Corporate Income Taxation
Philippine Amusement and Gaming Corporation
PAGCOR vs BIR
PAGCOR was created pursuant to PD 1067-A on January 1977
- Simultaneous to its creation, PD 106-B was issued exempting
PAGCOR from the payment of any type of tax,
o EXCEPT a franchise tax of 5% on gross income.
o June 2, 1978 PD 1399 was ssued expanding the scope of
PAGCOR’s exemptions including :
 (2) Income and other taxes. — (a) Franchise
Holder: No tax of any kind or form, income or
otherwise, as well as fees, charges, or levies of
whatever nature, whether National or Local,
shall be assessed and collected under this
Franchise from the Corporation; nor shall any
form of tax or charge attach in any way to the
earnings of the Corporation, except a
Franchise Tax of ve percent (5%)of the gross
revenue or earnings derived by the
Corporation from its operation under this
Franchise. Such tax shall be due and payable
quarterly to the National Government and
shall be in lieu of all kinds of taxes, levies, fees
or assessments of any kind, nature or
description, levied, established, or collected by
any municipal, provincial or national
government authority.
- The exemption was removed but it was restored again.
- 1998- NIRC took effect which provided that GOCC’s shall pay
corporate income tax EXCEPT PAGCOR, GSIS, SSS, and
PHILHEALTH and PCSO
o (c) Government-owned or Controlled Corporations,
Agencies or Instrumentalities. — The provisions of
existing special general laws to the contrary
notwithstanding, all corporations, agencies or
instrumentalities owned and controlled by the
Government,except the Government Service and Insurance
Corporation (GSIS), the Social Security System (SSS), the
Philippine Health Insurance Corporation (PHIC), the
Philippine Charity Sweepstakes Office (PCSO), and the
(PAGCOR), shall pay such rate of tax upon their taxable
income as are imposed by this Section upon corporations
or associations engaged in similar business, industry, or
activity.
- Enactment of RA 9337 on 2005, certain sections of NIRC were
amended which in particular, is already excluding PAGCOR from
the enumeration of GOCC’s that are exempt from payment of
corporate income tax.
ISSUE :
Whether or not PAGCOR is still exempt from corporate income tax and VAT
with the enactment of R.A. No. 9337
HELD :
In our Decision dated March 15, 2011, we have already declared petitioner's
income tax liability in view of the withdrawal of its tax privilege under R.A.
No. 9337. However, we made no distinction as to which income is subject to
corporate income tax, considering that the issue raised therein was only the
constitutionality of Section 1 of R.A. No. 9337, which excluded petitioner
from the enumeration of GOCCs exempted from corporate income tax.
For clarity, it is worthy to note that under P.D. 1869, as amended, PAGCOR's
income is classified into two: (1) income from its operations conducted under
its Franchise, pursuant to Section 13 (2) (b) thereof (income from gaming
operations) ; and (2) income from its operation of necessary and related
services under Section 14 (5) thereof (income from other related services). In
RMC No. 33-2013, respondent further classified the aforesaid income as
follows:
1. PAGCOR's income from its operations and licensing of gambling
casinos, gaming clubs and other similar recreation or amusement places,
gaming pools, includes, among others:
(a) Income from its casino operations;
(b) Income from dollar pit operations;
(c) Income from regular bingo operations; and
(d) Income from mobile bingo operations operated by it, with agents on
commission basis. Provided, however, that the agents' commission income
shall be subject to regular income tax, and consequently, to withholding tax
under existing regulations.
2.Incomefrom"otherrelatedoperations" includes,butisnotlimitedto:
(a) Income from licensed private casinos covered by authorities to operate
issued to private operators;
(b)Income from traditional bingo, electronic bingo and other bingo variations
covered by authorities to operate issued to private operators;
(c) Income from private internet casino gaming, internet sports betting and
private mobile gaming operations; DSATCI
(d) Income from private poker operations;
(e) Income from junket operations;
(f) Income from SM demo units; and
(g)Income from other necessary and related services, shows and
entertainment.
First. Under P.D. 1869, as amended, petitioner is subject to income tax
only with respect to its operation of related services. Accordingly, the
income tax exemption ordained under Section 27 (c) of R.A. No. 8424
clearly pertains only to petitioner's income from operation of related
services. Such income tax exemption could not have been applicable to
petitioner's income from gaming operations as it is already exempt
therefrom under P.D. 1869, as amended, to wit:
Section 13 Exemption : No tax of any kind or form, income or otherwise, as
well as fees, charges or levies of whatever nature, whether National or
Local, shall be assessed and collected under this Franchise from the
Corporation; nor shall any form of tax or charge attach in any way to the
earnings of the Corporation, except a Franchise Tax of five (5%) percent
of the gross revenue or earnings derived by the Corporation from its
operation under this Franchise.
Indeed, the grant of tax exemption or the withdrawal thereof assumes that the
person or entity involved is subject to tax. This is the most sound and logical
interpretation because petitioner could not have been exempted from paying
taxes which it was not liable to pay in the first place. This is clear from the
wordings of P.D. 1869, as amended, imposing a franchise tax of five percent
(5%) on its gross revenue or earnings derived by petitioner from its operation
under the Franchise in lieu of all taxes of any kind or form, as well as fees,
charges or levies of whatever nature, which necessarily include corporate
income tax.
Second. Every effort must be exerted to avoid a conflict between statutes; so
that if reasonable construction is possible, the laws must be reconciled in that
manner.
Third. Even assuming that an inconsistency exists, P.D. 1869, as amended,
which expressly provides the tax treatment of petitioner's income prevails
over R.A. No. 9337, which is a general law. It is a canon of statutory
construction that a special law prevails over a general law — regardless of
their dates of passage — and the special is to be considered as remaining an
exception to the general.
Creba vs Romulo
Creba (Chamber of Real Estate and Builder’s Associations, Inc.)
Petitioner – an association of real estate developers and builders in the
Philippines.
- It is impleaded former executive Secretary Alberto Romulo, then
acting Sec of Finance Amatong and Parayno.
 - Assails the validity of the imposition of MCIT on corporations and The MCIT is imposed on gross income which is arrived at by
CWT on sales of real properties classified as ordinary assets. deducting the capital spent by a corporation in the sale of its
goods, i.e., the cost of goods 48 and other direct expenses from gross
Section 27 € of RA 8424 provides for MCIT on domestic corporations and is sales. Clearly, the capital is not being taxed.
implemented by RR – 9 -98. Furthermore, the MCIT is not an additional tax imposition. It is
imposed in lieu of the normal net income tax, and only if the normal
Petitioner argues income tax is suspiciously low. The MCIT merely approximates the
MCIT violates the due process amount of net income tax due from a corporation, pegging the rate at a
clause because it levies income tax very much reduced 2% and uses as the base the corporation's gross
even if there is no realized gain income.
Sec of finance has no authority to
Besides, there is no legal objection to a broader tax base or
collect CWT
taxable income by eliminating all deductible items and at the same time
It ignores the different tax treatment reducing the applicable tax rate.
by RA 8424 of orfinary assets and
capital assets
Wrong to base CWT on the gross
selling price or FMV of real 2. Yes.
properties classified as ordinary
assets Respondent Secretary has the authority to require the withholding of a
tax on items of income payable to any person, national or juridical,
Petitioner’s argument (1) residing in the Philippines. Such authority is derived from Section 57
(B) of RA 8424 which provides: ICTDEa
gross income as defined under said provision only considers the cost of goods 3. SEC. 57. Withholding of Tax at Source. —
sold and other direct expenses; other major expenditures, such as 4. xxx xxx xxx
administrative and interest expenses which are equally necessary to produce 5. (B) Withholding of Creditable Tax at Source. The
gross income, were not taken into account. 31 Thus, pegging the tax base of [Secretary] may, upon the recommendation of the [CIR],
the MCIT to a corporation's gross income is tantamount to a confiscation of require the withholding of a tax on the items of income
capital because gross income, unlike net income, is not "realized gain. payable to natural or juridical persons, residing in the
Philippines, by payor-corporation/persons as provided for
Issue/s : Is it violative of due process? by law, at the rate of not less than one percent (1%) but not
Does the Sec of finance have authority to collect CWT? more than thirty-two percent (32%) thereof, which shall be
Is it wrong to base CWT on FMV of real properties credited against the income tax liability of the taxpayer for
the taxable year.
1. No. 6. The questioned provisions of RR 2-98, as amended, are well
within the authority given by Section 57(B) to the
Certainly, an income tax is arbitrary and confiscatory if it taxes capital Secretary, i.e., the graduated rate of 1.5%-5% is between the 1%-
because capital is not income. In other words, it is income, not capital, 32% range; the withholding tax is imposed on the income payable
which is subject to income tax. However, the MCIT is not a tax on and the tax is creditable against the income tax liability of the
capital. taxpayer for the taxable year.

3. NO.
The use of the GSP/FMV as basis to determine the withholding taxes is
evidently for purposes of practicality and convenience. Obviously, the
withholding agent/buyer who is obligated to withhold the tax does not
know, nor is he privy to, how much the taxpayer/seller will have as its
net income at the end of the taxable year. Instead, said withholding
agent's knowledge and privity are limited only to the particular
transaction in which he is a party. In such a case, his basis can only be
the GSP or FMV as these are the only factors reasonably known or
knowable by him in connection with the performance of his duties as a
withholding agent.|||
Under RR 2-98, the tax base of the income tax from the sale of real
property classified as ordinary assets remains to be the entity's net
income imposed under Section 24 (resident individuals) or Section 27
(domestic corporations) in relation to Section 31 of RA 8424, i.e. gross
income less allowable deductions. The CWT is to be deducted from the
net income tax payable by the taxpayer at the end of the taxable
year. 71 Precisely, Section 4 (a) (ii) and (c) (ii) of RR 7-2003 reiterate
that the tax base for the sale of real property classified as ordinary assets
remains to be the net taxable income:
Section 4. Applicable taxes on sale, exchange
or other disposition of real property. — Gains/Income
derived from sale, exchange, or other disposition of real
properties shall unless otherwise exempt, be subject to
applicable taxes imposed under the Code, depending on
whether the subject properties are classified as capital
assets or ordinary assets;
(ii) The sale of real property located in the Philippines, classified as ordinary
assets, shall be subject to the [CWT] (expanded) under Sec. 2.57.2(j) of [RR
2-98], as amended, based on the [GSP] or current [FMV] as determined in
accordance with Section 6(E) of the Code, whichever is higher, and
consequently, to the ordinary income tax imposed under Sec. 24(A)(1)(c)
or 25(A)(1) of the Code, as the case may be, based on net taxable income.
Cyanamid vs CA
On February 7, 1985, the Commissioner of Internal Revenue (CIR)
sent an assessment letter to petitioner Cyanamid Philippines, Inc. for taxable
year 1981. On March 4, 1985 petitioner protested the assessment particularly,
(1) the 25% Surtax Assessment of P3,774,867.50; (2) 1981 Deficiency
Income Assessment of P119,817.00; and (3) 1981 Deficiency Percentage
Assessment of P8,846.72. Petitioner, through its external accountant, Sycip,
Gorres, Velayo & Co., claimed, among others, that the surtax for the undue
accumulation of earnings was not proper because the said profits were
retained to increase petitioner's working capital and it could be used for
reasonable business needs of the company. Petitioner contended further that
it availed of the tax amnesty under Executive Order No. 41, hence, it enjoyed
amnesty from civil and criminal prosecution granted by law. In reply, the CIR
refused to allow the cancellation of the assessment notices on the ground that
the availment of the tax amnesty under Executive Order No. 41, as amended,
is sufficient basis, in appropriate cases, for the cancellation of the assessment
issued after August 21, 1986 only. Petitioner appealed to the Court of Tax
Appeals (CTA). During the pendency of the case, however, both parties
agreed to compromise the 1981 deficiency income tax assessment and the
petitioner paid the reduced amount. With regards to the surtax on improperly
accumulated profits, the CTA denied the petition by ruling that there was no
need for petitioner to set aside a portion of its retained earnings as working
capital reserve as it claims since it had considerable liquid funds. On appeal,
the Court of Appeals affirmed the CTA decision.
In this petition, the Court ruled that the Tax Court opted to determine
the working capital sufficiency by using the ratio between current assets to
current liabilities. The working capital needs of a business depend upon the
nature of the business, its credit policies, the amount of inventories, the rate
of turnover, the amount of accounts receivable, the collection rate, the
availability of credit to the business, and similar factors. Petitioner, by
adhering to the "Bardahl" formula, failed to impress the tax court with the
required definiteness envisioned by the statute. The Court agreed with the tax
court that the burden of proof to establish that the profits accumulated were
not beyond the reasonable needs of the company, remained on the taxpayer.
The Court will not set aside lightly the conclusion reached by the Court of
Tax Appeals which, by the very nature of its function, is dedicated
exclusively to the consideration of tax problems and has necessarily
developed an expertise on the subject, unless there has been an abuse or
improvident exercise of authority. Unless rebutted, all presumptions
generally are indulged in favor of the correctness of the CIR's assessment
against the taxpayer. With petitioner's failure to prove the CIR incorrect,
clearly and conclusively, this Court was constrained to uphold the correctness
of tax court's ruling, as affirmed by the Court of Appeals
TAX ON CORPORATIONS; TAX ON IMPROPER ACCUMULATION
OF SURPLUS; A PENALTY TAX DESIGNED TO COMPEL
CORPORATIONS TO DISTRIBUTE EARNINGS. — Section 25 of the
National Internal Revenue Code discouraged tax avoidance through
corporate surplus accumulation. When corporations do not declare dividends,
income taxes are not paid on the undeclared dividends received by the
shareholders. The tax on improper accumulation of surplus is essentially a
penalty tax designed to compel corporations to distribute earnings so that the
said earnings by shareholders could, in turn, be taxed.|||

HELD :

TAXATION; TAX ON CORPORATIONS; SURTAX ON IMPROPER

ACCUMULATED PROFITS; "BARDAHL" FORMULA; ELUCIDATED.
— The "Bardahl" formula was developed to measure corporate liquidity. The
formula requires an examination of whether the taxpayer has sufficient liquid
assets to pay all of its current liabilities and any extraordinary
expenses reasonably anticipated, plus enough to operate the business during
one operating cycle. Operating cycle is the period of time it takes to convert
cash into raw materials, raw materials into inventory, and inventory into
sales, including the time it takes to collect payment for the sales.|||

ACCUMULATED EARNINGS TAX; NOT LIMITED TO CLOSELY

HELD CORPORATIONS. — A review of American taxation history on
accumulated earnings tax will show that the application of the accumulated
earnings tax to publicly held corporations has been problematic. Initially, the
Tax Court and the Court of Claims held that the accumulated earnings tax
applies to publicly held corporations. Then, the Ninth Circuit Court of
Appeals ruled in Golconda that the accumulated earnings tax could only
apply to closely held corporations. Despite Golconda, the Internal Revenue
Service asserted that the tax could be imposed on widely held corporations
including those not controlled by a few shareholders or groups of
shareholders. The Service indicated it would not follow the Ninth Circuit
regarding publicly held corporations. In 1984, American legislation nullified
the Ninth Circuit's Golconda ruling and made it clear that the accumulated
earnings tax is not limited to closely held corporations. Clearly, Golconda is
no longer a reliable precedent.|||