Recent Supreme Court ruling in Thunderbird case
The recent case of Thunderbird Pilipinas Hotels and Resorts, Inc. vs. Commissioner of Internal Revenue made bold assertions and clarifications regarding the exemption from income tax, value-added tax (“VAT”), withholding tax, and other related taxes of PAGCOR licensees. The decision of the Supreme Court in Thunderbird Pilipinas Hotels and Resorts, Inc. vs. Commissioner of Internal Revenue[1] (“Thunderbird”) clarified the tax treatment granted to PAGCOR licensees and service providers. But what effect does the decision really have on the revenue generated by them on their gaming operations, and from the income earned by licensed service providers servicing them?
Here is our take.
First, the Thunderbird case does not revive any previous ruling or issuance of the Bureau of Internal Revenue (“BIR”).
There is no rule which provides that a decision of the Supreme Court in Division may revive a government issuance that was previously declared void or decreed to have unduly expanded the Court’s decision and interpretation.
Only Supreme Court En Banc can overturn case law
Only the Supreme Court sitting En Banc can overturn a case law decided by the Supreme Court in Division which had declared a government issuance void. This cannot be done in a decision promulgated by another Division of the Supreme Court. No less than the 1987 Constitution declares that “no doctrine or principle of law laid down by the court in a decision rendered en banc or in division may be modified or reversed except by the court sitting en banc”[2].
In the full text of the Thunderbird case, the Supreme Court did not mention categorically, or even by mere implication, that a previous and related BIR issuance (BIR RMC No. 33-2013) is revived, insofar as the tax treatment of the income from gaming operations of PAGCOR and its licensees and contractees are concerned. The Supreme Court actually does not have the authority to do so, unless done by the high court, sitting En Banc. Otherwise, this would be tantamount to what is called judicial legislation, which is frowned upon in our form of government. As such, the doctrine of the Supreme Court holding RMC No. 33-2013 as void still stands as the case law.
In the case of PAGCOR vs. BIR[3] (“PAGCOR”), the Supreme Court decreed:
“In view of the foregoing disquisition, respondent, therefore, committed grave abuse of discretion amounting to lack of jurisdiction when it issued RMC No. 33-2013 subjecting both income from gaming operations and other related services to corporate income tax and five percent (5%) franchise tax. This unduly expands our Decision dated March 15, 2011 without due process since the imposition creates additional burden upon petitioner. Such act constitutes an overreach on the part of the respondent, which should be immediately struck down, lest grave injustice results. More, it is settled that in case of discrepancy between the basic law and a rule or regulation issued to implement said law, the basic law prevails, because the said rule or regulation cannot go beyond the terms and provisions of the basic law.
xxx
In view of the above-discussed findings, this Court ORDERS the respondent to cease and desist the implementation of RMC No. 33-2013 insofar as it imposes: (1) corporate income tax on petitioner’s income derived from its gaming operations; and (2) franchise tax on petitioner’s income from other related services.” [Emphasis supplied.]
In effect, RMC No. 33-2013 was declared void by the Supreme Court whereby the BIR is ordered to cease and desist from the implementation of the Circular. Notably, though, the resolution in this case was limited to clarifying the tax treatment relating to the income from gaming operations of PAGCOR only. The decision in this case did not delve into the tax treatment of income relating to third parties with a contractual relationship with PAGCOR, nor to those parties who are operating with PAGCOR’s licensees or contractees because they are not parties to the case.
Bloomberry case is still good law
The case of Bloomberry is very much alive and current law.
Subsequently, in the case of Bloomberry Resorts and Hotels, Inc. vs. Bureau of Internal Revenue[4] (“Bloomberry”), the Supreme Court reiterated its order to the BIR to cease and desist from the implementation of the Circular. This time, the Supreme Court discussed the tax treatment of the income from gaming operations of PAGCOR’s licensees and contractees. This is because the aggrieved party in this case is a licensee of PAGCOR. The Supreme Court ruled in favor of Bloomberry because PAGCOR contractees and licensees are also exempt from taxes on income derived from their casino operations, pursuant to Section 13(2)(b) of Presidential Decree No. 1869.
In the case of Thunderbird, the Supreme Court seemingly ruled that PAGCOR’s contractees and licensees are now subject to income tax as prescribed in the National Internal Revenue Code, as amended, thereby departing from the doctrine laid down in Bloomberry. However, a careful scrutiny of the case will readily show that the Supreme Court did not depart from nor abandon the doctrine laid down in Bloomberry.
The Supreme Court is correct in stating that Bloomberry is not squarely congruent with Thunderbird. There is the mention of Republic Act (“R.A.”) No. 9487 when this was discussed in the case. This is because R.A. No. 9487 was the enabling law whereby PAGCOR was given the authority to license casinos and other gaming operations. This is relevant in the case because the taxable year involved in Thunderbird is 2006, when it was operating a casino and resort complex by virtue of a Memorandum of Agreement. At this time, PAGCOR did not yet have the authority to license gaming operators.
On the other hand, in the case of Bloomberry, Bloomberry was granted a license on 08 April 2009. At this point in time, PAGCOR already had the authority to license casinos and other gaming operations. It must be noted that R.A. No. 9487 was enacted on 20 June 2007.
To delineate the Thunderbird case viz-a-viz Bloomberry, Thunderbird is not considered as a PAGCOR licensee for the taxable year involved because in the first place, PAGCOR had no authority to issue a license to operate casinos and other gaming operations at that time. In Bloomberry, the taxpayer was already a holder of license from PAGCOR, since in 2007, which is the taxable year involved, PAGCOR had the authority to issue licenses.
Supreme Court ruling in Acesite clarifies tax regime
That is why the Supreme Court ruled that the doctrine laid down in CIR vs. Acesite (Philippines) Hotel Corp.[5] (“Acesite”) is applicable to the case of Thunderbird because at that time, the latter is operating without any license but only by virtue of a Memorandum of Agreement with PAGCOR. Acesite provides, to wit:
“The tax exemption of PAGCOR extends only to those individuals or entities that have contracted with PAGCOR in connection with PAGCOR’s casino operations. The exemption does not include private entities that were licensed to operate their own casinos.”
The case of CIR vs. Acesite (Philippines) Hotel Corp. was decided under a different factual milieu.
When Acesite was decided, R.A. No. 9487 was not yet enacted. The license to operate casinos and other gaming operations when Acesite was promulgated was merely by virtue of a Memorandum of Agreement. Thus, the Supreme Court ruled in Thunderbird that, “Thunderbird was authorized and licensed by PAGCOR to construct and operate a casino complex, by virtue of the April 11, 2006 Memorandum of Agreement and the October 31, 2006 License. Petitioner does not fall within the purview of Section 13(2)(b). Therefore, revenues derived by petitioner from its casino operations are not exempt from income tax.”
In order to harmonize the seemingly conflicting decisions, the doctrine laid down in Thunderbird should be applicable to casinos and other gaming operators which were licensed by virtue of a Memorandum of Agreement with PAGCOR. On the other hand, the doctrine laid down in Bloomberry should be applied to casinos and other gaming operators which were licensed by the authority of PAGCOR through R.A. No. 9487.
The opening statement in Thunderbird is quoted herein, to wit:
“Strictly construed, Section 13(2)(b) of Presidential Decree No. 1869 means that the Philippine Amusement and Gaming Corporation (PAGCOR)’s income tax exemptions only extend to entities or individuals in a contractual relationship with PAGCOR in connection with its casino operation. A PAGCOR licensee authorized to operate its own casino does not fall within the purview of Section 13(2)(b). Its income from its casino operations, therefore, is not tax-exempt.” [Emphasis supplied.]
This should be considered merely as an obiter. At the very least, this should apply to those casinos and other gaming operators equally situated with Thunderbird, specifically, those who are licensed by PAGCOR to operate their own casino by virtue of a Memorandum of Agreement prior to the enactment of R.A. No. 9487.
Travellers case also clarifies tax regime
Even in the case of Commissioner of Internal Revenue Vs. Travellers International Hotel Group, Inc.[6] (“Travellers”), the doctrine laid down in Bloomberry was reiterated by the Supreme Court to resolve the issue of the taxpayers gaming revenues as a PAGCOR licensee. It bears emphasis that the ruling in the Travellers case is more recent than the decision of the Supreme Court in Thunderbird. The Supreme Court in the Travellers case held that:
“Even assuming that the delegation of authority was valid, the CTA En Banc also correctly found that respondent’s gaming revenues as a PAGCOR licensee were exempt from regular corporate income tax after payment of the five percent (5%) franchise tax per the Court’s pronouncement in Bloomberry Resorts and Hotels, Inc. v. Bureau of internal Revenue. Hence, the CTA En Banc correctly set aside the deficiency tax assessment against respondent.” [Emphasis and underscoring supplied.]
In this case, the taxable year involved is 2010. Travellers was authorized by PAGCOR to establish and operate casinos within the latter’s regulatory and licensing authority under P.D. No. 1869, as amended, otherwise known as the PAGCOR Charter.[7] Therefore, it is eligible to claim exemption for taxes, after payment of the five percent (5%) franchise tax.
Tax Treatment of PAGCOR licensees and service providers essentially the same
In conclusion, the decision in Thunderbird should not significantly affect the tax treatment of existing PAGCOR licensees and licensed service providers, specifically those operating by virtue of the powers of PAGCOR granted under P.D. No. 1869, as amended by R.A. No. 9487.
The status quo on the tax treatment of the gaming operations of such licensed contractees and service providers prior to October 2021, and other PAGCOR licensees and contractees by virtue of the authority granted by R.A. No. 9487, should be maintained. Their income from the operations should still be exempt from regular income tax, VAT, and other related taxes. They should be obliged to pay only the franchise tax of five percent (5%) on its gross revenue from its operations, in lieu of all other taxes.
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[1] G.R. No. 211327, 11 November 2020.
[2] Section 4(3), Article VIII of the 1987 Constitution.
[3] G.R. No. 215427, 10 December 2014
[4] G.R. No. 212530, August 10, 2016.
[5] G.R. No. 147295, 16 February 2007.
[6] G.R. No. 255487, 03 May 2021.
[7] Decision dated 17 July 2020, CTA EB No. 2047; Decision dated 08 November 2018, CTA Case No. 9168.
