commissioner, require the withholding of a tax on the items of income payable to natural or juridical persons, residing in the Philippines, by payor-corporation/persons as provided for by law, at the rate of not less than one percent (1%) but not more than thirty-two percent (32%) thereof, which shall be credited against the income tax liability of the taxpayer for the taxable year.
(C) Tax-free Covenant Bonds. – In any case where bonds, mortgages, deeds of trust or other similar obligations of domestic or resident foreign coiporations, contain a contract or provisions by which the obligor agrees to pay any portion of the tax imposed in this Title upon the obligee or to reimburse the obligee for any portion of the tax or to pay the interest without deduction for any tax which the obligor may be required or permitted to pay thereon or to retain therefrom under any law of the Philippines, or any state or country, the obligor shali deduct bonds, mortgages, deeds of trust or other obligations, whether the interest or other payments are payable annually or at shorter or longer periods, and whether the bonds, securities or obligations had been or will be issued or marketed, and the interest or other payment thereon paid, within or without the Philippines, if the interest or other payment is payable to a nonresident alien or to a citizen or resident of the Philippines.
33 See Film Development Council of the Phils. v. Colon Heritage Realty Corp., 760 Phil 519, 537 (2015).
34 Phil. Guaranty Co., Inc. v. Commissioner of Internal Revenue, 121 Phil. 755, 760 (1965).
35 Commissioner of Internal Revenue v. Algue, Inc., 241 Phil. 829, 836 (1988).
36 See Lutz v. Araneta, 98 Phil. 148, 153 (1955).
37 See id.
38 See Cargill Philippines, Inc. v. Commissioner of Internal Revenue, G.R. No. 203346, September 9, 2020.
39 Alexander Howden & Co., Ltd. v. Collector of Internal Revenue, 121 Phil. 579, 582 (1965).
40 Article III, Section 1 of the 1987 Constitution reads:
chanroblesvirtuallawlibrarySECTION 1. No person shall be deprived of life, liberty, or property without due process of law, nor shall any person be denied the equal protection of the laws.41 Manila Gas Corp. v. Collector of Internal Revenue, 62 Phil. 895, 900 (1936).
42 Id.
43 See Phil. Guaranty Co., Inc. v. Commissioner of Internal Revenue, supra note 32.
44 Section 42. Income from Sources Within the Philippines. –(A) Gross Income From Sources Within the Philippines. – The following items of gross income shall be treated as gross income from sources within the Philippines:45 Section 42. Income from Sources Within the Philippines.-
chanroblesvirtuallawlibraryx x x x
(3) Services. – Compensation for labor or personal services performed in the Philippines;
x x x xx x x x
(C) Gross Income From Sources Without the Philippines. – The following items of gross income shall be treated as income from sources without the Philippines:46 Manila Gas Corp. v. Collector of Internal Revenue, supra note at 901.x x x x
(3) Compensation for labor or personal services performed without the Philippines;
x x x x
47 233 Phil. 406 (1987).
48 Id. at 422-424.
49 531 Phil. 480 (2006).
50 Id. at 491-493.
51 Commissioner of Internal Revenue v. S.C. Johnson and Son, Inc., 368 Phil. 388, 404 (1999).
52 See Pharmaceutical and Health Care Association v. Duque III, 561 Phil. 386, 398 (2007).
53 See Article 5 (1) of the RP-US Tax Treaty.
54 See Article 5 (2) of the RP-US Tax Treaty.
55 See Article 5 of the RP-China Tax Treaty.
56 See Article 5, RP-Singapore Tax Treaty; Article 5, RP-Japan Tax Treaty; and Article V, RP-Canada Tax Treaty, as examples.
57 Organization for Economic Cooperation and Development (OECD), Commentaries on the Articles of the Model Tax Convention, p. 93 (2010).
58 Vienna Convention on the Law of Treaties, Section 3, Article 31.1 (1969).
59 OECD/G20 Base Erosion and Profit Shifting Project, Addressing the Tax Challenges of the Digital Economy, pp. 84-95 (2014).
60 OECD/G20 Base Erosion and Profit Shifting Project, Addressing the Tax Challenges of the Digital Economy, p. 102 (2014).
61 OECD/G20 Base Erosion and Profit Shifting Project, Addressing the Tax Challenges of the Digital Economy; pp. 112-121 (2014).
62 See Section 6, PAGCOR Offshore Rules and Regulations.
63 Congressional Record Vol. 5, February 1, 2021, p. 46.
64 Senate Journal Session No. 63, May 25, 2021, p. 791.
65 See Bureau of Internal Revenue v. First E-Bank Tower Condominium Corp., G.R. Nos. 215801 & 218924, January 15, 2020.
66 See Phil. Amusement, and Gaming Corp. v. Bureau of Internal Revenue, 749 Phil. 1010 (2014).
67 Commissioner of Internal Revenue, v. Philippine Airlines. Inc., 535 Phil. 95, 109 (2006).
68 See ponencia, p. 24.
69 Entitled "AN ACT FURTHER AMENDING PRESIDENTIAL DECREE NO. 1869, OTHERWISE KNOWN AS PAGCOR CHARTER," approved on June 20, 2007.
70 See Section 125-A, in relation to Section 22 (II), of the Tax Code, as amended by RA 11590.
SCEH averred that it was not doing business in the Philippines since the activities of SCEH were carried outside of the Philippines, its employees were in Hong Kong, its property was outside the Philippines, and that the SEN servers were located in the United States (U.S.). Offshore-based POGO licensees raised the same arguments save for the fact that they conducted their offshore gaming operations through the services of PAGCOR-accredited local gaming agents and service providers for its gaming operations.I likewise agree that petitioners' activities are consummated here which subject them to government regulations—among which is taxation:
Despite the averments of SCEH, the SEC still opined that the activities SCEH proposed to undertake would deem it as "doing business" in the Philippines since the twin characterization test was satisfied. First, the enumerated activities to be undertaken by SCEH indicated that it would be continuing in the Philippines the substance of the business for which it was organized. Second, the SCEH enumerated activities which were considered consummated within the Philippines, albeit done in a virtual plane. I see no reason not to apply the same ruling to offshore-based POGO licensees whose footprints are all over the Philippines; they entered into contracts with PAGCOR-accredited local gaming agents and service providers in furtherance of their main line of business, i.e. gaming operations.
Verily, the gaming operations conducted by offshore-based POGO licensees within the Philippines through the services of PAGCOR-accredited local gaming agents and service providers for its offshore gaming operations implies the continuity of commercial dealings and arrangements, and contemplates the performance of acts incident to, and in the progressive prosecution of their business. These services will not be provided intermittently but for a long period of time in the Philippines. Accordingly, petitioners are considered resident foreign corporations doing business in the Philippines.13 (Emphasis in the original)
For the source of income to be considered as coming from the Philippines, it is sufficient that the income is derived from activity within the Philippines, e.g., sale of tickets in the Philippines is the activity that produces the income as the tickets exchanged hands here and payments for fares were also made here in Philippine currency. The situs of the source of payments is the Philippines. The flow of wealth proceeded from, and occurred within, Philippine territory, enjoying the protection accorded by the Philippine government. In consideration of such protection, the flow of wealth should share the burden of supporting the government.The transnational nature of POGOs blur borderlines and facilitate the possibility of non-taxation in any of the jurisdiction where they operate. The revenue from gambling operations may not be worth the kind of values they instill, the politics they infect, the health they risk, and the lives they destroy. Thus, allowing gambling operations and issuing licenses for them entail the corresponding duty to strictly regulate them, and efficiently collect their enforced contributions.
Here, I respectfully submit that the services of offshore-based POGO [licensees] "offering by a licensee of PAGCOR authorized online games of chance via the Internet using a network and software or program, exclusively to offshore authorized players excluding Filipinos abroad, who have registered and established an online gaming account with the licensee"- are being rendered here. These enumerated activities are transactions deemed to have been consummated within the Philippines, albeit done on the virtual plane. From placing the bet to winning a bet, the commercial transaction, e-commerce or any sort of virtual transactions find themselves within the Philippines through the services of PAGCOR-accredited local gaming agents and service providers for its offshore gaming operations.14 (Emphasis in the original)
Endnotes:
1 Every bill passed by the Congress shall embrace only one subject which shall be expressed in the title thereof.
2 Republic Act No. 11494 (2020), sec. 3(1).
3 Presidential Decree No. 1869 (1983), sec. 1(a).
4 Presidential Decree No. 1869 (1983), sec. 3(1) provides:
SECTION 3. Corporate Powers. — The Corporation shall have the following powers and functions, among others:
. . .
1) to do anything and everything necessary, proper, desirable, convenient or suitable for the accomplishment of any of the purpose or the attainment of any of the objects or the furtherance of any of the powers herein stated, either alone or in association with other corporations, firms or individuals, and to do every other act or thing incidental, pertaining to, growing out of, or connected with, the aforesaid purposes, objects or powers, or any part thereof.
5 Presidential Decree No. 1869 (1983), sec. 10, as amended by Republic Act No. 9487 (2007), sec. 1.
6 Presidential Decree No. 1869 (1983), sec. 13(2).
7 Rules and Regulations for Philippine Offshore Gaming Operations (2016), sec. 2(b).
8 TAX CODE, Title I, sec. 4, as amended by Rep. Act No. 8424 (1997), Tax Reform Act of 1997.
9 Ponencia, p. 17.
10 Id. at 19.
11 Id. at 8.
12 Id. at 9.
13 J. Lazaro-Javier, Dissenting Opinion, p. 8.
14 J. Lazaro-Javier, Dissenting Opinion, p. 14.
15 Genalyn Kabiling, President signs into law Bayanihan 2, MANILA BULLETIN, September 11, 2020, < https://mb.com.ph/2020/09/11/president-signs-into-law-bayanihan-2/> (last accessed January 6, 2021).
SEC. 125-A. Gaming Tax on Services Rendered by Offshore Gaming Licensees. — Any provision of existing laws, rules or regulations to the contrary notwithstanding, the entire gross gaming revenue or receipts or the agreed predetermined minimum monthly revenue or receipts from gaming, whichever is higher, shall be levied, assessed, and collected a gaming tax equivalent to five percent (5%), in lieu of all other direct and indirect internal revenue taxes and local taxes, with respect to gaming income: Provided, That the gaming tax shall be directly remitted to the Bureau of Internal Revenue not later than the 20th day following the end of each month: Provided, further, That the Philippine Amusement and Gaming Corporation or any special economic zone authority or tourism zone authority or freeport authority may impose regulatory fees on offshore gaming licensees which shall not cumulatively exceed two percent (2%) of the gross gaming revenue or receipts derived from gaming operations and similar related activities of all offshore gaming licensees or a predetermined minimum guaranteed fee, whichever is higher: Provided, furthermore, That for purposes of this Section, gross gaming revenue or receipts shall mean gross wagers less payouts: Provided, finally, That the taking of wagers made in the Philippines and the grave failure to cooperate with the third-party auditor sell result in the revocation of the license of the offshore gaming licensee.Verily, the taxability of POGOs is now beyond question. Section 125-A, NIRC imposes a five percent (5%) gaming tax on all income derived from gaming operations and twenty-five percent (25%) income tax on income derived from non-gaming operations from sources within the Philippines on offshore-based POGO licensees such as petitioners here.
The Philippine Amusement and Gaming Corporation or any special economic zone authority or tourism zone authority or freeport authority shall engage the services of a third-party audit platform that would determine the gross gaming revenues or receipts of offshore gaming licensees. To ensure that the proper taxes and regulatory fees are levied, periodic reports about the results of the operation showing, among others, the gross gaming revenue or receipts of each offshore gaming licensee shall be submitted to the Bureau of Internal Revenue by the Philippine Amusement and Gaming Corporation or any special economic zone authority or tourism zone authority or freeport authority as certified by their third-party auditor: Provided, That the third-party auditor shall be independent, reputable, internationally-known, and duly accredited as such by an accrediting or similar agency recognized by industry experts: Provided, finally, That nothing herein shall prevent the Bureau of Internal Revenue and the Commission on Audit from undertaking a post-audit or independent verification of the gross gaming revenues determined by the third-party auditor.2cralawredlibrary
d) The phrase 'doing business' shall include soliciting orders, service contracts, opening offices, whether called 'liaison' offices or branches: appointing representatives or distributors domiciled in the Philippines or who in any calendar year stay in the country for a period or periods totalling one hundred eight(y) (180) days or more; participating in the management, supervision or control of any domestic business, firm, entity, or corporation in the Philippines; and any other act or acts that imply a continuity of commercial dealings or arrangements, and contemplate to that extent the performance of acts or works; or the exercise of some of the functions normally incident to, and in progressive prosecution of, commercial gain or of the purpose and object of the business organization; Provided, however, That the phrase 'doing business' shall not be deemed to include mere investment as a shareholder by a foreign entity in domestic corporations duly registered to do business, and/or the exercise of rights as such investor, nor having a nominee director or officer to represent its interests in such corporation, nor appointing a representative or distributor domiciled in the Philippines which transacts business in its own name and for its own account.”7 (Emphasis supplied)More, Section 1, Republic Act No. 54558 decrees:
SECTION. 1. Definition and scope of this Act. - (1) x x x the phrase "doing business" shall include soliciting orders, purchases, service contracts, opening offices, whether called "liaison" offices or branches; appointing representatives or distributors who are domiciled in the Philippines or who in any calendar year stay in the Philippines for a period or periods totaling one hundred eighty days [180] or more; participating in the management, supervision or control of any domestic business firm, entity or corporation in the Philippines; and any other act or acts that imply a continuity of commercial dealings or arrangements, and contemplate to that extent the performance of acts or works, or the exercise of some of the functions normally incident to, and in progressive prosecution of, commercial gain or of the purpose and object of the business organization." (Emphasis supplied)In Section 65, Presidential Decree No. 1789,9 the Omnibus Investment Code of 1981, a similar definition has been provided.
ARTICLE 65. Definition of Terms. – As used in this Book, the term "investment" shall mean equity participation in any enterprise formed, organized[,] or existing under the laws of the Philippines; and the phrase "doing business" shall include soliciting orders, purchases, service contracts, opening offices, whether called "liaison" offices or branches; appointing representatives or distributors who are domiciled in the Philippines or who in any calendar year stay in the Philippines for a period or periods totalling one hundred eighty [180] days or more; participating in the management, supervision or control of any domestic business firm, entity or corporation in the Philippines, and any other act or acts that imply a continuity of commercial dealings or arrangements and contemplate to that extent the performance of acts or works, or the exercise of some of the functions normally incident to, and in progressive prosecution of, commercial gain or of the purpose and object of the business organization. (Emphases supplied)There are other statutes defining the term "doing business" in the same wise, and as may be observed, one common denominator among them all is the concept of "continuity."10chanRoblesvirtualLawlibrary
By way of a background, you stated that SCEH is a company organized and existing under the laws of Hong Kong and operates Sony Entertainment Network (SEN) in Singapore, Indonesia, Taiwan, Malaysia, Thailand, and Hong Kong. SEN is an online platform that offers various content and services such as an online community and an online gaming system, which requires a SEN account in order to participate. Since SEN is an internet-based system, persons in the Philippines can create a SEN account to participate in the online community and to purchase content from and/or use SEN's services even if the SCEH does not have a physical presence in the Philippines. A SEN account holder can buy content and services from SEN only by using funds from an associated SEN online wallet, which can be funded by using a credit or debit card or a prepaid card where available.Using the twin-characterization test, the SEC found SCEH to be "doing business" in the Philippines, viz.:
Finally, SEN employees are located in Hong Kong while SEN's servers are based in the United States.
SCEH is seeking confirmation that it is not engaged in doing business in the Philippines and will not be required to obtain a license for the following activities:
1) Offer and sale of SEN services on the internet without restricting persons located in the Philippines from availing of these services (Maintenance); 2) Assuming that Maintenance, by itself, is not considered doing business in the Philippines, accepting online payments for using SEN in any currency, including Philippine currency; 3) Marketing or advertising the SEN in the Philippines through (a) online and printed publications, and (b) television and radio commercials, which is based on the enumerated acts constituting not "doing business" provided in Section 1(f) of the Implementing Rules and Regulations (IRR) of the Foreign Investment Act of 1991 (FIA); and 4) Further, as a form of expansion, hiring Independent Contractors for marketing or advertising of its products and the selling of prepaid cards in relation to its online gaming services.
x x x x
You stated that there is no reason to consider that SCEH will be doing business in the Philippines since the activities of SCEH are carried outside of the Philippines, considering that its employees are in Hong Kong, that its property is outside the Philippines, and that the SEN servers are in the United States.SCEH averred that it was not doing business in the Philippines since the activities of SCEH were carried outside of the Philippines, its employees were in Hong Kong, its property was outside the Philippines, and that the SEN servers were located in the United States (U.S.). Offshore-based POGO licensees raised the same arguments save for the fact that they conducted their offshore gaming operations through the services of PAGCOR-accredited local gaming agents and service providers for its gaming operations.
However, we opine that the activities SCEH proposes to undertake shall be considered as "doing business" in the Philippines since the twin characterization lest is satisfied in this case. First, the following activities indicate that SCEH will be continuing the body or substance of the business of SCEH for which it was organized in the Philippines, to wit: (i) funding of the SEN online wallet; (ii) offering and selling SEN services; (iii) accepting online payments for using SEN in any currency, including Philippine currency; (iv) marketing or advertising; and (v) hiring Independent Contractors lor marketing or advertising of its products and the selling of prepaid cards in relation to its online gaming services.
Second, the above-mentioned enumerated activities are transactions consummated within the Philippines although they are done in virtual plane. The following salient points of the online commercial transactions, or e-commerce, will find themselves in the Philippines:
(i) The creation of a new SEN account will take place in the Philippines in order to participate in SEN; (ii) The offering for sale and sale of online content and services of SEN will be made to the SEN account holder who is located in the Philippines; (iii) The funding of the SEN online wallet will take place in the Philippines as will be further discussed below; (iv) The payment of the sale of online content and services of SEN will be made from the Philippines by the SEN account holder; and (v) The delivery of the online content and services of SEN will be made in the Philippines.
The salient points above-mentioned are evidenced by the use of an IP address through a device (e.g. PlayStation 4, computer, HDTV or mobile device) used by the SEN account holder. IP address is short for Internet Protocol (IP) address. The IP is the method or protocol by which data is sent from one computer to another on the Internet. Each computer (known as a host) on the Internet has at least one IP address that uniquely identifies it from all other computers on the Internet. An IP address consists of four numbers, each of which contains one to three digits, with a single dot (.) separating each number or set of digits (e.g., 78.125.0.209). Moreover, an IP address may reveal such information as the continent, country, region, and city in which a computer is located; the ISP (Internet Service Provider) that services that particular computer; and such technical information as the precise latitude and longitude of the country, as well as the locale, of the computer. The location of an IP address can be traced through the use of an IP geolocation service.
Here, once the SEN account holder enters the SEN online store through his device, he may view the content or service which is offered to him for sale that is sent to his device in the Philippines. Thereafter, the SEN account holder may accept the offer of the content or service from the Philippines by clicking "Confirm Purchase." Once it is purchased, the acceptance of the offer is transmitted from his IP Address through his device in the Philippines to the virtual plane, and the content or service is delivered through said virtual plane to the account of the SEN account holder who is in the Philippines. The SEN account holder will then download the content or service through his device through his IP address located in the Philippines. Clearly, such transaction(s) will be consummated in the Philippines.
Furthermore, it must be remembered that the offering for sale and the sale of content and services, and the funding of the SEN online wallet, are intricately connected since the sale of the SEN content and services cannot be consummated without the funding of said SEN online wallet. Since the SEN online wallet funded by credit cards and debit cards, it, thus, logically and reasonably means that may be SCEH will likewise have arrangements with the credit card/debit card issuers here in the Philippines.
The permission to use and buy from the SEN online store through the funding of the SEN online wallet also clearly indicates that there is intent to continue the main business for a period of time. Once the SEN account holder puts funds in the SEN online wallet, he can resume transactions on the SEN while his account is still active (subject of course, to the SEN's rules on membership in the network), thereby maintaining a business relationship with the SCEH even if the transactions are intermittent and infrequent and even if the SEN user only purchases credit and uses them up at one time.
x x x x
x x x xThus, the Sliding Scale Test or Zippo Test was born. This test was based on the premise that "the likelihood that 'personal jurisdiction' can be constitutionally exercised is directly proportionate to the nature and quantity of commercial activity that an entity conducts over the internet." At one end of the scale are "passive" websites, which alone generally do not generate sufficient contacts with a foreign state to establish personal jurisdiction since they are only used to post information therein. At the other end of the scale are "active" websites, which generate sufficient business over the internet to establish personal jurisdiction. "Interactive" websites fall in the center of the scale since they are hybrid sites that contain elements of both passive and active websites, and courts determine whether to exercise personal jurisdiction over the interactive website owner on a case-by-case basis.
The Constitutional limitations on the exercise of personal jurisdiction differ depending upon whether a court seeks to exercise general or specific jurisdiction over a non-resident defendant.16 General jurisdiction permits a court to exercise personal jurisdiction over a nonresident defendant for non-forum related activities when the defendant has engaged in "systematic and continuous" activities in the forum state.17 In the absence of general jurisdiction, specific jurisdiction permits a court to exercise personal jurisdiction over a non-resident defendant for forum-related activities where the "relationship between the defendant and the forum falls within the 'minimum contacts' framework" of International Shoe Co. v. Washington18 and its progeny.19 Manufacturing does not contend that we should exercise general personal jurisdiction over Dot Com. Manufacturing concedes that if personal jurisdiction exists in this case, it must be specific.
A three-pronged test has emerged for determining whether the exercise of specific personal jurisdiction over a non-resident defendant is appropriate: (1) the defendant must have sufficient "minimum contacts" with the forum state, (2) the claim asserted *1123 against the defendant must arise out of those contacts, and (3) the exercise of jurisdiction must be reasonable.20 The "Constitutional touchstone" of the minimum contacts analysis is embodied in the first prong, "whether the defendant purposefully established" contacts with the forum state.21 Defendants who "'reach out beyond one state" and create continuing relationships and obligations with the citizens of another state are subject to regulation and sanctions in the other State for consequences of their actions."22 "[T]he foreseeability that is critical to the due process analysis is x x x that the defendant's conduct and connection with the forum State are such that he should reasonably expect to be haled into court there."23 This protects defendants from being forced to answer for their actions in a foreign jurisdiction based on "random, fortuitous or attenuated" contacts.24 "Jurisdiction is proper, however, where contacts proximately result from actions by the defendant himself that create a 'substantial connection' with the forum State."25chanRoblesvirtualLawlibrary
The "reasonableness" prong exists to protect defendants against unfairly inconvenient litigation.26 Under this prong, the exercise of jurisdiction will be reasonable if it does not offend "traditional notions of fair play and substantial justice".27 When determining the reasonableness of a particular forum, the court must consider the burden on the defendant in light of other factors including: "the forum state's interest in adjudicating the dispute; the plaintiffs interest in obtaining convenient and effective relief, at least when that interest is not adequately protected by the plaintiffs right to choose the forum; the interstate judicial system's interest in obtaining the most efficient resolution of controversies; and the shared interest of the several states in furthering fundamental substantive social policies."28chanRoblesvirtualLawlibrary
2. The Internet and Jurisdiction
In Hanson v. Denckla, the Supreme Court noted that "[a]s technological progress has increased the flow of commerce between States, the need for jurisdiction has undergone a similar increase."29 Twenty seven years later, the Court observed that jurisdiction could not be avoided "merely because the defendant did not physically enter the forum state."30 The Court observed that:
chanroblesvirtuallawlibrary[I]t is an inescapable fact of modern commercial life that a substantial amount of commercial business is transacted solely by mail and wire communications across state lines, thus obviating the need for physical presence within a State in which business is conducted.Enter the Internet, a global "'super-network' of over 15,000 computer networks used by over 30 million individuals, corporations, organizations, and educational institutions worldwide."31 "In recent years, businesses have begun to use the Internet to provide information and products to consumers and other businesses."32 The internet makes it possible to conduct business throughout the world entirely from a desktop. With this global revolution looming on the horizon, the development of the law concerning the permissible scope of personal jurisdiction based on Internet use is in its infant stages. The *1124 cases are scant. Nevertheless, our review of the available cases and materials reveals that the likelihood that personal jurisdiction can be constitutionally exercised is directly proportionate to the nature and quality of commercial activity that an entity conducts over the Internet. This sliding scale is consistent with well developed personal jurisdiction principles. At one end of the spectrum are situations where a defendant clearly does business over the Internet. If the defendant enters into contracts with residents of a foreign jurisdiction that involve the knowing and repeated transmission of computer files over the Internet, personal jurisdiction is proper. E.g.[,] CompuServe, Inc. v. Patterson, 89 F.3d 1257 (6th Cir. 1996). At the opposite end are situations where a defendant has simply posted information on an Internet Web site which is accessible to users in foreign jurisdictions. A passive Web site that does little more than make information available to those who are interested in it is not grounds for the exercise personal jurisdiction. E.g.[,] Bensusan Restaurant Corp., v. King, 937 F. Supp. 295 (S.D.N.Y. 1996). The middle ground is occupied by interactive Web sites where a user can exchange information with the host computer. In these cases, the exercise of jurisdiction is determined by examining the level of interactivity and commercial nature of the exchange of information that occurs on the Web site. E.g. [,] Maritz, Inc. v. Cybergold, Inc., 947 F. Supp. 1328 (E.D.Mo. 1996).
Traditionally, when an entity intentionally reaches beyond its boundaries to conduct business with foreign residents, the exercise of specific jurisdiction is proper.33 Different results should not be reached simply because business is conducted over the Internet. x x x
x x x x
SEC. 22. Definitions. - When used in this Title:Consequently, they are subject to income tax in accordance with Section 23 of the NIRC:
(H) The term 'resident foreign corporation' applies to a foreign corporation engaged in trade or business within the Philippines.34cralawredlibrary
SEC. 23. General Principles of Income Taxation in the Philippines. - Except when otherwise provided in this Code:As the provision plainly states, a foreign corporation, whether engaged or not in trade or business in the Philippines, is subject to Philippine income taxation on income received from all sources within the Philippines. This rule is based on the source concept defined as:
(A) A citizen of the Philippines residing therein is taxable on all income derived from sources within and without the Philippines;cralawlawlibrary
(B) A nonresident citizen is taxable only on income derived from sources within the Philippines;cralawlawlibrary
(C) An individual citizen of the Philippines who is working and deriving income from abroad as an overseas contract worker is taxable only on income derived from sources within the Philippines: Provided, That a seaman who is a citizen of the Philippines and who receives compensation for services rendered abroad as a member of the complement of a vessel engaged exclusively in international trade shall be treated as an overseas contract worker;cralawlawlibrary
(D) An alien individual, whether a resident or not of the Philippines, is taxable only on income derived from sources within the Philippines;cralawlawlibrary
(E) A domestic corporation is taxable on all income derived from sources within and without the Philippines; and
(F) A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines.35 (Emphases supplied)
Source concept. The jurisdiction to impose income tax is based either on the relationship of the income (tax object) to the taxing state (commonly known as the source or situs principle) or the relationship of the taxpayer (tax subject) to the taxing state based on residence or nationality. Under the source principle, a State's claim to tax income is based on the State's relationship to that income.36cralawredlibraryIn CIR v. Baier-Nickel,37 the Court provided a background on sourcing of income under the Internal Revenue Code of the U.S. from whence our Tax Code originated:
The following discussions on sourcing of income under the Internal Revenue Code of the U.S., are instructive:For the source of income to be considered as coming from the Philippines, it is sufficient that the income is derived from activity within the Philippines, e.g., sale of tickets in the Philippines is the activity that produces the income as the tickets exchanged hands here and payments for fares were also made here in Philippine currency. The situs of the source of payments is the Philippines. The flow of wealth proceeded from, and occurred within, Philippine territory, enjoying the protection accorded by the Philippine government. In consideration of such protection, the flow of wealth should share the burden of supporting the government.40chanRoblesvirtualLawlibrary
The Supreme Court has said, in a definition much quoted but often debated, that income may be derived from three possible sources only: (1) capital and/or (2) labor; and/or (3) the sale of capital assets. While the three elements of this attempt at definition need not be accepted as all-inclusive, they serve as useful guides in any inquiry into whether a particular item is from "sources within the United States" and suggest an investigation into the nature and location of the activities or property which produce the income.
If the income is from labor the place where the labor is done should be decisive; if it is done in this country, the income should be from "sources within the United States." If the income is from capital, the place where the capital is employed should be decisive; if it is employed in this country, the income should be from "sources within the United States." If the income is from the sale of capital assets, the place where the sale is made should be likewise decisive.
Much confusion will be avoided by regarding the term "source" in this fundamental light. It is not a place, it is an activity or property. As such, it has a situs or location, and if that situs or location is within the United States the resulting income is taxable to nonresident aliens and foreign corporations.
The intention of Congress in the 1916 and subsequent statutes was to discard the 1909 and 1913 basis of taxing nonresident aliens and foreign corporations and to make the test of taxability the "source," or situs of the activities or property which produce the income. The result is that, on the one hand, nonresident aliens end nonresident foreign corporations are prevented from deriving income from the United States free from tax, and, on the other hand, there is no undue imposition of a tax when the activities do not take place in. and the property producing income is not employed in, this country. Thus, if income is to be taxed, the recipient thereof must be resident within the jurisdiction, or the property or activities out of which the income issues or is derived must be situated within the jurisdiction so that the source of the income may be said to have a situs in this country.
The underlying theory is that the consideration for taxation is protection of life and property and that the income rightly to be levied upon to defray the burdens of the United States Government is that income which is created by activities and property protected by this Government or obtained by persons enjoying that protection.38 (Emphases supplied)
The important factor which determines the source of income of personal services, therefore, is not the residence of the payor, or the place where the contract for service is entered into, or the place of payment, but the place where the services were actually rendered.39cralawredlibrary
Taxes are essential to the very existence of government.42 The obligation to pay taxes rests not upon the privileges enjoyed by, or the protection afforded to, a citizen by the government, but upon the necessity of money for the support of the state.43 For this reason, no one is allowed to object to or resist the payment of taxes solely because no personal benefit to him can be pointed out.44chanRoblesvirtualLawlibraryThis basis of taxation was subsequently articulated in CIR v. Algue, Inc.,45 where the Court pronounced:
x x x x
It is said that taxes are what we pay for civilization society. Without taxes, the government would be paralyzed for lack of the motive power to activate and operate it. Hence, despite the natural reluctance to surrender part of one's hard earned income to the taxing authorities, every person who is able to must contribute his share in the running of the government. The government for its part, is expected to respond in the form of tangible and intangible benefits intended to improve the lives of the people and enhance their moral and material values. This symbiotic relationship is the rationale of taxation and should dispel the erroneous notion that it is an arbitrary method of exaction by those in the seat of power.46 (Emphasis and italics supplied)Thus, the basis of taxation is the existence of a social contract, characterized as a symbiotic relationship between the State and its citizens – offshore gaming licensees in this case, which compel reciprocal duties of protection and support between the parties. In Abakada Guro Party List v. Ermita,47 the Supreme Court restated the basis of taxation – "The expenses of government, having for their object the interest of all, should be borne by everyone, and the more man enjoys the advantages of society, the more he ought to hold himself honored-in contributing to those expenses."
x x x x
Endnotes:
1 An Act Taxing Philippine Offshore Gaming Operations, Amending for the Purpose Sections 22, 25, 27, 28, 106, 108, and Adding New Sections 125-A and 288(G) of the National Internal Revenue Code of 1997, As Amended and for Other Purposes. (Republic Act No. 11590, Approved on September 22 2021).
2 Id.
3 72 Phil. 524-531 (1941).
4 Id. at 528.
5 MR Holdings, Ltd. v. Bajar, et al., 430 Phil. 443, 462 (2002).
6 An Act to Promote Foreign Investments, Prescribes ihe Procedures for Registering Enterprises Doing Business in the Philippines, and for Other Purposes.
7 Section 3(d) of Republic Act No. 7042, Approved on June 13, 1991 (as amended).
8 An Act to Require that the Making of Invesments and the Doing of Business Within the Philippines by Foreigners or Business Organizations Owned in Whole or in Part by Foreigners Should Contribute to the Sound and Balanced Development of the National Economy on a Self-Sustaining Basis, and for Other Purposes, Enacted Without executive approval, September 30, 1968, (65 O.G. No. 29, p. 7410).
9 A Decree to Revise, Amend and Codify the Investment, Agricultural, and Export Incentives Acts to be known as the Omnibus Investment Code, (Presidential Decree No. 1789, Signed on January 16, 1981).
10 Supra note 5 at 464.
11 C. Villanueva, Philippine Corporate Law (2010 ed.), p. 986.
12 See Cargill, Inc. v. Intra Strata Assurance Corporation, Inc., 629 Phil. 320, 333 (2010).
13 SEC-OGC Opinion No. 17-03 Re; Foreign Corporation; Doing business; Online Gaming, issued by Hon. Camilo S. Correa, General Counsel of Securities and Exchange Commission.
14 Id.
15 Zippo Mfg. Co. v Zippo Dot Com, Inc., 952 F. Supp. 1119 (W.D. Pa. 1997). https://law.justia.com/cases/federal/district-courts/FSupp/952/1119/1432344/. (Accessed on December 27, 2021, 9:19 PM), citing Mellon, 960 F. 2d at 1221.
16 Id, Mellon, 960 F.2d at 1221.
17 Id, Helicopteros Nacionales de Colombia S.A. v. Hall, 466 U.S. 408, 414-16, 104 S. Ct. 1868, 1872-73, 80 L. Ed. 2d 404 (1984).
18 Id, International Shoe Co. v. Washington, 326 U.S. 310, 66 S. Ct. 154, 90 L. Ed. 95 (1945).
19 Id, Mellon, 960 F.2d at 1221.
20 Id.
21 Id, Burger King Corp. v. Rudzewiez, 471 U.S. 462, 475, 105 S. Ct. 2174, 2183-84, 85 L. Ed. 2d 528 (1985) (citing International Shoe Co. v. Washington, 326 U.S. 310, 319, 66 S. Ct. 154, 159-60, 90 L. Ed. 95 (1945)).
22 Id, citing Travelers Health Assn. v Virginia 339 U.S. 643, 647, 70 S. Ct. 927, 929, 94 L. Ed. 1154 (1950)).
23 Id, World-Wide Volkswagen Corp. v. Woodson, 444 U.S. 286, 297, 100 S. Ct. 559, 567, 62 L. Ed. 2d 490 (1980).
24 Id, Keeton v. Hustler Magazine, Inc., 465 U.S. 770, 774, 104 S. Ct. 1473, 1478, 79 L. Ed. 2d 790 (1984).
25 Id, Burger King, 471 U.S. at 475, 105 S. Ct. at 2183-84 (citing McGee v. International Life Insurance Co., 355 U.S. 220, 223, 78 S. Ct. 199, 201, 2 L. Ed. 2d 223 (1957)).
26 Id, World-Wide Volkswagen, 444 U.S. at 292, 100 S Ct. at 564-65.
27 Id, International Shoe, 326 U.S. at 316, 66 S. Ct. at 158.
28 Id, World-Wide Volkswagen, 444 U.S. at 292, 100 S. Ct. at 564.
29 Id, Hanson v. Denckla, 357 U.S. 235, 250-51, 78 S. Ct. 1228, 1237-39, 2 L. Ed. 2d 1283 (1958).
30 Id, Burger King, 471 U.S. at 476, 105 S. Ct. at 2184.
31 Id, Panavision Intern., L.P. v. Toeppen, 938 F Supp. 616 (C.D.Cal. 1996) (citing American Civil Liberties Union v. Reno, 929 F. Supp. 824, 830-48 (E.D.Pa. 1996)).
32 Id.
33 Id, Burger King, 471 U.S. at 475, 105 S. Ct. at 2183-84.
34 AN ACT AMENDING THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED, AND FOR OTHER PURPOSES, Republic Act No. 8424, December 11, 1997.
35 Id.
36 Concepts and issues, I. International Double Taxation, UN Committee of Experts on International Cooperation in Tax Matters Seventh session, Geneva, 24-28 October 2011, Item 5 (h) of the provisional agenda, Revision of the Manual for the Negotiation of Bilateral Tax Treaties.
37 CIR v. Juliane Baier-Nickel, 531 Phil. 480-496 (2006).
38 Id. at 488-489.
39 Id. at 489.
40 See CIR v. British Overseas Airways Corporation, 233 Phil. 406, 422 (1987).
41 Pablo Lorenzo v. Juan Posadas, Jr., 64 Phil. 353, 370 (1937).
42 Id, citing Dobbins v. Erie County, 16 Pet., 435 10 Law, ed., 1022; Kirkland v. Hotchkiss, 100 U.S., 491; 25 Law. ed., 558; Lane County v. Oregon, 7 Wall. 71, 19 Law. ed., 101; Union Refrigerator Transit Co., v. Kentucky, 199 U. S., 194; 26 Sup. Ct., Rep., 36, 50 Law. ed., 150, Charles River Bridge v. Warren Bridge, 11 Pet., 420; 9 Law. ed., 773.
43 Id, citing Dobbins v. Erie County.
44 Id, citing Thomas v. Gay, 169 U. S., 264, 18 Sup. Ct. Rep., 340; 43 Law. ed 740.
45 CIR v. Algue, 241 Phil. 829-836 (1988).
46 Id. at 836.
47 506 Phil. 1, 74 (2005).
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