TAX TRANSCRIPT MAY 14

Sir: Any Questions? WALA ok very good.

ATTY: we will start with the second part GOCC. When we talk about GOCC we must talk about the basis
excluding the government entities that are already exempt. Over the years these are dwindled down.
There is always an agenecy that is removed from the exempt agencies. Then only exempt corporations
now are 1. SSS 2. GSIS 3. PHILHEALTH. PCSO is now not exempt in the train law. The primary reason is to
ensure revenue coming from the activities of the PCSO.

RAIN: Pagcor case… Pagcor was created via a PD simultaneously an new PD was enacted which exempts
them from corporate income tax but they must pay the Franchise tax. NIRC took effect and PAGCOR
should not pay any tax, but in 2005 excluding PAGCOR from the corporate income tax. The court held
that they are not exempt from the corporate income tax due to the fact they are no longer part of the
exempt companies. Taxation is the rule and the exemption is to be construed strictly, inclusion of one
thing excludes others.

ATTY: The case talked about the revenue streams of pagcor, what is you understanding of the two and
the distinctions, give an example what kind of income may fall part of the first and the second type of
revenue stream.

RAIN: the first is what may be included is the gambling operations and then contributions to PAGCOR.

ATTY: But if it is a gift or contribution to PAGCOR then it would not form part of the gross income what
else? If pagcor is not required to segregate their income which is not part of their gaming operations
hence is part of their franchise and subject to the 5% preferential tax rate. Then we need to understand
that there is that type of income that is not linked to its gaming operations?

RAIN: Services sir….

ATTY: what services?

Rain: Operation of necessary and related services such as electric bingo?

ATTY: no gaming parin yan to be covered by the franchise it must be typical gaming operations but they
decide to franchise this out and generat3es the income it is now income from the franchise that would
form part of the normal corporate income. If pagcor owns a building and leases a portion to private
entity then those would fall out of the franchise

ATTY: what about POGO??

Rain: since I mentioned the online bingo I believe they could be taxed for that and also using the
property where they are like cavite but then they are foreign corporations

ATTY: POGOS are handling gaming activities in China that cannot be conducted there bring the people
here instead of having a legit casino in china they have a virtual casino in the Philippines. While
essentially not catering to Filipinos they are nevertheless subject to the regularity powers of PAGCOR.
What is the income taxability to the POGOS?

Rain: uhm well maybe the tax on the property of the POGOS are using.
ATTY: Segment the problem, the way that I would describe it is that PAGCOR acts like a regulatory
board. These POGOS are entities which are resident foreign and now the government wants pagcor to
regulate them does this give rise to a tax exemption to POGOS?

RAIN: well if they are resident foreign corporations then I don’t think that would make them tax exempt.

ATTY: Take a look at the premise under the franchise of pagcor and if it has the ability to carry over to
others regulated by pagcor, BUT NO this does not happen IT MERELY REGULATES. Are they still taxable?

RAIN: Well uhm if the POGO the resource is here but the transaction is in china then it would depend if
the pogo would be considered a branch of subsidiary. Resident foreign corporation and as such they are
taxable for sources of income in the Philippines. The activity is still contemplated under engaged in
business and thus is taxable.

ATTY: What type of income do POGOS generate?

RAIN: Uhm. I don’t think it would be dividends but it would be as in income of the pogo itself sir?

ATY: It is the corporate income not the personal income that we are talking about so what is it?

RAIN: ahh okay then I believe in the Philippines maybe the rentals and royalties sir?

ATTTY: It is the POGOS paying rent not the one receiving rent they pay PBCOM they don’t generate rent
income. What income do they generate?

RAIN: SERVICE IN COME SIR?

ATTY: what is the rule when confronted with an issue which deals with service income. What income do
we ask to determine if it is Philippine source or not?

RAIN: Uhm if it is uhh if it’s the service income is here in the Philippines and if it is here and well, I
remember the discussion on the reginal or area head quarters or something like that.

ATTY: It all boils down to when these individuals do what they are doing pretending to deal cards
virtually, are they providing the service in the Philippines? If we make an assumption that this is really
service income… I don’t know their arrangement , but they are servicing an entity not the individuals
they have an agreement with another entity domiciled in china are these individuals really performing
the service in the Philippines, for service income is the service rendered here, but as while we are
discovering,… that it Is a more complicated when you go through the process they are physically here,
that is the only thing that is here the servers and equipment is all in china pretty much everything is not
here, in my opinion THEN YES SERVICE INCOME SHOULD BE TAXED HERE they must have used the same
thinking like in the case of Marubeni went through that process, of breaking down the contract BUT
anyways we may have been a little bit of a divergence of what w are talking about. If we go back to the
basic issue if they are benefited from the pagcor franchise, they are NOT being extended the PAGCOR
privilege.

CARL:I have a question sir whether or not if it is serviced in the Philippines isn’t it the same as the south
Dakota case? Because in the south Dakota ruling the SC ruled that purchase outside the US would still be
taxable, wouldn’t that have any implication on the situation, b/c the gambling is done outside the PH
because at some pint the transaction happens in the Philippines at some point in time
ATTY: I guess is to establish the diff between the south Dakota case and the POGO, is that in the south
Dakota case it involved a tangible asset and hence with the source of income rules, the question in the
south Dakota case is hat W/N if it is taxable in south Dakota… and so I think the basic premise is there
need be an economic nexus in south dakota itself, the distinction with the Pogo is that the have
PHYSICAL PRESENCE here and they are in fact the 2 physical things here the legal entity is here and it is
registered here but n the other hand the individuals are here itself, so prang eroded na yung dilemma in
south Dakota because the buyer is there but the seller is not there and therefore the 2 nd difference that
this is a service income, it is where did you actually do the service because if you go to the BOAC
decision talked about the sales of airline tickets , are they rendering service or selling a product which is
the ticket the position of the SC the actual source of income is the sale of the ticket but the dissenting
said that in reality when you are an airline carrier then you are not in the business of selling paper but in
carrying of income and it should be a service income. Ut if you think along those lines where is the POGO
generating income, all I can say is THE BASIS OF ASSUMPTION that they are here because it cannot be
done in china so somebody has to do it and hence it is an activity and therefore there is a service that is
being done here, in south Dakota the issue is not that they cannot be in the other states and do their
selling they are really is just domiciled in south Dakota but they have buyers in other states there is no
prohibition for the company to be somewhere else unlike in the case of the POGO. It is really service
income for the POGO, if there is a really a business need for them to be here because they cannot be
doing gambling operations in china and thus must be done here and it is the source of the business
arrangement between the two which leads me to conclude that it is really service income. Again what is
important is understanding the commercial agreement you must make a determination whenever there
is a source issue there so many considerations, such as documents and decisions like the arrangement
between the employees in the company there are many moving pieces but if we lay down the rules and
you have the full blown ability to look at the POGO model.

JESSE: is it a gray area of the taxability of the pogo? Or are the individuals themselves taxable, and thus
must be taxed as individuals are they taxable or not?

ATTY: there is an important distinction, with the individuals there is no gray area, so it is not different by
a person being employed by IBM and all the employees are earning the Philippine source income. So
what we are talking about is the corporation entities and if the entity itself which May have a gray area,
but as to the individuals working here it is no doubt that they are taxable as individuals, because it is for
the Philippine entity service. Look at it like the Chinese employees in the Philippines are already 2 steps
removed from the entity in china. They are really taxable as individuals.

LOJA: will the tax implication be different if the currency used in virtual currency?

ATTY: Well it depends on how the parties couch the whole agreement and the transaction, but if we put
virtual currency and that the PH company is taking advantage of the intellectual property of the virtual
currency, the PH may now tax them for royalties and we must now look at the rules of taxing royalties.
But caution must be said that just because there is that arrangement you must look at the
documentation and look at the whole agreement.

ATTY: Section 30 corporations we touched on this provision when we talked about educational
institutions we know the theme of sec 30 these are entities that re doing good, desirable activities,
contributing to society and hence the benefit of the tax Exemption, your income is exempt from income
taxation, notwithstanding to satisfy the req of the type of income provided for in section 30 that you
earning income from activities for profit you are to be taxed to the extent of that activity. I guess maybe
the first question is if I am part of those entities, then I don’t care about any tax implication?

ATTY: NO because one very clear exclusion is the passive income items which is not exempt. There are
supplementing rules.

WISCH: The case of CINCO established a educational institution named as the foundation college, DEPED
said they should be incorporated and did so, by making a non-stock corporation and the capitalization
itself was provided by Cinco himself and continued regular educational purpose, but the BIR asse3sed
them a tax of 5k however the college later protested according to the NIRC, if used for educational
purposes and thus should be exempt. BUT the BIR contended that the income inured to the benefit of a
private individual hence it is taxable, they found out there is a transaction that the corporation is one of
the biggest stockholders in a publishing company. Cinco argued that yes, he is president of the
corporation and at one point became a teacher and for purposes the salary is set aside and even if he is
a stockholder of another company it is distinct from himself ad that the payments are uses for the
services rendered to the college. SC held that they should be exempt from income tax, it is unfair to
conclude that the income set aside for orderly accounting does not inure to the benefit if the
stockholder, the salaries paid to teachers is incidental to it being an educational institution, the tuition
fees does not mean the educational institution is a profit making enterprise and that these fees are for
the upkeep of the institution. Part of the income is used to buy buildings but this may redound to the
benefit of the stockholders it is not safe to assume such.

ATTY: Thank you. This case was decided in 1956, the main theme of the decision is that the overstepping
of the tax provision of the tax code, because there are some benefits that inured to the individuals. Can
we still apply this case now? One thing you can consider is that did the case include a citation of the tax
provision at that time or is it similar to the current tax code provision?

WICSCH: Probably the last part of section 30, income of whatever kind that with respect to activities
conducted for profit.

ATTY: While the code never contained an inurement provision, Did you read RMC 2014 that RMC
include certain situations that include certain badges of profit related activities. One thing that has
developed is badges of profit related activities, such as High salary, donations, transferring of assets.
That if you do any of those activities then you will lose the tax exemption. The circular talks about
salaries trustees are considered as badges of profit activities which is contravention with the SC decision,
my opinion, is that that part of the circular is not valid? With the DLSU case is non stock non profit but
DLSU resulted to that some portion of section 30 of the NIRC as unconstitutional did CINCO give the
same implication stating that of youre a school in section 30 then you are not part of the last paragraph.

WISCH: No sir.

ATTY: Because the thought process is this what DLSU said that if educational institution is that the
income is used for the educational purpose, there are 2 things to consider is where I get the income and
where I use the income, now DLSU said that where I get the income is irrelevant and it is where I use the
income that is important. Clearly the contrary provision is the income from personal property or real
property, but if used for educational purpose then it is exempt. Is CINCO the same?
WISCH: The case specified the redounding to the benefit for the institution then it is not taxable as long
it does not redound to the stockholders

ATTY: Actual, direct and exclusive that if you have for profit activities then you lose your tax exemption
so wala inconsistency dun. If you have activities conducted for profit that is inconsistent for using your
income for educational purposes. We must tie it up with the constitution. CINCO does NOT have the
same implication as DLSU case.

CASSI: Dumaguete case: it was assessed on deficiency withholding tax on its honorarium of the board of
directors and the interest from saving deposits on members, and they filed a process, they argue that
they are exempt from paying the tax on the interest of its members, CTA ruled they are not except
because they are similar to the revenue regulation, and that there should be a 20% withholding tax on
the interest bearing notes SC held that based on a BIR ruling since the interest {inadudible} they are not
the proper party to withhold but this does not apply in cases where the deposits were made by the
members of the cooperatives themselves but SC said that this ruling which clarified that such
cooperatives are exempt from those kinds of taxes and this benefit extends to their members.

ATTY: The entitlement of the exemption comes from the cooperative code; this is important because if
the exemption is from the tax code what answer would you have given?

CASSI: if it is the tax code hen it falls under the cooperative bank.

ATTY: Cooperatives are listed down in section 30 that’s the easy part we now as a general rule they are
exempt, would you then conclude that all their income is exempt because they are part of section 30?
There are 2 parts to section 30 that you are generally exempt but there are times you may not be
exempt, if this provision did not exist will the cooperative still be tax exempt for their money
placements?

CASSI: Yes sir, because they are listed as exempt.

ATTY: Correct but if we go to the last paragraph, that if the money placement is income for profit or
from personal or real property do they fall under any of these 2?

CASSI: I think it could be income from personal property. The implication being that if it is from the
interest income from the savings deposits then it would not fall under the exemption.

ATTY: Alright in its bare assumption you are making money from the notes in the banks. So it could be
taken that way, so that’s the possible basis to strip the tax exemption, the stronger basis would be
would be the PASSIVE INCOME ITEMS. Which this is.

ATTY: You must understand where the exemption being drawn from, The general default rule is that
passive income items are subject to income tax, except if these are schools, they are exempt. IN SUM I
am generally exempt from income tax because I’m listed in section 30 but I must consider 2 points that
whether it is passive income or not or if it falls under the last paragraph. But if there is another law that
says you are exempt you may also use the other law.

CASSI: What is the diff between coop and corporation, cooperatives don’t operate based on profit
margins they are really constituted for the crowd mentality you aggregate to have leverage for buying
and selling stuff, you don’t operate on a margin. VAT on COOP is exempt and was supposed to be lifted
but leaders of COOP threatened the senate.