Philippine Amusement and Gaming Corporation v. Commissioner of Internal Revenue
CLARIFICATIONFacts
The Antecedents: The Philippine Amusement and Gaming Corporation (PAGCOR) was created by Presidential Decree (P.D.) No. 1067-A on January 1, 1977, and P.D. No. 1067-B simultaneously exempted it from all taxes except a 5% franchise tax. This exemption was expanded by P.D. No. 1399 and consolidated under P.D. No. 1869, which explicitly stated that no tax of any kind or form, income or otherwise, shall be assessed and collected from PAGCOR, except a 5% franchise tax, and that this exemption would inure to the benefit of entities contracting with PAGCOR. While P.D. No. 1931 temporarily removed PAGCOR's tax exemption in June 1984, it was restored by Letter of Instruction No. 1430 in September 1984. Subsequently, Republic Act (R.A.) No. 8424, or the National Internal Revenue Code of 1997, which took effect on January 1, 1998, specifically enumerated PAGCOR among the government-owned and controlled corporations (GOCCs) exempt from corporate income tax. Procedural History: On May 24, 2005, R.A. No. 9337 was enacted, amending certain sections of the National Internal Revenue Code of 1997. Section 1 of R.A. No. 9337 notably excluded PAGCOR from the enumeration of GOCCs exempt from corporate income tax. The constitutionality of R.A. No. 9337, on other grounds, had previously been upheld by the Supreme Court in Abakada Guro Party List v. Ermita on September 1, 2005. On the same date, the Bureau of Internal Revenue (BIR) issued Revenue Regulations (RR) No. 16-2005, which specifically identified PAGCOR as one of the franchisees subject to the 10% Value Added Tax (VAT) imposed under Section 108 of the National Internal Revenue Code of 1997, as amended by R.A. No. 9337. The Petition: PAGCOR filed a Petition for Certiorari and Prohibition with the Supreme Court, seeking the declaration of nullity of Section 1 of R.A. No. 9337 insofar as it amended Section 27(c) of the National Internal Revenue Code of 1997, by excluding PAGCOR from exemption from corporate income tax. PAGCOR argued that this amendment was repugnant to Sections 1 (equal protection clause) and 10 (non-impairment clause) of Article III of the 1987 Constitution. Additionally, PAGCOR sought to prohibit the implementation of BIR Revenue Regulations No. 16-2005, specifically Section 4.108-3, paragraph (h), contending that it was contrary to law for imposing VAT on PAGCOR and its licensees or franchisees, as the basic law, R.A. No. 8424, as interpreted by jurisprudence, did not impose VAT on them.
Issue(s)
Whether or not Section 1 of Republic Act (R.A.) No. 9337, which excludes PAGCOR from exemption from corporate income tax, is null and void ab initio for being repugnant to the equal protection clause embodied in Section 1, Article III of the 1987 Constitution. Whether or not Section 1 of R.A. No. 9337 is null and void ab initio for being repugnant to the non-impairment clause embodied in Section 10, Article III of the 1987 Constitution. Whether or not Bureau of Internal Revenue (BIR) Revenue Regulations (RR) No. 16-2005, Section 4.108-3, paragraph (h) is null and void ab initio for being beyond the scope of the basic law, R.A. No. 8424, Section 108, insofar as the said regulation imposed Value Added Tax (VAT) on the services of PAGCOR as well as PAGCOR's licensees or franchisees.
Ruling
The petition is PARTLY GRANTED. Section 1 of Republic Act No. 9337, amending Section 27 (c) of the National Internal Revenue Code of 1997, by excluding petitioner Philippine Amusement and Gaming Corporation from the enumeration of government-owned and controlled corporations exempted from corporate income tax is valid and constitutional. However, BIR Revenue Regulations No. 16-2005 insofar as it subjects PAGCOR to 10% VAT is null and void for being contrary to the National Internal Revenue Code of 1997, as amended by Republic Act No. 9337.
Ratio Decidendi
On Issue 1: The Supreme Court held that Section 1 of R.A. No. 9337, which removed PAGCOR's corporate income tax exemption, does not violate the equal protection clause. The Court noted that PAGCOR's previous exemption under R.A. No. 8424 was not based on a valid classification showing substantial distinctions, but rather on PAGCOR's own request. Taxation is the rule, and exemption is the exception, with the burden of proof resting on the claimant. The legislative intent behind R.A. No. 9337 was to subject PAGCOR to corporate income tax, as evidenced by the Bicameral Conference Meeting records. The principle of expressio unius est exclusio alterius applies, meaning the express mention of other exempted GOCCs excludes PAGCOR from the exemption. Therefore, the legislative act of removing PAGCOR's exemption is a valid exercise of legislative power and does not constitute arbitrary discrimination. On Issue 2: The Supreme Court ruled that Section 1 of R.A. No. 9337 does not violate the non-impairment clause of the Constitution. The non-impairment clause is limited to laws that derogate from prior acts or contracts by changing the intention of the parties. However, as held in Manila Electric Company v. Province of Laguna, a franchise partakes the nature of a grant which is beyond the purview of the non-impairment clause. Article XII, Section 11 of the 1987 Constitution explicitly states that no franchise shall be granted except under the condition that it shall be subject to amendment, alteration, or repeal by Congress when the common good so requires. PAGCOR's franchise, including any tax exemptions derived therefrom, is therefore subject to this constitutional reservation of power by Congress. Thus, the withdrawal of PAGCOR's corporate income tax exemption, even if it affects benefits to private parties contracting with PAGCOR, is a valid exercise of legislative power and does not unconstitutionally impair contractual obligations. On Issue 3: The Supreme Court found BIR Revenue Regulations No. 16-2005, insofar as it subjected PAGCOR to 10% VAT, to be null and void. The Court emphasized that nowhere in R.A. No. 9337 is it provided that PAGCOR can be subjected to VAT; the law only removed PAGCOR's exemption from corporate income tax. R.A. No. 9337 itself, through Section 7(k), exempts transactions under special laws, and PAGCOR's charter, P.D. No. 1869, is a special law granting it tax exemption. Furthermore, Section 6 of R.A. No. 9337 retained Section 108(B)(3) of R.A. No. 8424, which subjects services rendered to entities whose exemption under special laws effectively subjects the supply of such services to a zero percent (0%) rate. Citing Commissioner of Internal Revenue v. Acesite (Philippines) Hotel Corporation, the Court reiterated that PAGCOR is exempt from indirect taxes like VAT, and this exemption extends to entities dealing with PAGCOR in casino operations. It is a settled rule that administrative regulations cannot go beyond the terms and provisions of the basic law they implement. Therefore, the BIR exceeded its statutory authority in subjecting PAGCOR to VAT.
Main Doctrine
The Supreme Court held that Congress has the power to withdraw tax exemptions previously granted to government-owned and controlled corporations (GOCCs), such as the Philippine Amusement and Gaming Corporation (PAGCOR), without violating the equal protection or non-impairment clauses of the Constitution. This is because tax exemptions are strictly construed, and legislative grants like franchises are inherently subject to amendment, alteration, or repeal by Congress. However, the Court also ruled that administrative regulations, like those issued by the Bureau of Internal Revenue (BIR), cannot impose taxes, such as Value Added Tax (VAT), if the basic law (Republic Act No. 9337) itself provides for an exemption under special laws, thereby limiting the scope of administrative rule-making.