August 21, 2007

BIR RULING [DA-460-07]

DA-045-2004 Sec. 1 (C) RA 9337; RA 7716;

Sec. 13 (2) (b) PD 1869; Sec. 27, NIRC

Cayañga, Zuñiga and Angel

2nd Flr. One Corporate Plaza
845 Arnaiz Ave. Legaspi Village
Makati City

Attention : Atty. Aureen Soriano

Gentlemen :

This refers to your letter dated September 9, 2005 requesting for a ruling on
whether the tax exemption being enjoyed by the Philippine Amusement and Gaming
Corporation (PAGCOR) under Section 13 (2) (b) of Presidential Decree (PD) No.
1869 may be extended to your client by virtue of its Contract of Lease with the
former.

It is represented that your client, Pacific Digital Amusement Systems,

Incorporated ("Pacific Amusements", for brevity) is a corporation duly organized
under Philippine laws and has exclusive proprietary rights to a gaming system
software and owns the hardware, equipment and accessories to operate electronic
games.

It is further represented that Pacific Amusements and PAGCOR executed a

Contract of Lease on August 8, 2005 whereby the former leased its electronic gaming
system, including gaming kiosks/terminals and a fully equipped electronic amusement
station in Miramar Hotel for a period of one year. The said contract also provided that
PAGCOR shall pay Pacific Amusements a monthly variable rent amounting to forty
percent (40%) of the gross revenues of the gaming system's operation at the station
after deducting the players' winnings/prizes and all applicable taxes due to the Bureau

Copyright 1994-2009 CD Technologies Asia, Inc. Philippine Taxation 2008 1

of Internal Revenue. EcHAaS

In reply, please be informed that Section 13 (2) (b) of PD 1869 is no longer

applicable to your client as PAGCOR, starting November 1, 2005, no longer enjoys
exemption from income taxes with the implementation of Republic Act (RA) No.
9337. Section 1 (C) of RA 9337 states that:

Section 1. Section 27 of the National Internal Revenue Code of 1997, as

amended, is hereby further amended to read as follows:

"(C) Government-Owned or Controlled Corporations, Agencies or

Instrumentalities. — The provisions of existing special or general laws to the
contrary notwithstanding, all corporations, agencies, or instrumentalities
owned or controlled by the Government, except the Government Service
Insurance System (GSIS), the Social Security System (SSS), the Philippine
Health Insurance Corporation (PHIC), and the Philippine Charity Sweepstakes
(PCSO), shall pay such rate of tax upon their taxable income as are imposed
by this Section upon corporations or associations engaged in a similar
business, industry, or activity."

It can be seen here that RA 9337 omitted PAGCOR from the list of
government corporations that are exempt from income taxation under Section 27 of
the Tax Code of 1997. As a result, PAGCOR is now regarded as liable for income
taxes imposed on domestic corporations along with its 10% (now 12% starting
February 1, 2006) VAT liability under RA 7716. And since there is no longer any
income tax exemption to speak of, it follows that PAGCOR has no exemption
privileges to extend to Pacific Amusements under Section 13 (2) (b) of P.D. 1869.

Accordingly, this office is of the opinion that since there is no longer any basis
on PAGCOR's part to claim exemption from income taxes, it follows that Pacific
Amusements is taxable on income gained from its Contract of Lease with the former
starting November 1, 2005. In addition, all transactions entered into by your client as a
seller of goods and services or lessor of properties are subject to VAT.

This ruling is being issued on the basis of the foregoing facts as represented.
However, if upon investigation, it will be disclosed that the facts are different, then
this ruling shall be considered null and void. DacTEH

Very truly yours,

Copyright 1994-2009 CD Technologies Asia, Inc. Philippine Taxation 2008 2

 Commissioner of Internal Revenue

By:

(SGD.) JAMES H. ROLDAN

Assistant Commissioner
Legal Service

Copyright 1994-2009 CD Technologies Asia, Inc. Philippine Taxation 2008 3