1. Are offshore-based Philippine Offshore Gaming Operations (POGO) licensees subject to Philippine taxes?
Before September 22, 2021, no. In the case of Saint Wealth Ltd. v. Bureau of Internal Revenue (G.R. Nos. 252965 & 254102, December 7, 2021), the Supreme Court ruled that before the effectivity of Republic Act No. 11590, which was passed into law on September 22, 2021, offshore-based POGO licensees were not subject to any Philippine tax.
POGO licensees are offshore gaming operators duly authorized through a gaming license issued by a POGO licensing authority (such as the Philippine Amusement and Gaming Corporation [PAGCOR] or any special economic zone authority) to conduct offshore gaming operations including the acceptance of bets from offshore customers. (Section 2F, Revenue Regulations No. 20-2021 dated November 6, 2021 Implementing Republic Act No. 11590, otherwise known as an "Act Taxing Philippine Offshore Gaming Operations").
The Supreme Court declared as null and void for being unconstitutional and contrary to other relevant laws: (1) Sections 11 (f) and (g) of Republic Act No. 11494 (Bayanihan 2 Law), as well as Revenue Regulations No. 30-2020 and Revenue Memorandum Circular No. 64-2020, which implement the same; and (2) Revenue Memorandum Circular Nos. 102-2017 and 78-2018, insofar as they impose franchise tax, income tax, and other taxes on offshore-based POGO licensees.
The Supreme Court held that Revenue Memorandum Circular Nos. 102-2017 and 78- 2018 are invalid insofar as they impose: (1) franchise tax on POGOs without any statutory basis; and (2) income tax and other applicable taxes on offshore-based POGO licensees despite the fact that they do not derive any income from sources within the Philippines. It said that POGOs do not fall under, and could not have been contemplated by, licensees of "casinos and other related amusement places" that are subject to franchise tax under Section 13(2)(b) Presidential Decree No. 1869. Further, it said that offshore-based POGO licensees derive no income from sources within the Philippines (which could be subject to Philippine income tax) because the "activity" which produces the income occurs and is located outside the Philippines. The flow of wealth or the income-generating activity - the placing of bets less the amount of payout - transpires outside the Philippines. Non-resident foreign corporations, such as off-share POGO licensees, are subject to income tax only on income from Philippine sources.
The Supreme Court also ruled that Sections 11 (f) and (g) of the Bayanihan 2 Law, insofar as they impose new taxes on POGO licensees, are unconstitutional for being riders. It held that Sections 11 (f) and (g) are not germane to the purpose of the Bayanihan 2 Law, which is not a tax measure but only a temporary relief measure to address the COVID-19 pandemic, thereby violating the "one subject, one title rule" under Article 6, Section 26(1) of the Constitution.
Presently, pursuant to Republic Act No. 11590, which amended the National Internal Revenue Code of 1997 (Tax Code) offshore-based POGO licensees are subject to (1) a 5% gaming tax on income derived from gaming operations; and (2) a 25% income tax on income derived from non-gaming operations from sources within the Philippines.
SyCipLaw TIP 1:
Offshore-based POGO licensees should take note of the taxes applicable to them before and after the passage of Republic Act No. 11590. If an offshore-based POGO licensee paid Philippine taxes before the passage of Republic Act No. 11590, it must study any available remedy to recover such tax considering, among others, that under the Tax Code, a claim for refund of erroneously or illegally collected taxes must be made within two years from the date of payment of such tax.
2. Does the Court of Tax Appeals have jurisdiction over issues concerning the national wealth share of local government units under the Local Government Code?
No because the national wealth share is not considered a tax. In CE Casecnan Water and Energy Company, Inc. v. Municipality of Alfonso Castañeda, Nueva Vizcaya, et al. (CTA EB No. 2494 [CTA AC No. 221], September 23, 2022), the Court of Tax Appeals (CTA) En Banc affirmed the CTA First Division's decision that the CTA has no jurisdiction over issues concerning the national wealth share of local government units (LGUs).
In this case, CE Casecnan Water and Energy Company, Inc. (CE Casecnan) entered into a Build-Operate-and-Transfer contract with the National Irrigation Administration (NIA) for the construction of an irrigation system and dams in the Municipality of Alfonso Castañeda (Municipality). Under the Local Government Code (LGC), LGUs have "an equitable share in the proceeds derived from the utilization and development of the national wealth within their respective areas, including sharing the same with the inhabitants by way of direct benefits." Pursuant to this provision, the Municipality issued an assessment against CE Casecnan, demanding that CE Casecnan automatically remit the Municipality's supposed national wealth share in the utilization and development of the bodies of water being utilized by CE Casecnan. The Municipality anchored its claim of direct remittance pursuant to Sections 286, 291, and 293 of the LGC and Section 66 of the Electric Power Industry Reform Act (EPIRA).
CE Casecnan filed a protest against the assessment, arguing that the Municipality cannot be considered as a host LGU, which is entitled to a share in the proceeds derived by CE Casecnan from its delivery of water to NIA. The Municipality, however, denied CE Casecnan's protest.
CE Casecnan then filed a complaint before the Regional Trial Court (RTC), which found that CE Casecnan, as a private entity, is not mandated to directly remit to the Municipality the latter's share in the proceeds of the utilization and development of national wealth within its territorial jurisdiction. The RTC further added that under DBM-DOF-DOE Joint Circular No. 2006-1 the National Government, through its agencies, that has the sole authority to collect and release the claims of LGUs from the proceeds in the utilization and development of national wealth. Accordingly, the RTC cancelled the assessment and set aside the denial of CE Casecnan's protest. The RTC found, however, that the Municipality is still entitled to receive the national wealth share of the proceeds derived by CE Casecnan, not directly from CE Casecnan, but from the National Government, pursuant to Sections 289 and 291 of the LGC. CE Casecnan moved for a partial reconsideration of the RTC's decision finding that the Municipality is entitled to receive its national wealth share but the motion was denied. CE Casecnan filed a petition for review before the CTA.
In affirming the CTA First Division's ruling, the CTA En Banc ruled that: (a) Republic Act No. 1125, as amended, vests the CTA with original or appellate jurisdiction to review by appeal, the decisions, resolutions, or orders of the RTC concerning local tax cases; (b) local taxes are those levied by the LGUs on the basis of Titles I and II of Book II of the LGC; (c) the basis of the Municipality's assessment cannot be classified as an assessment of a local tax that is within the coverage of Titles I and II of Book II of the LGC as the share of LGUs in the national wealth is sourced from the taxes levied by the National Government on persons engaged in the utilization and development of national wealth and resources; (d) CE Casecnan's main arguments are based on Title III, Book II of the LGC, which is outside the definition of local taxes under Titles I and II, Book II of the LGC; and (e) CE Casecnan has expressly and categorically stated that the Municipality's sole basis for its entitlement in the national wealth share is Section 66 of the EPIRA, and not the LGC.
Thus, considering that the subject matter of CE Casecnan's petition is neither a local tax case nor even a tax issue, the CTA is devoid of any jurisdiction to rule on the same.
A motion for reconsideration of the decision is currently pending.
CTA decisions, while persuasive, do not become the law of the land, unlike decisions of the Supreme Court.
SyCipLaw TIP 2:
In order to be classified as a local tax case that is within the jurisdiction of the CTA, the taxpayers' cause of action against an LGU must be based on Titles I and II of Book II of the LGC. Cases that involve causes of action that are outside the scope of any of these provisions of the LGC will not be considered as a local tax case and will therefore be outside the jurisdiction of the CTA.
3. Is a general professional partnership, which is engaged in the practice of the architecture profession, liable for contractor's tax, which is a local business tax, under the Revised Makati Revenue Code?
No. While Section 3A.02(g) of the Revised Makati Revenue Code (RMRC) imposes a local business tax on contractors and other independent contractors, and on owners or operators of business establishments rendering or offering interior decorating and landscaping services, the RMRC defines a contractor to include "persons, natural or juridical, not subject to professional tax". Considering that the partners of the general professional partnership (GPP) involved in this case already paid their professional taxes in their individual capacities, the GPP here is not subject to local business tax under Section 3A.02(g) of the RMRC.
In Barlis and the City of Makati v. GF & Partners, Architects, Co. (CTA AC No. 247 [Civil Case No. 15-315], September 16, 2022), GF & Partners, Architects, Co. (GFAPC), a GPP, received an assessment from the City of Makati, finding it liable for local business tax under Section 3A.02(g) of the RMRC. GFAPC filed a protest, but the City of Makati did not act on it. GFAPC then filed a petition for the cancellation of the assessment before the RTC, which ordered the cancellation of the assessment and declared that the GFACP is not liable for the local business tax under Section 3A.02(g) of the RMRC. The City of Makati then filed a petition for review before the CTA. The City of Makati claimed that the GFAPC was assessed as a contractor, or as an owner or operator of a business establishment, which renders or offers interior decoration and landscaping services, based on Section 3A.02(g) of the RMRC, and not as a GPP.
The CTA, in ruling in favor of GFAPC, found that the RMRC provides that persons who are subject to professional tax are not included in the term "contractor." Based on its professional tax receipts, GFAPC was able to prove that its partners have been paying their professional taxes with the City of Makati. In addition, it was shown, through the GFAPC's articles of partnership, that it is engaged in the practice of a profession, considering that the sole purpose of the partnership was for the general practice of architecture, interior decoration, landscaping, land development, and such further activities as may be incident thereto. The CTA further ruled that "[t]he income tax is imposed not on the professional partnership, which is tax exempt, but on the partners themselves in their individual capacity computed on their distributive shares of partnership profits." Hence, as a GPP, GFAPC is not subject to local business tax under Section 3A.02(g) of the RMRC.
A motion for reconsideration of the decision is currently pending.
CTA decisions, while persuasive, do not become the law of the land, unlike decisions of the Supreme Court.
SyCipLaw TIP 3:
A GPP is not liable for the contractor's tax under the RMRC, provided that the individual partners are consistently paying their professional taxes as evidenced by its professional tax receipts. However, a GPP must first prove that it is not engaged in any trade or business other than the general practice of its profession.
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